Improving Tax Policy (Finance Bill 2011)
David Gauke Excerpts(13 years, 6 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
At the June Budget the Government set out a commitment to build a new approach to tax policy making1—one founded on predictability, stability and simplicity—with consultation on policy design and scrutiny of draft legislation as the cornerstones. The Government will therefore publish draft clauses planned for Finance Bill 2011 on 9 December. At the same time, the Government will publish a formal response or update on the following consultations that it has undertaken over the summer/autumn:
tax policy-making: a new approach;
simplification of corporate capital gains for companies;
pensions annuitisation;
furnished holiday lettings; and
a number of areas relating to HMRC’s powers review.
Ahead of this, the Government will publish more details on corporate tax reform, including interim improvements to controlled foreign company legislation and reform of foreign branches planned for inclusion in the Finance Bill 2011. It will also publish the outcome of consultations that have been carried out on a number of anti-avoidance measures.
1“Tax policy making: a new approach” HM Treasury and HMRC, June 2010
Finance (No.2) Bill
David Gauke Excerpts(13 years, 6 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
New clause 1 and new schedule 2 seek to provide additional tax relief for companies producing video games. The measure was announced, but not implemented, by the previous Administration. As the Chancellor said in the emergency Budget statement, this tax relief for the video games industry is poorly targeted, which is why we have decided not to introduce it.
The United Kingdom’s video games industry is recognised as a world leader, having produced hugely successful games such as the “Grand Theft Auto” series, and has led to innovations in industries as diverse as defence and health care, as the hon. Member for Dundee West (Jim McGovern) pointed out. All that has been achieved without specific Government intervention for the sector through the tax system.
We estimate that the relief proposed by the Opposition would cost some £40 million to £50 million a year—that was the costing for the previous Administration’s proposal—and we believe that without strong evidence of a market failure in the games industry, it is difficult to justify spending that amount of money on such an intervention, particularly given the state of public finances.
Jim McGovern
At a recent meeting with the Minister, I told him that before the Budget that announced the intention to promote tax breaks, there were at least six ministerial visits to Dundee, which included the then Secretary of State for Scotland, Ministers from the Departments for Business, Innovation and Skills and for Culture, Media and Sport, and the Chancellor. There was a lot of consultation before the then Chancellor eventually announced the decision on tax breaks. Will the Minister tell the House how many visits were made to Dundee before this Government’s decision to withdraw them?
Mr Gauke
The circumstances facing us in the run-up to the June Budget were such that we wanted to introduce a more fundamental reform of corporation tax. In that Budget on 22 June, we announced a reduction in the main corporation tax rate from 28% to 24% over the next four years. In doing that, we wanted to show a sense of direction, to ensure that Britain was open for business, and that we were providing lower rates. Our approach is to have a broader base but lower rates rather than targeted intervention, unless there is clear evidence that intervention is the right approach.
Stewart Hosie
The Minister is being generous. He is paraphrasing the Green Book, which says that the Government will
“prioritise spending which supports private sector growth and investment”.
Various forms of those words have been used since his party and the Liberal Democrats took office. Surely tax breaks that would cost perhaps £195 million and would deliver £415 million in tax receipts are precisely the sort of investment in precisely the sort of industry that would meet the Government’s objectives.
Mr Gauke
We have heard the figures quoted by TIGA, but we do not accept the validity of that analysis because we feel that some of the assumptions underpinning those estimates are erroneous. The research commissioned by the industry implicitly assumes that the investment incentivised by the subsidy is entirely additional to the UK economy. In reality, it is likely that the relief will displace investment from elsewhere in the economy, so the net impact on total UK investment could be limited. For example, it is possible that such a tax subsidy would divert investment from more productive sectors to the detriment of the productivity of the UK economy as a whole.
If Opposition Members are making the case that lower taxes always result in growth in the economy, I would listen with great interest and it would—my right hon. Friend the Member for Wokingham (Mr Redwood) made this point—be an interesting conversion to supply-side economics. I do believe, however, that the strongest economic case can be made for lower tax rates as a whole, across a broader base, as opposed to targeting some sectors, unless there is a strong case that there is some kind of market failure. We have not yet heard such a case being expressed in a way that we find persuasive, and that is why we decided not to proceed with video games tax relief.
That is not to say that we do not wish to support British businesses—far from it; we do. It is vital that we have a strong private sector to drive the recovery, but we must support that growth in the right way. In the emergency Budget, the Government announced a major package of reforms to the business tax regime with the aim of creating the most competitive corporate tax system in the G20.
