Finance Bill

David Gauke Excerpts

Tuesday 21st July 2015 Commons Chamber

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

I beg to move, That the Bill be now read a Second time.

As my right hon. Friend the Chancellor set out in the recent Budget, the British economy is fundamentally stronger than it was five years ago. The deficit has been halved as a percentage of GDP; for the first time since 2001-02 debt as a share of GDP is falling; the UK was the fastest growing economy in the G7 in 2014, and we are expected to repeat that in 2015, too. We have more individuals in work than ever before, and wages continue to rise above inflation.

Having come so far, we need to stick to our long-term plan for economic recovery. The first Finance Bill of this Parliament demonstrates this Government’s commitment to continuing the plan to build a productive, balanced and secure economy, which delivers for working people at every stage of their lives.

I shall happily take interventions this afternoon, but let me first set out to hon. Members the order in which I intend to discuss the measures in the Bill. I shall begin by talking about those measures that are intended to support working people through the tax system. Next, I shall set out how the Bill will help put the public finances in order by tackling tax avoidance, evasion, non-compliance and imbalances in the tax system. Finally, I shall talk about how the summer Finance Bill 2015 will take the first steps in implementing measures to improve the UK’s productivity.

I shall begin with those measures designed to help hard-working people keep more of the money they earn, a principle to which this Government are committed. We have a proud record on reducing tax for the lowest paid. As a result of action taken in the previous Parliament, 27.5 million individuals saw their typical income tax bill reduced by £825. This Finance Bill makes even further progress, by increasing the tax-free personal allowance to £11,000 in 2016-17 and to £11,200 in 2017-18. As a result of those changes, a typical basic rate taxpayer will be £80 better off in 2016-17 compared with in this tax year. Further, the higher rate threshold will also increase from £42,385 in 2015-16 to £43,000 in 2016-17—£300 more than the amount announced in the March Budget. That will take 130,000 individuals out of the higher rate of tax by 2016-17.

It is the firm belief of this Government that individuals working 30 hours a week on the national minimum wage should not pay income tax. That is why this Finance Bill will enshrine that link in law for future increases in the personal allowance. Once the personal allowance has reached £12,500, it will always be at least the equivalent of 30 hours a week on the national minimum wage. Until that point, my right hon. Friend the Chancellor will have a legal duty, when setting the personal allowance, to consider the financial impact on an individual working 30 hours on the national minimum wage. This Finance Bill also delivers another legislative commitment to low levels of taxation. It introduces aspects of the five-year tax lock by ruling out increases in income tax and VAT for the duration of this Parliament.

Finally, this Government know that the wish to pass something on to one’s children is the most basic human aspiration. To give hard-working people the security of knowing that they can continue to provide for their families after they have gone, this Bill phases in a new £175,000 per person transferable allowance when a person’s home is passed on at death to their direct descendants. This means that by the end of this Parliament, the effective inheritance tax threshold for married couples and civil partners will be £1 million.

At the same time, to ensure that those with the broadest shoulders continue to bear the biggest burden, this new allowance will be gradually withdrawn for individuals with assets of more than £2 million. This reform will be paid for by cutting down on the £34 billion that the Government spent on pensions tax relief in 2013-14 —two thirds of which goes to higher and additional rate taxpayers. The benefits of pensions tax relief for top earners will be restricted by tapering away the annual allowance for those with a total income of over £150,000 from April 2016.

These are important measures, rewarding and supporting the efforts and aspirations of working Britain—and doing so in a fair and balanced way.

[Richard Fuller (Bedford) (Con)]

In the previous Parliament, under the previous Government, one outcome was that the wealthiest in the country paid a higher proportion of tax than they did under the preceding Government. Do this Government intend that to continue to be the case in this Parliament?

[Mr Gauke]

I can confirm to my hon. Friend that that will continue to be the case. We have set out a Budget that is balanced, ensuring that those with the broadest shoulders continue to bear the greatest burden.

I now turn to the way in which the summer Finance Bill 2015 will help to fix the public finances. We know that the UK’s economic recovery is well established, with growth at 3% in 2014, and continued robust growth for 2015 and 2016, according to the Office for Budget Responsibility’s forecast. But this country needs the economic security of running a surplus, and, if we are to achieve that, a further £37 billion in fiscal consolidation is required over the course of this Parliament. To deliver that, the summer Budget included measures to tackle tax avoidance and tax planning, evasion and compliance and imbalances in the tax system, which will collectively raise £5 billion a year by 2019-20.

