David Gauke
Main Page: David Gauke (Independent - South West Hertfordshire)Department Debates - View all David Gauke's debates with the HM Treasury
(11 years, 4 months ago)
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Chris Evans
Yes, but I should tell the hon. Gentleman that I was in the Treasury Committee when Bob Diamond came to give evidence about LIBOR and that I was in the Chamber when the Chancellor announced the investigation. I listened to it and it made me sad. It made me sad because I realised for the very first time that people do not trust anybody any more. That is the problem. It goes much deeper than economics, politics, banking or whatever. People simply do not trust others any more. [Interruption.] I know that I am digressing from the new clause, Mr Deputy Speaker, and that you are itching to stop me. I want to put it on the record, however, that I genuinely feel that people do not trust each other any more. That is the saddest thing of all about this issue. It does not matter whether we are talking about Conservatives or Labour, people just do not trust politicians, journalists, lawyers or others. This is a much deeper problem than anything else for our society.
That brings me to the issue of anger about what the family man or family woman will save from what is on the kitchen table tonight. When those people hear about the tax cuts for the rich, I am sure they will think of those bankers who may or may not have committed crimes, of the journalists who may or may not have committed crimes, and of the editors of national newspapers—people earning six-figure salaries—and they will believe that those are the people who will get rewarded. That may not be the case, but that is the perception, and as we all know as politicians, the perception is usually stronger than reality. What members of the public will think about this Government and about this place is that they are run by an elite who are more interested in helping out their friends in the City than anything else. That is the real tragedy of this issue.
I have sat here and heard all the arguments about the tax cuts. Yes, I have attacked what I believe is a failed economic theory, but the truth is that the Government won the election in May 2010. I do not like that personally, and I hope that we can turn that around in 2015. The Government have the right to put whatever they want into the Finance Bill, and we cannot change it, much as I would have loved to table an amendment to abolish this tax cut. I cannot, and all we can do is bring about a review. This review is crucial because it will allow us to see how much this cut for millionaires is affecting the British economy.
This may be deemed an aside, Mr Deputy Speaker, and you may call me to order, but let me ask the Minister one more question. When the Treasury was considering the 5p tax cut, did it also consider a 1p tax cut for those whose earnings were below the threshold? If it did not consider that option, why did it not do so, and if it did, why did it rule it out?
You are clearly champing at the bit, Mr Deputy Speaker. Perhaps you want me to wind up my speech, and I shall try to do so. [Interruption.] Do not get too enthusiastic, please!
We need a review. We need to know the facts, because this is so important.
The Exchequer Secretary to the Treasury (Mr David Gauke)
We have heard a couple of rather lengthy speeches about a topic that is fairly familiar to those of us who have dealt with Finance Bills in the past. We discussed the reduction in the top rate of income tax at some length during the early, middle and late stages of last year’s Bill, and we have discussed it on a number of occasions during our earlier debates on this Bill. It is striking, however, that the number of Labour Back Benchers present during much of today’s debate so far has been three or perhaps four. Although we have heard some passionate and lengthy speeches, I am not sure that I need to make a lengthy speech in response, but a few basic points are worth making.
The Government agree that the wealthiest should make the biggest contribution to deficit reduction, and it will be clear to anyone who looks at our record across the board that we have stuck to that principle. In the 2010 Budget, the higher rate of capital gains tax was increased. In the 2011 Budget, we tackled a major area of tax avoidance, namely disguised remuneration. The Labour party opposed that measure in Committee, but we tackled the problem none the less, and our action has resulted in considerable extra revenue, particularly from high earners.
The 2012 Budget, which contained the measure that has provided the subject matter of most of today’s debate—the cut in the 50p rate of income tax—also introduced a new rate of stamp duty for high-value homes, measures to clamp down on stamp duty land tax avoidance, and a cap on reliefs used in the tax system, which raised an amount considerably larger than the cost of the cut in the 50p rate. The 2012 autumn statement provided for action to reduce the cost to the Exchequer of pensions tax relief, and the 2013 Budget contained further measures to tackle offshore tax evasion by, in particular, high earners.
We clearly have a strong record in this respect. We have gained additional revenue not only from capital gains tax and stamp duty, but—as is shown by the distributional analysis—from the income tax paid by the top 1% of earners. That was mentioned by a number of my hon. Friends, including my hon. Friend the Member for Gainsborough (Sir Edward Leigh), who pointed out that we are receiving more from the top 1% than the Labour party ever managed to.