Mr Mark Field
The Minister has twice referred to the concept of market failure. Did not the hon. Member for Dundee East (Stewart Hosie) make a compelling argument when he spoke about the very nature of this market? Perhaps we should be talking not about market failures but about the way in which the video games industry operates and the fact that its nature makes it susceptible to the kind of tax relief that we are looking for. The Minister is understandably, and rightly, sceptical about some of the figures being put out by TIGA, but a multiplier of nine seems pretty high. What level of multiplier would be so unacceptable as to allow this kind of relief to be put in place?
Mr Gauke
The TIGA analysis makes the assumption that everything achieved as a consequence of the relief would be additional to the economy. It does not appear to recognise that there would also be displacement, and that highly skilled graduates would not remain unemployed if they did not find work in the video games industry. We are therefore sceptical about the TIGA analysis. My hon. Friend makes his point well, however, and the nature and profile of the video games business clearly have some significance for his constituency, but we are as yet unconvinced of the necessity for the tax relief that was proposed by the previous Government, and that is proposed in the new clause.
The Government’s focus must be on providing a strong business environment for sectors across the board, including video games. Our reforms will reduce rates of corporation tax by four percentage points over the next four years, which means that the UK will continue to have the lowest main rate in the G7. This will improve our relative position significantly, compared with that of our competitors, after the years in which we have fallen behind. This will benefit companies across the economy, including those in the video games industry.
Stewart Hosie
My party welcomes the reduction in corporation tax; we believe that it is a good thing. However, some of the businesses that are creating video games are not big enough to pay corporation tax. Many of them are dependent on the annual allowances, but some of those have now gone, and one has been halved. So although I welcome the reduced corporation tax, the overall package will not necessarily help the start-up studios and small studios as they develop their games.
Mr Gauke
We have also reduced the small profits rate of corporation tax from 21% to 20%, when it was set to go up to 22%, and we have effectively reversed the jobs tax—the increase in national insurance contributions that would have hurt start-ups. We are also offering start-ups, including those in the hon. Gentleman’s constituency, a national insurance contributions holiday for the first 10 employees, so there were plenty of positive policies for start-ups announced at the time of the Budget. Indeed, given the state of the public finances, it was a very pro-business, pro-growth Budget in the way that it set up proposals for lower taxes.
On tax simplification, the Office of Tax Simplification earlier today announced the list of reliefs and exemptions within the tax system. When its work began in the summer, the general expectation was that there would be about 400 reliefs and exemptions; the total reached is 1,042 such reliefs and exemptions. Many play an important role within our tax system—I do not wish to decry that—but we have to think carefully about introducing new areas of complexity and new reliefs and exemptions, unless there is a strong case for doing so. Members have already made the case for video games, but the Government remain unconvinced.
Jim McGovern
I thank the Minister for giving way again. He talks about hearing what has been said in the Chamber, but as far as I am aware he has not yet met Richard Wilson of TIGA. Like everyone else who mentions the organisation, I originally referred to it as “teega” but Mr Wilson continually refers to it as “tiger”, and I assume that he knows better than I do. I believe the logo resembles a tiger, so there is a connection with the pronunciation there. Will the Minister agree to come to Dundee and I will arrange for Richard Wilson to be there? If figures are to be bandied about, with the Minister saying they are erroneous and Richard Wilson saying they are correct, it would be better if those two were in the same room at the same time to discuss the issue.
Mr Gauke
I am grateful for that invitation. I am sure it will be small comfort to the hon. Gentleman, but I will accept the pronunciation “tiger” and concede that point. I am not sure that it would be terribly helpful if we were all in the same room to discuss these particular numbers. As I say, we are not convinced by the case made on these numbers. Of course, Members with constituencies that have a concentration of video game companies will want to make that case, but it is right for the Government to look at the economy as a whole and to bring forward policies that benefit all parts of the country and all sectors, including the video game sector. As I said in the meetings I have had with the hon. Member for Dundee West, there is no sense in which the Government are in any way anti-video games or think it is an antisocial issue or anything like that. It is a question of economic efficiency and where we believe the role of Government can be best used—and that is in providing a favourable climate for businesses.
I appreciate that the new clause and new schedule proposed by the right hon. Member for Delyn (Mr Hanson) are probing measures, but I would like to touch on a point made by my hon. Friend the Member for Dover (Charlie Elphicke). This relief is targeted at a specific sector and it would be considered to be state aid; as such, it would require notification to and approval from the European Commission. The new clause and new schedule would be effective from Royal Assent. As the Government would not be able to secure approval in such a short period, the provisions would create an illegal state aid. As I said, I understand that the amending provisions are probing, but the same issue applies to the previous Government’s proposals—and they, too, would have required state aid approval, which is worth putting on the record.
The new clause would create unjustified distortion and complexity in the corporate tax system. We do not think that such an intervention would represent good value for money for the Exchequer or be conducive to providing a simple and competitive tax system. The UK needs a tax system that supports all businesses, because it is the private sector across the board that will drive the recovery. I therefore ask the right hon. Gentleman to withdraw the new clause and new schedule.