This Finance Bill implements a number of those measures. First, it includes provisions preventing private equity and some hedge fund managers from exploiting tax loopholes to avoid paying the full rate of capital gains tax. Secondly, it removes the ability for companies to use UK losses and reliefs against their controlled foreign company charge. That will improve the effectiveness of the UK CFC regime in countering aggressive tax planning by multinational companies. Thirdly, the Bill legislates to stop a potentially significant tax planning risk, whereby corporate groups exploit tax rules for asset transfers between related parties. This puts it beyond doubt that the tax rules cannot be manipulated to prevent profits from being charged to tax.

[Patrick Grady (Glasgow North) (SNP)]

The International Monetary Fund recently said that developing countries lose £212 billion a year through corporate tax avoidance by multinational companies. Transparency will be absolutely crucial in dealing with that, but the Bill makes no mention of public country-by-country reporting. Will the Government look carefully at that, and at any amendments that might come forward, given that it would enable people in the developing world to see the taxes that companies pay locally for their benefit?

[Mr Gauke]

The UK has been instrumental in bringing in country-by-country reporting to tax authorities as part of the OECD’s base erosion and profit shifting project, which will be of great assistance to tax authorities. We want to ensure that developing countries can benefit from that co-operation between tax authorities and from greater use of data. The publication of country-by-country reporting is best approached multilaterally.

But we should all acknowledge the progress that has been made. For example, much more information is now available to tax authorities, enabling them to assess large companies’ tax strategies. One proposal in the Budget earlier this month was to make UK-based multinational companies publish their tax strategies. Such information would help to incentivise behaviour away from aggressive tax avoidance, which Members in all parts of the House wish to address.

[Sammy Wilson (East Antrim) (DUP)]

Does the Minister accept that the target of £5 billion is really small beer when one considers the amount of tax that many multinational companies, including those that operate here in the UK, avoid paying by moving their profits around?

[Mr Gauke]

No, I do not accept that. Indeed, if one looks at Her Majesty’s Revenue and Customs’ tax gap publication, which identifies where the tax gap falls, one sees that, in terms of avoidance and acting contrary to the intention of Parliament, we should not overstate the element that is corporation tax avoidance by large multinationals. It is important that we address it, but one should not believe that it amounts to a huge pot. We have taken a number of steps in this area, some of which are operational. For example, we have supported HMRC to expand its large business service. Again, further progress on that was announced in the Budget. We have introduced the diverted profits tax, which came into force earlier this year. That is a very significant measure to address aggressive tax avoidance. We want to take further steps. Indeed, the base erosion and profit shifting project, which the OECD is running, means that we can hopefully take further steps in future. But those areas are best dealt with on a multilateral basis, and the UK has been very engaged in ensuring that there is progress in that area. I hope that there will be further progress on that front later this year.

Once again, this Government have introduced a Bill that makes it clear that avoidance and evasion by corporates and wealthy individuals will not be tolerated. But fixing the public finances also means that everyone in Britain must pay their fair share of tax. The vast majority of people pay their tax on time and in full, but a small minority of taxpayers refuse to pay what they owe despite having the money to do so. The Finance Bill introduces direct recovery of debts, giving HMRC the power to recover tax and tax credit debts directly from debtors who have debts of over £1,000 and more than £5,000 in the bank.

The UK must remain competitive as a global financial centre, but it is only fair that the contribution banks make reflect the risk they pose to the UK economy. The Finance Bill introduces a new supplementary tax of 8% on banking sector profit, while gradually reducing the full bank levy rate over the Parliament. That will ensure that banks contribute a further £2 billion to the short-term task of deficit reduction, while ensuring the lowest tax rate of banks’ profit in the G7 nations.

[George Kerevan (East Lothian) (SNP)]

In the shift to the new tax on banks, the Government are sweeping in mutual banks, building societies and the smaller challenger banks. That creates problems both in capital accumulation for the mutuals and in the ability of the new challenger banks effectively to gain capital to take on the larger banks. Is that an accident, or has some decision been taken to penalise those organisations?

[Mr Gauke]

The first point I have to make is that banks with the smallest profits do not pay the surcharge. There is a minimum level to protect the very smallest banks. The bank levy that was introduced early in the previous Parliament reflected some of the issues that existed at that time. It was designed in part to encourage a different type of behaviour that would reduce risks. Regulatory changes have rather addressed that particular point. The move to a surcharge—a higher level of corporation tax—is sensible and timely given some of the changes that have been made. It is not possible in those circumstances to carve out those institutions that we like and dislike beyond putting in that de minimis level. That was a sensible approach to take.