It is interesting to note that the proportion of income tax contributed by the top 1% exceeded 25% in only one year during Labour’s time in office, namely 2009-10, which was a slightly strange year because a large amount of income was brought forward so that the tax could be paid at a rate of 40% rather than 50%. In that year, 26.5% of income tax was paid by the top 1%, but in the remaining years the proportion was 25% or lower. We estimate that in 2013-14, with the new lower rate of 45%, nearly 30%—to be precise, 29.8%—of income tax receipts will come from the top 1%. The problem with the 50p rate was that it was not very good at doing what a tax is supposed to do—raising revenue. That is the Labour party’s essential difficulty in advocating a 50p rate of income tax.
Bob Stewart (Beckenham) (Con)
I do not understand all the differentials, but is the Treasury model that we would get more tax income by reducing the rate than by leaving it at 50%?
Mr Gauke
My hon. Friend brings me to the point that I wanted to move on to: the report that the Chancellor of the Exchequer commissioned in Budget 2011 to evaluate the Exchequer impact of the additional rate of income tax. The report was published alongside Budget 2012. It concluded that the underlying yield from the increase from 40% to 50% was much lower than originally forecast, owing to large behavioural effects—it was possibly only £1 billion and could in fact be negative. The 50% rate also risked damaging growth and the UK economy if it had remained permanent.
Mr Brooks Newmark (Braintree) (Con)
The hon. Member for Islwyn (Chris Evans) focused on our policies. The inconvenient truth for the Labour party is that it had the opportunity for 13 years to test the 50p rate to destruction, but we quickly saw the evidence of the Laffer curve, which shows that, as we lower tax rates, we can collect more revenue. The Government should be congratulated on finding alternative ways of trying to get the rich to pay their just deserts, if the Labour party wants them to do that. In fact the Government have collected more money from the rich by lowering the rate from 50p to 45p and by looking at other ways to collect that money.
Mr Gauke
My hon. Friend is absolutely right. The point is not whether we should seek to get a significant contribution from the wealthiest; it is how we go about doing it. There is a real problem with a very high rate of income tax directed at the most mobile people, who have many more options in how they respond. Not surprisingly, the evidence that the HMRC evaluation discovered is that there is a significant behavioural response.
The hon. Member for Kilmarnock and Loudoun (Cathy Jamieson) said, “This is all tax avoidance and one should crack down on tax avoidance.” I agree: one does need to address tax avoidance, and we have more ambitious targets for HMRC than it has ever had before. We have made a number of changes to the law to address avoidance. I could go on at some length about the steps that we have taken, but the behavioural effect is not only about tax avoidance, it is also about behaviour that is entirely consistent with Parliament’s intentions. One might find people making bigger pension contributions, for which the House has determined tax relief should be available. One might find people retiring earlier or locating in other jurisdictions. All those things have an impact.
Therefore, there is a significant behavioural effect in this area, which brings me to the point that my hon. Friend the Member for Braintree (Mr Newmark) made: the 50p rate is not an effective way of raising revenue, which is why, in my opinion, the Labour party will not give a commitment to bringing the 50p rate back. It knows it is bad economics and does not raise revenue. It knows it sends a bad message about the UK as a location in which to do business. That is why Labour had a 40p rate for 4,722 of the 4,758 days that it was in office. There was a 50p top rate for just 36 days at the very fag end of the last Government, when they knew with a fair degree of confidence that they were going to lose office.
Mr Newmark
I sympathise somewhat with the point of the hon. Member for Islwyn (Chris Evans) about his and his party’s desire to target bankers, but if we want to create an entrepreneurial society, we must realise that not all the big wealth creators are bankers; they are also people in manufacturing, hi-tech industry and so forth. If we want them to settle in the UK, we must make our tax environment attractive and competitive internationally.
Mr Graham Stuart
My hon. Friend is giving a thoughtful economic analysis, but he perhaps misunderstands where the Opposition are coming from, because I do not think they are particularly interested in the economics. The fact is that their position is now so desperate that they have their 36% strategy, they are entirely paid for by the union movement, and their desire now is to lurch to the left. They do not care if they get less money; what they want to do is appeal to a core vote which they hope will be enough to return them to power because of the invidious and unfair electoral system we have. That is what is going on, which is why we waste our time when we talk about entrepreneurialism or the benefits to public services, because they are not really interested.