Mr Hanson
I am grateful for the Minister’s clarification of the Government’s response. If we take into account the comments made by my hon. Friend the Member for Edinburgh East (Sheila Gilmore), it is clear that the Government are not in favour of the principle of this type of tax relief rather than the practicalities of the suggestions in the amending provisions. I am disappointed about that. I remind the Minister again of what the Under-Secretary said. When asked during the election campaign whether the Conservative party was in favour of a games development tax break, he answered:
“emphatically, 100 per cent in support for game tax breaks. No ifs, no buts.”
That does not appear to be the Government’s position today, which disappoints me.
Perhaps at this point I should declare that PricewaterhouseCoopers helped me to draw up the new clause. I shall register that in due course.
Mr Umunna
No doubt the Government will consider my hon. Friend’s interesting suggestion and comment accordingly.
One of the main problems with the new measure is that people fall off a cliff edge when they hit the higher rate. Have the Government considered introducing a taper mechanism to prevent that anomaly from occurring, because obviously that is where the unfairness shines through?
Mr Gauke
The new clause would link the future withdrawal of child benefit from higher rate taxpayers with the principle of independent taxation. The payment of child benefit is clearly a spending issue and is not directly linked to the Bill. I therefore shall not try your patience, Madam Deputy Speaker, but it is important to set out the background to the change.
The spending review set out how the Government will tackle the deficit that they inherited from the previous Administration. Given the comments that have been made by the Leader of the Opposition—I congratulate him on becoming the recipient of another child benefit payment, and wish him and his family well—as well as by the hon. Member for Nottingham East (Chris Leslie) and several other Labour Members today, I take it that the Labour party remains opposed in principle to our reform of child benefit and believes that it should continue to be paid to all households.
Sheila Gilmore
Does the Minister agree that this is a case of reforming in haste and repenting at leisure? However tempting it might be to put in place something that sounds simple in principle, the complexity of the proposal should have been examined. The Government could have acted differently, such as by making child benefit part of taxable income. I do not necessarily suggest that that would be the best solution, but it would mean that several issues around independent taxation would not apply. If the Government wish to reduce child benefit to some households, there are other ways of doing it.
Mr Gauke
I take the hon. Lady’s point, but I am not clear about whether her party’s position is to say, “Something should be done, but we don’t like the way it’s being done,” which, I think, is the position that she sets out, or to say, “We don’t think anything should be done at all,” in which case we must include the £2.5 billion that the measure will save the Exchequer—that is an estimate from the Office for Budget Responsibility—as part of our assessment of the Opposition’s fiscal policies.
Mr Umunna
The Minister cites savings of £2.5 billion, but will he estimate the likely cost of administering the new policy, which will have an impact on those savings? John Whiting has said that the extra burden associated with administering the change in the way it is envisaged will make a fairly big dent in the expected savings.
Mr Gauke
The hon. Gentleman asks a fair question, but I will not give him a precise number because that is something that we continue to consider. The implementation of any policy clearly involves a cost, but I assure him that this cost will be small when compared with £2.5 billion. I am keen to ensure that the policy does not place an undue burden on HMRC. He made a fair point about HMRC. It faces a budget reduction, even though the Government are protecting it by ensuring that it has more resources to tackle evasion and avoidance, but we are keen to ensure that the burden of administering the policy will not cause it undue difficulty.
We have to take tough decisions and make tough choices, and this is one of the decisions that the Government have taken because we believe it is the right thing to do. We do not think it is fair to tax people on low incomes to pay for the child benefit of those earning much more. We cannot afford to continue providing financial support through child benefit to better-off households where there is a higher rate taxpayer. From January 2013, the Government will therefore withdraw child benefit from families that contain a higher rate taxpayer. Despite the noises from the Opposition, the British people understand that this is a tough, but fair, decision.
Geraint Davies
Can the Minister explain why the proposal to tax higher rate taxpayers in that way was made and announced before the comprehensive spending review? I put it to him that the reason for that was to warm up the audience and to make out that the comprehensive spending review would be fair and balanced, as opposed to the IFS’s conclusion that it hit the poor two and a half times as much as it hit the rich. Was not the timing of the announcement entirely cynical?
Mr Gauke
The policy underlines the fact that the Government are looking to address our deficit in a way that is fair, and to ensure that all parts of society play their part and those with the broadest shoulders make the biggest contribution. That is what we are doing. It is remarkable that it is Opposition Members who appear to be trying to prevent that happening, though I am not sure whether they object to the way in which it is being done or whether they intend to fight in the last ditch to defend the principle of universality as it applies to child benefit.