[Richard Fuller]

Perhaps the Minister can clarify the intention of the levy. Is it to continue modifying behaviour? Do we need it because we have concerns about systemic risk, or because we want to close the deficit?

[Mr Gauke]

Essentially, it is to ensure that the banking sector, which poses particular risks and which benefits from implicit guarantees, makes a fair contribution to the public finances. I hope that provides some clarity to my hon. Friend.

[Mark Durkan (Foyle) (SDLP)]

The Financial Secretary seems to imply that the banking levy, which was developed at the start of the previous Parliament, was essentially an ephemeral need that has now been taken care of by subsequent regulation. Banks have been able to cope with the fact that they have, essentially, a too big to fail subsidy—the VAT exemption. They have been able, with the levy, to absorb record-breaking fines for their own misbehaviour. Now he is saying that that is all to the good and that we do not need that same system of taking from the banks. Surely we do, though. They need to make a contribution to the public purse.

[Mr Gauke]

There is no disagreement over the need for a contribution from the banking sector towards the public purse. We have concluded that the better way to make that contribution is through a corporation tax surcharge, and that is what we are introducing. There was also a particular argument in 2010 about trying to influence behaviour, but, to some extent, that has now been addressed by a new regulatory regime. I agree that there is a need for a contribution. What we have here is a new surcharge on the banking sector, which performs precisely that task.

Britain’s insurance premium tax is also well below rates in many other countries, such as Germany, so this Bill proposes an increase to 9.5%. but that applies to only one fifth of all premiums. The Government are also committed to meeting their climate change objectives in a cost-effective way. Over the next five years, the climate change levy exemption for renewable energy is due to cost £4 billion, one third of which would subsidise overseas projects that bring no benefit to the UK. This Finance Bill therefore takes urgent action to stabilise CCL revenue.

Finally, to make the tax system fairer, the Bill restricts the amount of tax relief landlords can claim on property finance costs to the basic rate of income tax. That will ensure that landlords with the largest incomes no longer receive the most generous tax treatment. We are tackling tax avoidance by wealthy individuals and corporates, addressing imbalances in the tax system and taking bold steps to ensure that it remains fair.

[Caroline Lucas (Brighton, Pavilion) (Green)]

The hon. Gentleman made a point a moment ago about the removal of the climate change levy for green energy. Does he recognise that that measure, by being retrospective and incredibly disproportionate to the ends he is trying to achieve, will seriously disrupt the green energy sector? The sector is already massively concerned about that. He talks about the importance of cost-effective measures to reaching green energy outcomes. Onshore wind is one of the most cost-effective energies out there, but his measures are undermining it.

[Mr Gauke]

I do not accept that point. Removing this exemption will achieve better value for money in the Government’s support for low-carbon generation by targeting support directly at generators and preventing UK taxpayers from subsidising overseas renewable projects that bring no benefit to the UK. That was the weakness; that was the failure of the existing regime, and it is right that we address it.

I now wish to deal with productivity. As my right hon. friend the Chancellor set out in the recent Budget, the rate of UK productivity has been a historical problem. It is vital to increase our productivity, because that is one of the fastest routes to creating jobs and raising the standard of living for everyone. Earlier this month, we published our productivity plan, setting out how we will tackle this long-term challenge. This Bill implements a number of measures taking this plan forward. A stable tax regime with competitive rates and strong investment incentives is essential to drive productivity forward. In the previous Parliament, the main rate of corporation tax was cut from 28% to 20% as a central part of the Government’s economic strategy. This Bill goes further, by cutting it to 19% in 2017 and 18% in 2020, saving businesses more than £6 billion by 2021 and giving the UK the lowest rate of corporation tax in the G20.

[Mr Nigel Dodds (Belfast North) (DUP)]

The Minister will know that the Stormont House agreement contains plans to have a lower rate of corporation tax for Northern Ireland, if the Assembly and the Executive so decide. He knows the problems that exist on the implementation of that agreement. Will he undertake to continue to work with the Northern Ireland Executive—with those parties that want to make progress economically in Northern Ireland—to ensure that that corporation tax relief is introduced as quickly as possible?