Mr Gauke
My hon. Friend takes a sceptical view of the Opposition, and events may well turn out to justify it. I want to take a more charitable view, however—although perhaps it is, in fact, a different form of scepticism or cynicism. My view is that they are not really serious about the 50p rate at all; much though they talk about it, they will not, in truth, pursue this policy because they know it is so damaging and that it does not do anything to raise revenue. That is why, despite repeated questions earlier, the hon. Member for Kilmarnock and Loudoun, who does like to be straightforward with the House, refused to say whether Labour would support a 50p rate after the next general election. She makes the argument that Labour will have to delay and wait to see what the state of the economy is, but given that we know this does not raise any substantial amount of revenue, it cannot be dependent on the state of the public finances; instead, it is a matter of political calculation. I hope my hon. Friend is wrong and that the Opposition are trying to edge away from a position that they saw as populist but which, in truth, is economically incoherent.
Cathy Jamieson
I am intrigued by the amount of advice being given to the Labour party by those on the Government Benches. Given that the Minister said he wanted to be in charitable mode, to return to the new clause, will he not concede that there is an argument for looking at the matter more thoroughly and having this review in order, as the Treasury Committee concluded in its report on the 2012 Budget, to discover what the actual impact of reducing the rate would be?
Mr Gauke
I am not persuaded by that argument. I hoped the hon. Lady would take that opportunity to provide some clarity on the Labour party’s position, but she did not do so. We do not need another review. We have evaluated the impact of the 50p rate. It was an economic failure. It failed to raise revenue. It in effect put up a “closed for business” sign over the UK economy. It was about politics, not economics.
I urge the Opposition to withdraw the new clause, and I hope they will also return to their approach of a few years ago. As my hon. Friend the Member for Gainsborough pointed out, when Tony Blair was in charge he was making pledges not to increase the top rate of income tax. That at least demonstrated a sense of where the UK needed to be and its place in the world, but that has, I am afraid, been long forgotten by the Labour party which just drifts ever leftwards.
Cathy Jamieson
Following the Minister’s example, I will be brief. We have had a useful debate containing some impassioned speeches, not least those from my hon. Friend the Member for Islwyn (Chris Evans) and from the hon. Member for Gainsborough (Sir Edward Leigh), who, interestingly, sought to give advice to the Labour party. My hon. Friend gave an interesting critique of Laffer curve economics but related it, importantly, to what happens in the real world. He spoke with a great deal of passion and experience from his time working in the financial services sector. He was absolutely right to say that not everyone working in the banks was wrong, and many people working on the front line are trying to change things and to clear up the problems. These people did not adopt the principles that got the banks into such difficulty.
Earlier, I read out a couple of quotes from various hon. Members about cutting the top rate, but, to keep a balance across the coalition, let me cite one that I missed from the president of the Lib Dems. The hon. Member for Westmorland and Lonsdale (Tim Farron) has said:
“Cutting the top rate was a stupid thing to do. It probably raised up to £3bn a year. We should pledge to restore the 50p rate at the next election. It’s not enough to be fair, you have to be seen to be fair.”
That has been one of the threads running through this afternoon’s debate. [Interruption.]
Again, I hear Government Members muttering from a sedentary position about what the Labour party is going to do. I outlined this earlier, but I will state it again: we will, of course, set out our manifesto in due course, in time for the general election—that is absolutely the correct thing to do—but we will not make false promises. We will not make promises that we will not be able to keep. Let me remind the House of that quote from the Prime Minister:
“I have been very clear—we have all been very clear—that we have to do this in a way that is fair so that the broadest backs bear the biggest burden.
That is why we haven’t changed… the 50p tax rate.”
As I outlined, that particular pledge was not kept and those with the broadest backs do not appear to be carrying the biggest burden.
The Minister said that he wanted to be charitable and to understand why we tabled the new clause, and I know from Finance Bill Committees that he does at least reflect on things. He rarely gives in to temptation to resist the advice he is given to reject all amendments and new clauses, but he does at least give the appearance of reflecting. In this case, I cannot understand why he will not accept a mild-mannered proposal that simply seeks to have a review of the impact of this measure and to bring forward further information for the interest of hon. Members across the House. That is a reasonable and sensible thing to do, and I know that the Minister, certainly in opposition, has regularly argued for this type of review. We have heard nothing from him today to explain why, suddenly—[Interruption.] Given the side conversation that is going on, I am sure that the Minister never got any of those reviews into the legislation at that time, but I say to him that there is a first time for everything. He could, even at this late stage, decide it was the correct thing to do to allow the review to go ahead and ensure that the House had further information.