We wanted to avoid creating a complex new means test for household income. To do so would fundamentally change the nature of child benefit and come at a significant cost to the taxpayer. This policy has therefore been designed to avoid affecting the vast majority of the population—some 80%—who are basic rate taxpayers. It also avoids additional systems being developed, as the measure can be delivered within existing pay-as-you-earn and self-assessment systems.
Let me deal with the issue behind the new clause—the principle of independent taxation, which was introduced in the Finance Act 1988. It is a great pleasure to hear Opposition Members applauding the 1988 Budget. If I remember rightly, proceedings in this place at the time were interrupted as the Chancellor of the Exchequer was shouted down by some Opposition Members. Section 32 abolished the provision that a wife’s income was income of her husband for income tax purposes. That remains the case, and none of the proposed changes to child benefit alters it.
Child benefit is provided for a child within a family and it is therefore necessary to consider the family as a group. The policy merely withdraws child benefit from a family to whom it is difficult to justify paying it. Furthermore, the withdrawal of child benefit from families containing a higher rate taxpayer will not affect the personal allowance or rate band applicable to an individual. The changes apply a simple test to ensure that child benefit is not provided to those who need it the least.
Of course, the House will have the full opportunity to debate the changes to child benefit when they are legislated, ahead of implementation in January 2013. That would be a better time to discuss the various specific issues that have been raised in the course of the debate. Although I understand that Opposition Members may wish to draw a link between child benefit and independent taxation in order to have this debate today, it is clear that the two systems remain separate and independent.
Chris Leslie
I am trying to follow the Minister’s logic. Does HMRC envisage child benefit continuing to be paid to all mothers, but that higher rate taxpayers will have a sum equivalent to child benefit deducted from their income, on top of taxes?
Mr Gauke
The hon. Gentleman, who has been somewhat ingenious in tabling the new clause, again seeks to draw me into a wider debate about the implementation of child benefit. He sets out one way in which it could work; in other circumstances, claimants might seek to stop receiving child benefit. However, I must stress that, although he has been somewhat ingenious in raising the issue in the context of the Finance (No.2) Bill, the new clause has nothing to do with independent taxation, so I ask him to withdraw it.
Chris Leslie
I am astonished by the Minister’s blinkered approach in sticking to the robotic text, “This has absolutely nothing to do with independent taxation,” when it patently does. If a higher rate taxpayer is being asked to pay for income that their partner or spouse receives, that clearly breaches the principle of independent taxation. The hon. Gentleman would not be drawn into the mechanism by which the scheme would be set up, but, given the great fanfare with which the policy was announced at the Conservative party conference, I would have thought that by now the panic stations at the Treasury might surely have subsided, and that he would be able to share with the House exactly how the measure would work.
Chris Leslie
I will come to deferred tax in a moment, because the corporation tax questions require much greater scrutiny. That is one reason we tabled the new clause. I hope that the hon. Gentleman will join me in the Lobby, should we divide on this issue—unless the Treasury concede it—and that he agrees that we should have a review of the level of tax the banks are paying. If they are paying too much, which I doubt, I will be happy to look at the evidence and the facts. However, there is opacity about these questions, and given the hit falling on the shoulders of families and children in this country, it is incumbent on us to ask whether the banks will be paying their fair share. That is all we are asking this evening.
We think that the Government’s banking levy has been a limp effort so far. Given some of the corporation tax changes, there is a bit of a cashback arrangement for some of the banks. I would like to touch on three areas of corporation tax that I think require more serious and rigorous review. The first is that cashback boost for the banks resulting from the reduction in corporation tax rates announced in the Budget. The Exchequer Secretary confirmed in a written answer that over the lifetime of the spending review the Treasury expects that the cut in corporation tax main rate from 28% to 27%, and eventually down to 24%, will return £1 billion to the banks—specifically to the banks:
“£0.1 billion in 2011-12, £0.2 billion in 2012-13, £0.3 billion in 2013-14 and £0.4 billion in 2014-15.”—[Official Report, 1 July 2010; Vol. 512, c. 610W.]
Mr Gauke
It is dangerous to intervene given that I do not have the answer to which the hon. Gentleman has referred in front of me, but my recollection is that the answer to that parliamentary question was in the context of financial services companies as a whole, including insurance firms, not specifically banks.
Chris Leslie
It might well be that in that written answer the Exchequer Secretary’s definition of “financial services” extends slightly beyond the banks. I am happy to concede that point. Of course, we framed the new clause in order to explore the tax burden not just on the banks but on financial services more widely. However, even the hon. Gentleman would have to concede that the banks will probably be the principal beneficiaries of the corporation tax cut that he is choosing to give them at a time when he is taking money from young, pregnant mothers—the health in pregnancy grant, to name one example of an incongruous decision that might be questioned by our constituents.