[Mr Gauke]

I am happy to give that undertaking to the right hon. Gentleman. We have always been clear that the devolution of corporation tax was dependent on stability in the finances for Northern Ireland, and I believe we agree on that point. We want to be in a position to implement that policy and I know he is also keen to implement it, but it is dependent on proper progress being made, and I entirely agree with him on that point.

To provide certainty to business and encourage investment in plant and machinery, the Bill also sets the annual investment allowance at the permanent higher level of £200,000. Improving productivity also means prioritising investment in infrastructure.

[George Kerevan]

The reality surely is that the AIA is being cut from the de facto £500,000 per year to £200,000, so it is not an increase. Doing that at the same time as cutting corporation tax runs the risk that firms’ accumulated reserves will be used to buy back shares rather than to go into productive investment, thereby meaning that the productivity growth the Government are seeking will not be achieved.

[Mr Gauke]

I do not accept that point. First, the increase to £500,000 was temporary, as we always made clear. Very strong representations were made by business groups that what was important was putting a permanent level in place. We have the highest permanent level ever; at £200,000 it is twice the level we inherited in 2010, at a time when corporation tax rates are substantially lower. This is therefore a much more generous regime than we have had before. Our changes to corporation tax rates are an important measure in encouraging investment. I am sure I will be corrected if I am wrong, but I do not believe it was that long ago that the Scottish National party was advocating a corporation tax rate of 18%. I am sure the SNP is delighted that there will be a rate of 18% across all the United Kingdom.

[Andrew Gwynne (Denton and Reddish) (Lab)]

Before the Minister moves off the issue of support for businesses, may I say that although there are many measures in the Bill to support businesses that we welcome, many of my local small businesses are eagerly awaiting the Government’s review on business rates later this year? Will he give some indication that those small businesses in my constituency will not end up worse off as a result of changes that may be planned to the business rates?

[Mr Gauke]

Our record on business rates is that we have consistently looked after the interests of small businesses: we have extended small business rate relief on numerous occasions; we have introduced the rebate for retail premises; and we have made a number of reforms to business rates to assist small businesses in particular, as well as capping increases in business rates. A review is ongoing and I am not going to make any announcement today, however nicely the hon. Gentleman asks me what its contents will be. It is ongoing and the consultation period has only relatively recently finished. We are keen to progress this and we have brought forward the timetable by which we will complete that review; we will have something by the end of the year.

Improving productivity also means prioritising investment in infrastructure. Our road network has suffered from decades of underinvestment. This Bill implements reforms to vehicle excise duty to support the creation of a roads fund. The reforms will ensure that VED still incentivises purchases of the cleanest cars, while putting revenues on a sustainable long-term footing.

[Caroline Lucas]

The Minister will not be surprised to hear that I completely disagree with him, but it is not just me, as the Society of Motor Manufacturers and Traders also says that this change to VED means that the take-up of low-emission vehicles will be disincentivised. How can that be a positive thing to do? He talks about productivity and in other places about the importance of air quality, but these measures, again, undermine both.

[Mr Gauke]

That is an unlikely alliance, but what I say to both the hon. Lady and the SMMT is that there is still an incentive in the first year and the evidence suggests that that is most important in influencing behaviour. There are incentives within the system.

[Sammy Wilson]

rose—

[Mr Gauke]

I will give way to the hon. Gentleman; an even more unlikely alliance might be about to be formed with the hon. Lady.

[Sammy Wilson]

I can assure the Minister that there is not likely to be an alliance between me and the hon. Lady or her party. The revenues will apply to a roads fund for England, but what arrangements does the Minister intend to put in place for the tax that is collected in places such as Northern Ireland and for that money then to be diverted to infrastructure projects for roads in that part of the United Kingdom?

[Mr Gauke]

I understand the good point that the hon. Gentleman is making. There will be a need for discussions with the Northern Ireland Executive to ensure that we reach a sensible conclusion to reflect the various requirements across all the United Kingdom. I hope he appreciates that we understand the point he is making.

Through backing businesses and supporting infra- structure investment, this Bill will take important steps to boost our productivity, creating growth and prosperity for all.

Before I conclude this speech I would like to comment briefly on the Government’s tax policy making process. At the start of the last Parliament, the coalition set out its ambition to improve the tax policy making process, through high levels of consultation and legislative scrutiny. That approach was welcomed by tax professionals, and I am delighted to inform the House there have been real achievements. More than 150 formal and informal consultations on tax changes took place over the past five years, and our commitment to publish the majority of Finance Bill clauses in draft was met. I can confirm that this new approach will continue into this Parliament. Indeed, since the recent Budget, we have already published more than 10 consultations on tax policy proposals for future Finance Bills. I should also add that we are establishing the Office of Tax Simplification on a permanent footing as from today, and I am delighted that we are able to do that.