I do not want to repeat all the points made earlier, as that would not be helpful at this stage. However, I simply remind the House that it is not only Opposition Members who are claiming or suggesting that there are concerns about this measure. To go back to the IFS, it stated:
“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”.
Much of the Government’s argument has been predicated on the notion that people will change their behaviour, but I have heard nothing from the Government that suggests to me that behaviour would be changed in such a way that there would suddenly be a huge influx of resource into the Treasury. The IFS went on to say:
“There is a lot of uncertainty, a lot of risk on this estimate.”
Chris Leslie
That is precisely why we think the proposal needs the Treasury’s support—to ensure that we can see what the levy would be. To return to our new clause, we think that the Liberal Democrats make a reasonable point that £2 billion could be raised on properties worth more than £2 million. We have not included those figures in our new clause; we have simply said that the Exchequer Secretary should study the issue and consider a 10p income tax rate band, to be funded by the proceeds of a mansion tax. That obviously depends on how wide the 10p band would be, so it is obviously moveable and that would flow through into the figures on the mansions tax.
Mr Gauke
I am afraid that I am going to disappoint the hon. Gentleman. He says that the Labour party’s objective is to raise £2 billion. Our assessment, as my hon. Friend the Member for Enfield, Southgate (Mr Burrowes) has pointed out, is that there are 55,000 properties worth more than £2 million in the country. We have the finest minds in the Treasury working on this, and they have divided £2 billion by 55,000—it did not require a huge amount of work—and ended up with an average of £36,000 a year as the annual levy. That is an average, and there might be some cases where the hon. Gentleman would want a lower rate for those who are property rich but cash poor. Can we just have some clarity? Does the Labour party want an average levy of £36,000 on all properties worth more than £2 million?
Chris Leslie
That was a good try by the Exchequer Secretary, and I understand where he is going with that argument, but I am not an estate agent and do not have a figure for the number of properties worth more than £2 million. However, it is very interesting that the Government have started counting the number of such properties. He talks about how the £2 billion would be defrayed across that number, which I am not sure is correct, but of course there would be a banding exercise, with different bands for properties worth more than £2 million, and we would see how far that goes. That is precisely why we need the Treasury to share some of its calculations with us. I am sure that it must be more than a back-of-a-fag-packet calculation from the Exchequer Secretary. Let us do the work, publish the findings— [Interruption.] Well, I will give way to him if he will agree to publish that work. Will he publish the internal Treasury assessment of the policy, because it would be very helpful?
Mr Gauke
Short of showing the workings, £2 billion divided by 55,000 is £36,000. The hon. Gentleman says that there would be different bands, but we would still end up with an average of £36,000. He will also find that most of the properties worth more than £2 million are worth only slightly more—between £2 million and £3 million. He will not find huge numbers of properties worth between £5 million and £10 million and so on. He has all the numbers he needs. I think that we can move on to the next debate.
Chris Leslie
I know that the Liberal Democrats support the Government on that and note the sedentary remarks from one of only two Liberal Democrats in the Chamber today. It is typical of the Treasury to hold back key information on these facts and figures. We need to know where those properties are and what valuations have been made. The Exchequer Secretary has done the work on the annual tax on enveloped dwellings, but he did not say that he would publish those findings. I think that we might be about to reach some consensus on this, because he is suggesting that the Treasury has done some work on it secretly, rather like the secrets held back in the spending review document, which was so thin that we still do not really know where the cuts have hit. Why does he not publish that information and start telling us how that could work in those circumstances? Will he publish it?
Mr Gauke
Actually, I quoted the figure of 55,000, which appears to have come as a huge surprise to the hon. Gentleman, several times when we had a similar debate in Committee. Admittedly, he was not dealing with the matter; his hon. Friend the Member for Newcastle upon Tyne North (Catherine McKinnell) was. The figure has been in the public domain for some time. Has he done any work on the matter?
Chris Leslie
I do not know how simple I need to make the point for the Exchequer Secretary, so I will do so very slowly and particularly. The new clause suggests that the Treasury—that means him, by the way—should publish some proper, worked-through evidence on where those properties lie across the country, how a banding proposal might work and what the options for the width of the 10p starting rate of income tax might be. By the way, he did not say a word about whether or not he supports a 10p starting rate of income tax.
Mr Gauke
New clause 9 proposes the introduction of an income tax rate of 10p on a band of income determined by the Exchequer yield of a mansion tax. Let me explain why the Government do not believe that the new clause is sensible
We are already helping people on low and middle incomes by means of the tax system. In May 2010, the coalition agreement set out our commitment to making the first £10,000 of income free from income tax by the end of the Parliament. In April we increased the personal allowance to £9,440—that was the largest ever cash increase—and it will rise again, by a further £560, to reach £10,000 in 2014-15, meeting this Government’s commitment a whole year early.