Chris Leslie
The hon. Lady has several thousand civil servants—for the time being, at least, before they are made redundant—in the Treasury to help her with the costings for such questions. I can only go with the facts published in Hansard. Perhaps she could save me the trouble of tabling a further written question to find out what the bank cashback arrangement will be on corporation tax. I will give way to her if she has to hand the precise figures on what the UK banks will be gaining from the corporation tax cut. Can she tell us what those figures are? If not, I will table a written question. If she can swiftly answer that, it will be for the benefit of the House. I am pretty sure that it will be a net gain for the banks.
Mr Gauke
Let me deal with this directly. The Treasury and Her Majesty’s Revenue and Customs figures that we have look at hits by sector—in this case, the financial services sector, which includes not only banking but insurance and financial auxiliary services. The hon. Gentleman quoted his figures and suggested that they represent a net gain. In fact, by the time we get to 2014-15, the bank levy will be £2.4 billion. At the same time, the corporation tax cuts in 2014-15 will benefit the financial services sector by £0.4 billion. However we divide £0.4 billion, it is hard to see how it will ever be higher than £2.4 billion.
Chris Leslie
Were those the only two relevant factors, that might be the case, but of course they are not. There are other tax changes through which the banks will more than benefit from the arrangements. If the Exchequer Secretary had had the patience to wait, I would have elaborated on that. I will come to that quicker.
It is important that the Exchequer Secretary listens to those experts who have talked about the benefit to the banks from the corporation tax change. Lloyds Banking Group plc could gain more from a cut in corporation tax than it loses under the new banking levy, according to analysts at Redburn Partners legal practice. Lloyds, 41% of which is owned by the British Government, might see a 3% rise in its earnings per share in 2012 as corporation tax begins to fall to 24% from 28% over those four years, according to Redburn analyst, Jon Kirk. There will therefore be a net positive for Lloyds. That is one example of a net gain for the banks.
Secondly, the banks have already found a way of minimising their corporation tax liabilities. A report published only last week by the TUC on the corporation tax gap showed a gap between the headline rate of corporation tax paid and the actual or effective rate of corporation tax paid. The TUC’s analysis of data on UK corporate returns showed that the larger a company is, the better it tends to be at reducing its effective rate of corporation tax, which fell from 28% in 2000, when the headline rate was 30%, to about 23% in 2009, when the headline rate was 28%. On that basis, the TUC’s economists predict that by 2014, the largest companies will be paying corporation tax at a rate of no more than 17% on average, while small companies will still be paying corporation tax at 20% or more.
Chris Leslie
I beg to move, That the clause be read a Second time.
New clause 5 takes us into completely different territory from that of the previous debate, and it picks up on a discussion we had in Committee about the legal definition of incapacitated persons. Committee members were concerned by the outdated nature of some of our tax law, under which antiquated terminology can often still find its way into our tax regime through extracts from statutes simply being cut and pasted into today’s legislation.
One such anomaly concerns a definition in the Taxes Management Act 1970, which I am told is still very much a cornerstone of our tax law. It defines an “incapacitated person” as
“any infant, person of unsound mind, lunatic, idiot or insane person”.
Those terms of reference are clearly insulting and demeaning to people who would be regarded as incapacitated. Not only is it out of date for those terms of reference to be extant in our legislation, but it is hurtful to those individuals who may suffer from incapacitation to be categorised and described in such derogatory terms. That definition derives from the 19th-century lunacy Acts and today appears grotesquely at odds with modern terminology, and this insulting state of affairs ought to have been reformed many years ago. That definition relates to section 72 of the 1970 Act, which says that an incapacitated person’s tax liabilities should apply to their
“trustee, guardian, tutor, curator or committee”
as if to a non-incapacitated person.
In Committee, we pressed Ministers to concede this small and surely non-controversial reform. We did not feel that it was a matter of party politicking; after all, it should not be a dividing line between the parties. The new clause is simply and straightforwardly about replacing and modernising the definition of an “incapacitated person” and aligning it with the meaning in the more modern and more appropriate Mental Capacity Act 2005, whose far more flexible and sophisticated definition is less hurtful in tone and more precise in its interpretation. It states:
“For the purposes of this Act, a person lacks capacity in relation to a matter if at the material time he is unable to make a decision for himself in relation to the matter because of an impairment of, or a disturbance in the functioning of, the mind or brain.”
That is a far more appropriate definition.