The Finance Bill before us today, at the start of the new Parliament, sets out the priorities and direction of this Government. Our direction is simple: towards stability and prosperity. The Bill rewards work and supports aspiration through lower taxes for working people; helps fix the public finances by tackling avoidance, evasion and imbalances in the tax system; and takes important steps in improving the UK’s productivity. I am delighted to commend it to the House.

--- Later in debate ---

[Mr Gauke]

I am grateful to the hon. Lady for informing the House that the official Labour party position is to abstain. Will she clarify: is she speaking for her Back Benchers today, because it does not always follow?

[Shabana Mahmood]

That was not quite the cutting put-down that the Minister might have envisaged. That is our position, and that is what all our party will be doing today.

--- Later in debate ---

[Shabana Mahmood]

My hon. Friend makes an important point. I wonder whether we would have the tax lock had it not been for the VAT bombshell poster we unveiled or for the exchanges at Prime Minister’s questions ahead of the general election. Ministers were certainly very quick to write such a law, and despite the Chancellor having suggested in 2009 that passing laws to ensure promises on taxation are kept was a very bad idea, he was very quick to convert to that cause. Nevertheless, they are passing a law on the tax lock. It was Labour party policy, and we are very pleased that we pushed the Conservative party into our territory in agreeing that the rates for ordinary people on lower and middle incomes should not go up.

Another change we support is on the annual investment allowance. I am pleased that the direction of travel has been set out for the whole Parliament. That contrasts very strongly with what happened during the last Parliament, when lots of chopping and changing on capital allowances definitely undermined business investment. Even if the deal is less generous, with a decrease from £500,000 to £200,000, it is important that businesses at least know that the deal they are going to get will last a lot longer than it previously did.

As my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) has mentioned with respect to the expected changes on corporation tax, there is a lack of concrete proposals for business rates. The Financial Secretary has raised expectations and hopes of real change on business rates when the consultation is finally unveiled later this year. We will certainly look at whether the business rates burden will come down for small and medium-sized companies.

[Mr Gauke]

The hon. Lady mentioned corporation tax. The Bill includes measures to reduce it first to 19% and then to 18%. Will the Labour party support those reductions, oppose them—after all, that was its position—or abstain?

[Shabana Mahmood]

As the Financial Secretary knows because we have already had such an exchange—I feel we are reliving our greatest hits—on a number of occasions in the past couple of years, our policy at the general election was our manifesto commitment not to go ahead with the corporation tax cut from 21% to 20%. We would not have gone ahead with that additional cut to 20%, but instead used all the money to pay for a cut to business rates this year and a freeze next year. It was a direct switch spend. We wanted to make a commitment to small and medium-sized businesses in our country to do something practical on business rates, but we needed to find a way to pay for that, and we chose to switch-spend in respect of the additional corporation tax cut. We of course lost the election, and the Government are proposing a further decrease of the corporation tax rate. We will support the corporation tax measures, but we will ask questions about what that means for the future direction of travel.

Following an intervention, the Financial Secretary mentioned the BEPS project. On corporation tax more generally, it is important—given how some companies seek to shift profits and game international taxation rules—to have international agreement. Concern has already been expressed in some quarters that some of the countries with which we need to do business and with which we need to agree international tax rules might start to see us as a tax haven. I disagree with such a characterisation, but there is such a risk in getting agreement within the OECD BEPS process. I would welcome it if Treasury Ministers could, in Committee, provide further details about what is happening and about how our friends in the BEPS process are reacting and responding to the Government’s proposal on the headline rate of corporation tax.

One measure we have already voted against relates to inheritance tax. Clause 9 introduces an additional residence nil-rate band for inheritance tax when a home is passed to the direct descendants of the deceased on or after 6 April 2017. The provision, which runs to more than 400 lines, is extremely technical, but it in effect allows parents to pass on a house worth £1 million to their children free of inheritance tax. We have made it clear that the focus of tax cuts should be to help people on middle and lower incomes and to tackle tax avoidance. The Treasury has admitted that 90% of households will not benefit from the Government’s inheritance tax policy. Their priority should be to help the majority of families and first-time buyers struggling to get a home of their own, rather than a further cut to the rate of inheritance tax at this stage.