Opposition Members clearly think that it would be better to introduce a starting rate of income tax, but let us not forget that they introduced a 10% rate once before and then scrapped it, to the cost of many of the people further down the income scale whom they claim to want to help. We have replaced the 10p rate that they doubled with successive increases in the tax-free personal allowance which effectively provide a 0% band. Our changes in the personal allowance have already more than compensated those who lost out when the 10% rate was abolished. In fact, since April 2013, those who lost the most as a result of the last Government’s policy have paid no income tax at all.
According to the Institute for Fiscal Studies,
“the proposal for a new 10p starting rate of income tax, has no plausible economic justification. It would complicate the income tax system and achieve nothing that could not be better achieved in other ways.”
The IFS says:
“A far simpler and more sensible way of achieving these aims would be to spend the same amount of money on increasing the personal allowance...This would have virtually the same impact on individuals’ tax payments… be slightly more progressive, take some people out of income tax altogether and avoid the complexity involved in introducing a new income tax rate.”
Proposed subsection (2) of the new clause proposes the introduction of a mansion tax to pay for the proposed introduction of a 10p rate. That proposal has already been debated a number of times in the House, and the Government’s position is clear. The coalition parties have different views, but the view of my party is that a mansion tax is not the answer.
We expressed our concern in the Public Bill Committee, during a debate on the annual tax on enveloped dwellings. As we made clear then, a third of the properties in London that are worth over £2 million have been owned by the same people for more than 10 years. Many of those people, such as elderly owners whose properties had increased substantially in value during that period, would be faced with an average tax of £36,000 every year, and could be forced out of their homes. Moreover, families or other owners of high-value homes would not necessarily have the liquid income that would enable them to pay the tax. A mansion tax could hit asset-rich but potentially income-poor households.
Mr Gauke
I will in a moment. I look forward to the hon. Gentleman’s question, and will listen to it attentively. Before I do so, however, I should acknowledge his assurance that there would be a case for some type of mitigation for people in the circumstances to which I have just referred. That would, of course, have an impact on the yield, and the average of £36,000 would increase.
Chris Leslie
With whom do the Minister’s sympathies lie most? Do they lie most with the householder faced with the hardships of the bedroom tax, or with the householder faced with having to deal with the mansion tax?
Mr Gauke
Let me reply by echoing what was said by my right hon. Friend the Secretary of State for Work and Pensions during Question Time this afternoon. For all that we hear from Labour Members about the so-called bedroom tax—the spare-room subsidy—they have given no indication that they would reverse the current Government’s policy. For all the bluster on that—[Interruption.] Let me make this point. Labour Members should be straightforward about the fact that their policy would have an impact on, for example, elderly widows who have lived for many years in a property whose value has increased. Would they seek to address that?
In addition, the mansion tax would not be precisely targeted at the very wealthy. It would not take into account the number of properties owned. Therefore, a person owning two properties valued at £1.9 million each would not fall within its scope but a family owning a £2 million home would, even though their property wealth was much lower. Any mansion tax would be complex to introduce and administratively burdensome for HMRC to operate. It would come at a cost for taxpayers, not to mention that it would be intrusive for the person having their home inspected.
I know that the essence of Labour’s argument is that we already have the annual tax on enveloped dwellings. However, that is a very targeted tax. Essentially, only 1,000 properties are likely to be affected by it, so it applies to only a very small group of taxpayers. HMRC can therefore administer the tax manageably, relying on self-assessment, with a limited number of inquiries. A mansion tax would affect a much larger number of taxpayers and require greater administration and valuation, which would make it much more expensive, time consuming and difficult to collect.
Chris Leslie
I am interested in the fact that the Minister thinks that the analogy is not applicable. How, though, would the administration of the mansion tax be more time consuming? The owner of the property would have responsibility for the valuation. It would not be more onerous for HMRC in that respect, if it were to follow the design of the ATED arrangements.