By updating the definition, we would also update provisions to encompass new arrangements relating to trusteeships. For example, the new arrangements would also modernise those of donees of powers of attorney, who would be properly included in the legal definitions, as well as those of Department for Work and Pensions appointees. I should like to thank the Chartered Institute of Taxation’s low incomes tax reform group—LITRG—for highlighting the issue consistently. It has been championing this minor technical change in the law for at least seven years and has been promised on numerous occasions that, “A tax law rewrite is just around the corner”, “More time is needed for consultation” and so on. I gather that it has been having discussions with officials, following our discussion in Committee. Although LITRG may have cause to trust the Minister’s officials, I believe that time is running out for this change to be made. When the Minister was unable to concede on this point in Committee, I said that we would try to have this debate on the Floor of the House because of the importance and urgency of making this reform.
It is a pity that the Minister has not tabled a Government new clause on Report, but I shall wait to hear what he has to say. We did try to reflect on the points that he raised in Committee. The provision that we had tabled then did not refer specifically to children and we have rectified that by making the appropriate change for the Report stage. As far as I can see, this new clause has no revenue implications and there is no clear reason for any Member to dispute the need to modernise this terminology. There is clear evidence that people are hurt and insulted by the terminology from a bygone age. It therefore seemed sensible to put this point again on Report, and I urge the Minister to accept the new clause.
Mr Gauke
As we have heard, new clause 5 seeks to change the definition in the Taxes Management Act 1970 of an “incapacitated person”. I appreciate that the purpose of the new clause is not to change the scope of the definition, but to ensure that it better reflects the modern understanding of an “incapacitated person”. Members of the Committee will recall that we debated a similar proposal at the end of the Committee stage. As I explained then, a definition is required to ensure that the obligations of the 1970 Act properly fall to those acting for children or for those with mental health problems. The existing definition can be traced back to at least 1880, and I reiterate that I agree that the wording used, such as “lunatic” or “idiot”, no longer feels appropriate, belonging as it does to the Victorian age, rather than to today’s times.
Sheila Gilmore
Earlier today I made the point, on another matter, that it may be unwise to reform in haste and repent at leisure. I am very pleased that the Minister has now decided to agree with me.
Mr Gauke
I am delighted if that is how the hon. Lady interprets my remarks, and if that pleases her, it pleases me.
In June, we produced our paper on the making of tax policy and we believe that it is very important to adopt a deliberative and consultative approach and, wherever possible, to consult thoroughly. We wish to avoid the experience of making reactive and piecemeal policy announcements that have been insufficiently thought through and result in unexpected consequences—we saw too much of that under the previous Government. Instead, we believe that appropriate consideration should be given to changes, thus providing an opportunity for those affected to comment and have certainty about our decisions. Any change on this matter should go through that process to ensure that we can come to this House with legislation that will work as intended.
Let me be clear that I agree that the wording in the current definition is outdated and that I am committed to delivering change. As I have said, my officials have already started to work with LITRG and will work with other groups that have the expertise to ensure that we get this right. The hon. Member for Nottingham East (Chris Leslie) has alluded to the fact that LITRG is happy to work with Treasury officials and accepts the need to get this right. I believe that it will be possible to deliver change to the definition in the next couple of years along the timetable that LITRG accepts.
I ask the hon. Gentleman not to press his new clause to a vote, but I hope that he will engage with us on how to make the change behind the clause that we both agree is necessary. I am grateful to him for raising the issue in Committee and today. I agree that this should not be a matter of party political dividing lines and we will seek to address it. It has been of long-standing concern, but the Government are determined to address it, so I ask him to withdraw the clause.
Chris Leslie
I am impressed that the Minister has taken the time to encourage his officials to meet LITRG. I am pleased that he agrees about the outdated nature of some of these archaic terms: “idiot”, “lunatic”, “insane” and so on should not be part of our modern legislative lexicon. I am interested that yet again he manages to find a flaw in the drafting. It is almost like one of those circular nightmares: no matter what point any Opposition party makes to any Government, there is always a desire to resist by pointing out drafting and terminological problems. I think that the Minister accepts the spirit in which we have been trying to raise this issue.
I agree entirely that it is important to take whatever time is necessary to frame the definitions correctly in law, but we are not talking about designing a whole new regulatory regime for financial services or some convoluted way of taxing child benefit. We are simply talking about a minor change to modernise the terminology in tax law. I am still slightly sceptical about the argument that we need to take another couple of years to do so.
Chris Leslie
I beg to move amendment 1, in page 7, line 40, leave out clause 4.
In Committee, we discussed the implications of clause 4, which I am happy to discuss again. It seeks to extend to seafarers resident in the European economic area the same 100% deduction from income tax of their earnings from employment as a seafarer wholly or partly outside the UK during an eligible period. I know that this is something about which many Members of the House will be very concerned.
At present the tax relief is available only to those seafarers who are ordinarily resident in the UK, but there are clearly seafarers resident in other EEA states yet not ordinarily resident in the UK who might also warrant the seafarers’ earnings deduction. The measure is listed in the Budget Red Book as costing the Exchequer £5 million annually and we debated the technical details of the clause, such as the navigation of waters beyond the UK continental shelf, how long would be spent away from the UK and how many seafarers are involved in the concession. The Minister said that it was in the order of 16,000.