Mr Gauke
We do not believe that that model could be scaled up to apply more generally. A proper valuation process will be needed if the mansion tax is a much less targeted tax. Let me give the Labour party a degree of credit, however. The hon. Gentleman said that Oppositions are often asked how they would pay for a measure, and the hon. Member for Islwyn (Chris Evans) said that Labour has a policy to pay for this proposal. However, under the mildest of questioning, the policy appeared to unravel before our eyes. The target yield is £2 billion. I repeat a number that I gave some weeks ago in Committee: the Treasury believes that 55,000 properties are valued at above that level. We undertook that research to cost the annual tax on enveloped dwellings. That is the number. A very simple calculation gives us an average of £36,000 a year. Rather than Labour saying, “We accept that. That is how we will pay for this. That is how we will get a yield of £2 billion,” it is sliding away from the policy. It is not accepting that that is the consequence of what it is advocating. If it thinks that £36,000 is too steep—maybe it does not, maybe it does—it should acknowledge that, but that is the average cost. I suspect that Labour does think that it is too steep and that is why the £2 million threshold is under threat. That is why, to raise £2 billion, any Government would have to apply the mansion tax to lower down the property ladder. That is why a tax that is designed for the few will become a tax for the many. The tax is ill thought out. Either it will result in very high sums being levied on small groups, or it will not raise anything like the yield that the Labour party claims it will and it will apply more generally.
Introducing a mansion tax would create real fairness issues by hitting asset-rich but potentially income-poor households. It would serve only to create complexity and uncertainty. The personal allowance is the most effective way to support those on low and middle incomes, because it enables people to keep more of their money. It is a better policy than reintroducing the 10p rate of income tax. The Government have made huge strides to make a fairer society and a stronger economy. All elements of the new clause are flawed. I urge the hon. Member for Nottingham East (Chris Leslie) to withdraw the motion.
Madam Deputy Speaker (Dawn Primarolo)
With this it will be convenient to discuss the following:
Government new clause 5—Restrictions on buying capital allowances.
New clause 12—Anti-abuse measures—
‘(1) Her Majesty’s Revenue and Customs shall review the possibility of bringing forward measures as part of the GAAR to work in conjunction with other G8 countries to require multi-national companies to publish a single easily comparable statement of the amount of corporation tax they pay in the UK.
(2) The Chancellor of the Exchequer shall review the effect of incorporating a global standard for public registration of ownership of companies and trusts via a convention on tax transparency, including a requirement on companies to publish a single easily comparable statement of the amount of corporation tax they pay in the UK, on Treasury tax receipts.
(3) The Chancellor of the Exchequer shall consider, when counteracting tax advantages arising from tax arrangements that are abusive, what steps HM Government could take, working alongside developing country governments, to assess how UK companies could report their use of tax schemes that have an impact on developing countries, and how the UK could assist in the recovery of that tax.
(4) Within six months of the passage of Royal Assent, the Chancellor of the Exchequer shall place copies of the review in the House of Commons Library, and consult with G8 countries on their effectiveness.’.
Government new schedule 1—Transfer of deductions.
Government new schedule 2—Restrictions on buying capital allowances.
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.
Mr Newmark
I congratulate the Government on their work, particularly in the G8 meeting, in trying to co-ordinate efforts to prevent abuse by multinational companies. Such companies are extremely portable and, does he not agree that the big problem is that if we do not act on a multi-jurisdictional basis, they can move anywhere? If we take unilateral action and they move, that risks jobs in this country—that is why we must never act unilaterally in dealing with such situations.
Mr Gauke
My hon. Friend makes a very important point. Elements of a business are highly portable. In 2007-08, for example, the UK’s position on headquartered companies was very uncompetitive because of our controlled foreign companies regime and a number of businesses moved their headquarters out of the UK and went elsewhere, which had an impact not just through lost corporation tax revenue but more widely, as it meant that individuals paying income tax and decision making were moved out of the UK. That was not in the UK’s long-term interest, so we reversed the situation. Now we have a much more competitive position, which means that companies are moving back to the UK and that new businesses are moving here, too.
My hon. Friend the Member for Braintree (Mr Newmark) is absolutely right that elements of a multinationals’ business are very mobile and that we need a tax system that reflects that. An important part of making our tax system fit for purpose is that it should reflect that, which is why we should work multilaterally.
Mr Newmark
Not that I like to pick on individual countries, but does my hon. Friend agree that the evidence from France, with a relatively newly elected left-wing Government, suggests that businesses and wealthy individuals are moving across the channel in their droves to set up business in the UK?
Mr Gauke
I would say—I think that this is the most tactful way of putting it—that the Government are determined to send the signal that the UK is open for business. That is how we can win the global race. Other Governments might wish to take other approaches, and that is for them to decide. For the UK, we believe in open markets and a competitive tax system—but a tax system, none the less, in which businesses pay the tax they should and in which economic activity is properly taxed.
We have made a commitment to act and have backed that up with extra resources for the OECD. The UK has been actively participating in the development of the OECD’s comprehensive action plan for tackling such issues, which will be presented to the G20 later this month. It might interest hon. Members to know that at the recent Lough Erne summit the G8 called on the OECD to draw up a common template for multinationals to report to tax authorities where they make their profits and pay taxes around the world. That will give tax authorities a new tool against tax avoidance to help them efficiently identify and assess risks, but requiring publication of that information would put the UK at a competitive disadvantage to other countries that did not require publication. It would also impose costly administrative burdens on business and Government.
The new clause proposed by the Opposition would require all multinational companies to report all their UK corporation tax payments—not just tax related to the GAAR, but the whole of their UK corporation tax. That goes way beyond the clear policy that we have set for the GAAR and would risk giving an impression that the GAAR has an impact on all corporation receipts, creating the sense of uncertainty about the impact of the GAAR that we have gone to some lengths to avoid.
Stella Creasy (Walthamstow) (Lab/Co-op)
I am interested by the Minister’s comments. The Minister has concerns about publishing such data, but in other cases the Prime Minister extols sunlight as the best disinfectant. Is it not important, if the public are to be confident in our tax system, for them to have such information? Why does he feel that tax receipts should be exempt from that disinfectant process?
Mr Gauke
There is a long-standing and widespread approach that tax is a matter of confidentiality between taxpayers and the tax authorities. I say that the approach is long standing; it is the approach we have had in the UK for time immemorial.
It is also the position that applies in pretty well all major economies, and if we were to change that approach, it would be sensible to do so multilaterally. If we introduced a requirement that multinationals based in the UK had to publish information in a way that would not apply if they were based elsewhere, that would raise questions about the attractiveness of the UK as a place in which to do business.
On how to move forward in this area, I would make the wider point that we work multilaterally. That approach was endorsed by Tony Blair, who, in a recent interview, said that if countries move unilaterally, others will eat your lunch, to put it bluntly. I think that was the phrase he used. It is right that we work with other countries to ensure that we have an effective tax system, but I would not favour measures that left the UK isolated in such a way.
Stewart Hosie
I am genuinely confused. The Minister said that the measure would go wider than the GAAR as intended, because it covered all a business’s corporation tax, but part 5 of volume II of the Bill states at clause 203(3):
“The general anti-abuse rule applies to…corporation tax, including any amount chargeable as if it were corporation tax or treated as if it were corporation tax”.
The idea that the proposal would widen the measure beyond the scope of the Bill does not appear to be correct.
Mr Gauke
I hope I can clear up the hon. Gentleman’s confusion. The GAAR applies to corporation tax—I am not arguing for a moment that it does not—but the point is that lumping in the new clause, which is based on the GAAR, and moving from the GAAR being quite carefully targeted at abusive tax avoidance to essentially saying that everything needs to be published under the GAAR as part of a general anti-avoidance or anti-abuse rule would rather confuse things. It is a pity to muddle the two. There is an argument for greater transparency and for publishing things, and there is an argument for a GAAR, but to bring the two together as the Opposition have done—perhaps that is partly due to parliamentary constraints and so on—sends out an unfortunate message. The two should be kept apart. I hope that has made things clearer for the hon. Gentleman.
Stewart Hosie
Well, not particularly, because the other argument that the Minister used is that the proposal might put us at a competitive disadvantage. However, the Bill is clear: one of the priority rules is the double taxation agreements that are already in place, so nothing could be done that impacted on the amount of tax a corporation paid in relation to its tax in the UK and elsewhere, because the double taxation agreements would have priority in any event. The Minister is trying hard to explain why he does not like the proposal, but he is not really succeeding.
Mr Gauke
The double taxation agreements are part of the international structure, but that is not the only element that determines whether the UK tax system is competitive. The point I am arguing is that our engagement and the leadership shown by the Prime Minister and the Chancellor represent the right way to go about changing how multinationals are taxed. I would consider, for example, what came out of the Lough Erne summit and, more broadly, measures to ensure that people pay the right amount of tax, as well as the dramatic progress that has been made including, on tax evasion, the exchange of information between Crown dependencies and overseas territories, and indeed the creation of a new international norm based on the American Foreign Account Tax Compliance Act, or FATCA. That is a big step forward, and we continue to take steps, leading the way in this multinational effort to give tax authorities new tools to deal with tax avoidance by providing more information about beneficial ownership. All those are steps that can help us to deal with tax avoidance and tax evasion. I hope they will be welcomed by all Members of the House.