The Minister also helpfully explained that the clause was brought forward as a result of the European Commission’s decision to challenge the compatibility of seafarers’ earnings deductions with the UK’s treaty obligations and to comply with our EU and EEA associations. It is welcome that the Conservative party is rushing to legislate to comply with these European arrangements. I know that some hon. Members—including the Minister of State, Foreign and Commonwealth Office, the hon. Member for Taunton Deane (Mr Browne), who is sitting on the Front Bench opposite—will be more pro-European than others, but he seems to be persuading the Conservative party towards the pro-European stance. It is interesting that there is no dissent from that interpretation.
In Committee I raised in particular a specific and contemporary issue that has been a subject of some controversy: the impact on the mackerel fishing dispute between UK and Icelandic fishermen. The clause is highly relevant and might have a significant bearing on that dispute, because if enacted it would grant to the Icelandic fishermen—and the Norwegians for that matter—a set of tax relief arrangements that would be very useful to them. I asked the Minister a series of questions on that, but he merely asserted in his indomitable way that the clause was “not relevant” to those discussions. So, I want to try again.
Will the Minister say what discussions have taken place between the Government and the Governments of Norway and Iceland in the drafting of the provisions and in what respect they will be reciprocated for UK-resident seafarers in those countries? Has the Minister spoken with his counterparts in the Department for Environment, Food and Rural Affairs, the Scottish Executive—I know that some hon. Members will be interested to learn about that—and the FCO regarding the impact that the change might have on the sensitive negotiations between the EU, Norway and Iceland over the mackerel quota? I gather that the practice of the Icelandic fishing community unilaterally to declare a larger catch quota for valuable fish, risking the sustainability of fish stocks and disrupting previously settled agreements, has caused consternation in some quarters. Is it therefore appropriate for the Treasury to grant this tax concession to Icelandic fishermen while there is such great sensitivity?
On Friday, I understand that the Icelandic ambassador to the UK, Benedikt Jonsson, met the chief executive of the Scottish Fishermen’s Federation and others to discuss the mackerel dispute at a meeting in Aberdeen organised by the Icelandic consulate. I gather that “frank views”, as they are often called, were exchanged about what constitutes responsible management of that mackerel quota. Iceland continues to assert its right to catch a significantly increased quota this year outside the bounds of the international agreements. What are the UK Government doing to bring the dispute to a sensible conclusion? Would it not be wise to pause on the gifting of the seafarers’ earnings deduction to the Icelandic fishing community until such time that the question over the fair fishing of mackerel stocks is resolved?
Other issues might be relevant, too. Are we, for instance, still confident that the relationships between the UK and Iceland are ensuring that our fiscal position is protected? For example, the UK ought to be getting money back from the collapse of Icesave and other Icelandic banks, but there have been recent suggestions, particularly resulting from protests in Iceland, that there might be some delay in repaying foreign creditors with the priority that is deserved. Is it sensible to be offering tax concessions to Iceland when such negotiations are going on? I understand that there are also some question marks over whether the EEA treaty arrangements necessarily require such a tax concession to be ceded to the Icelanders.
I have asked a number of questions and I wonder whether the Minister can address them. They are not necessarily at the top of people’s minds in every constituency in this country, but there are some corners of the country where this is a big issue. I would be grateful for the Minister’s attention to it.
Mr Gauke
As we have heard, amendment 1 seeks to remove clause 4 on the seafarers’ earnings deduction from the Bill. Doing so would prevent the extension of seafarers’ earnings deductions to EEA resident seafarers. By way of background, it is worth pointing out that in November 2008 the European Commission sent a pre-infraction letter on this matter. The Commission stated that the rules for seafarers’ earnings deductions are incompatible with the EU rules because the deduction is available only to seafarers who are ordinarily resident in the United Kingdom. After due consideration of the Commission’s letter, the previous Government decided to respond by enacting a change in the law. Consequently, last year they said that they would legislate to extend the rules for this deduction, enabling European economic area resident seafarers from outside the UK to claim. The previous Government committed to implementing the change from April 2011.
Mr Gauke
I beg to move, That the Bill be now read the Third time.
We find ourselves in the unusual situation of having considered three Finance Bills this year. The first, as usual, was introduced following the May Budget, but was curtailed by the election. The second allowed this Government to enact measures that were deemed necessary to address the financial mess that was left to us. This third Bill has allowed this Government to take forward those technical and uncontroversial measures set out by the previous Administration. The nature and timing of this third Bill are a product of both the economic position and our commitment to improving future Finance Bills.