John Mann (Bassetlaw) (Lab)
May I say how pleased I am to hear that the Minister is a converted Blairite these days? In extolling the virtues of what he has done with the overseas territories, he has ignored the fact that none of us, including Treasury officials, knows who owns what company and what company structures are there, and therefore what moneys are around. That includes some of the big banks and state-owned banks.
Mr Gauke
I am grateful to the hon. Gentleman, who brings me on neatly to the next issue, which is registration of ownership. New clause 12(2) asks for a review of the effects of
“a global standard for public registration of ownership of companies and trusts via a convention on tax transparency”.
At the recent Lough Erne summit, the G8 leaders all committed to work internationally to ensure that tax collectors and law enforcers can easily obtain information about who really owns companies. That represents real progress in the UK’s aim to secure a substantial change in international tax transparency. That is an important point and something that we have been pressing. We have agreement from the overseas territories to develop their plans to ensure that there is access to information on beneficial ownership.
John Mann
I thank the Minister for generously giving way. We do not even know in this country about thousands of companies based here because inadequate returns are made to Companies House, which has neither the wherewithal nor, it would appear, the desire to do anything about that. How on earth is anyone meant to get on top of structures abroad when we are not even on top of corporate structures in this country?
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.
Stephen Doughty
The Minister will recall our debates on this issue in Committee. I am afraid that I still do not buy the arguments that he makes, just as I did not buy them then. Does he not understand the disappointment felt by the many campaigners on this issue? The Enough Food for Everyone If campaign said that Treasury Ministers’ refusal to consider the amendments put forward in Committee, which are very similar to new clause 12, was shocking. There is a real contrast between the Prime Minister’s big words at the G8 and what is happening in practice. This is a reasonable new clause, and campaigners just do not buy the arguments.
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.
Alison Seabeck
Indeed, but that is a whole separate debate. My hon. Friend makes a serious, sensible point.
In this recession, we really cannot afford to allow those billions to disappear. Nor should we allow those developing countries to lose out so substantially. We need to work closely with other Governments to bring consistency into the process and, in doing so, ensure that doing the right thing in taxation terms is given value. We need transparency so that the public can take more informed decisions about the products they buy and from whom they buy them. I hope that those Members on the Government Benches who have been toying with the idea of supporting new clause 12 will see the sense in getting justice into the taxation system, and that they will support the new clause.
Mr Gauke
We have had a thorough debate. I do not intend to reprise all my earlier arguments, but I want to pick up some of the points that hon. Members have raised. The issue of the yield for the loss-buying rule was raised by the hon. Member for Newcastle upon Tyne North (Catherine McKinnell). It is around £200 million a year, but there is a more precise breakdown available in the tax information and impact note.
Several hon. Members have mentioned the general anti-abuse rule—the GAAR—which is expected to raise around £235 million over the next five years. It will also protect revenue that would otherwise be lost. We believe that it will change the avoidance landscape as its impact starts to be recognised. It will act as a deterrent to those tempted to engage in abusive avoidance schemes, and where those schemes persist, the GAAR will give HMRC the means to tackle them and to secure payment of the right amount of tax.
We have accepted the proposal from Graham Aaronson that a narrowly targeted GAAR is the right approach to tackling the persistent problem of abusive avoidance schemes. This has to be viewed in the context of the fact that the previous Government did not bring in a general anti-abuse rule. We believe that a broader rule would be likely to generate considerable uncertainty, which could lessen the attractiveness of the UK as a place to do business, and generate significant cost for HMRC. We are not complacent, however, and we will continue vigorously to tackle all forms of tax avoidance. Indeed, the Bill will close 10 loopholes, and the Budget announced further reviews of tax law that is being exploited for avoidance.
Simply because a scheme is not caught by the GAAR will not mean that it is okay. The GAAR will not set the boundary for tax avoidance. It deliberately targets abusive avoidance schemes, but HMRC will continue to tackle all forms of tax avoidance using the full range of tools available. As for the argument that we will not need targeted anti-avoidance rules in future, we believe that it would be reckless to remove a central protection against avoidance without being fully confident that doing so would not create risks. Although we expect the proposed GAAR to be effective in tackling and deterring abusive tax avoidance schemes, it might take time for those who engage in persistent avoidance to accept that their schemes do not work, so there will still be a need to retain existing anti-avoidance provisions and amend other legislation that provides unintended tax planning opportunities that are not within the scope of the GAAR.