The enormity of the challenges facing Britain was one of the catalysts for a brief, focused Finance Bill in the summer. As my right Hon. Friend the Prime Minister set out, private sector-led growth is at the centre of the changes that this Government need to make to avoid the mistakes of the previous Government. The first part of providing that must be macro-economic stability, which is why it was necessary to enact in the summer those policies that would quickly tackle Labour’s deficit. Doing so restored the confidence in the economy of both the financial markets and the British people. Stable public finances are the only way in which to prevent higher interest rates, rising inflation and more taxes.
Alongside such policies was the need to show that Britain is, once again, open for business. We have taken such steps and committed ourselves to more. In so doing, we have been opposed by Members on the Opposition Benches, particularly on our measures for growth. I am sure that many hon. Members will remember the hon. Member for Wallasey (Ms Eagle) invoking Lord Kitchener on Second Reading. I am more drawn to the words of Churchill, who contended that a people taxing themselves into prosperity is like a man standing in a bucket and trying to lift himself by the handle. That is why we are reducing the rates of corporation tax for large and small companies and removing nearly 1 million people from tax, and why we did not go ahead with Labour’s jobs tax.
It was because of the need to take such steps in the summer that a short, focused Bill was required, which meant that an additional Bill was needed in the autumn. However, this Bill has also been an opportunity for the Government to demonstrate how we will improve tax policy making. On 12 July, the clauses in the Bill were published in draft for consultation. More than 60 comments were received and resulted in changes to nine clauses. The publication of the clauses in draft followed the commitments set out in the June Budget. The changes will ensure greater predictability, fewer changes and better consultation. We have already made a good start on the first of those. Last week, my right hon. Friend the Chancellor announced the date of the Budget, four and a half months ahead of time. This evening, I can confirm that we will be publishing the majority of the clauses for the Finance Bill 2011 later this year. We will set out the draft clauses on 9 December.
I have discussed the foundations of the Bill and the process that we will undertake for future Bills, but we should not forget the important measures before us. Clauses 1, 2, 3 and 16 will provide for fairer tax treatment for carers. Clauses 5 and 6 will assure the future of venture capital schemes, which have supported more than £10 billion of investment. The support to real estate investment trusts under clause 10 will allow them to meet their regulatory requirements more easily. The changes in clauses 19 to 22 ensure EU compliance on several technical but necessary issues. I shall not press this point, but I remind hon. Members of the important action that we are taking against long cigarettes and the tax avoidance connected with them.
The Bill is a result of necessary action that was taken earlier in the year and of the greater scrutiny and consultation to which all future Bills will be subjected. Although it is not packed with headline measures, it will help many groups. It assists businesses and individuals, supports investment and benefits those in need. The Bill will make a real difference in the real world and I commend it to the House.
Double Taxation Agreement (UK and Qatar)
David Gauke Excerpts(13 years, 6 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
A protocol to the double taxation agreement with Qatar was signed on 20 October 2010. The text of the protocol has been deposited in the Libraries of both Houses and made available on HM Revenue and Customs’ website. The text will be scheduled to a draft Order in Council and laid before the House of Commons in due course.
Tax Information Exchange (Netherlands Antilles)
David Gauke Excerpts(13 years, 6 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
A tax information exchange agreement (TIEA) was signed with the Netherlands Antilles in The Hague on 10 September 2010.
The text of the TIEA has been deposited in the Libraries of both Houses and made available on HM Revenue and Customs’ website. The text will be scheduled to a draft Order in Council and laid before the House of Commons in due course.
VAT (Charities)
David Gauke Excerpts(13 years, 7 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
May I first congratulate the hon. Member for Wrexham (Ian Lucas) on securing this debate? I am pleased to have this opportunity to explain and discuss the Government’s policy on VAT and charities. Charities, voluntary organisations and social enterprises do so much for our country, and the Government are grateful for the significant contributions that these organisations make to our communities. The Government continue to support charities in a number of ways, and I will talk about our direct support for the sector a little later, although Members will appreciate that there is a limit to what I can say about that, ahead of tomorrow’s spending review.
It might help if I first put on record something about the VAT system and charities. A basic feature of the VAT system is that if VAT is not charged on outputs, it cannot be recovered on inputs. The implication of this for charities is that when no charge is made, as is generally the case, any VAT that has been incurred will not be recoverable. Of course, when a charity is registered for VAT and engaged in taxable business activities, this will enable that charity to recover its VAT costs in the normal way. We are not in a position to change the structure of VAT to protect charities fully from its impact, but we provide support for charities through the tax system, including some VAT reliefs.
Existing VAT zero rates for charities, which were introduced at the start of VAT, and which successive Governments have maintained, provide a benefit of more than £150 million to the sector. They include VAT zero rating on sales of donated goods, on medical and scientific equipment and on goods for use by disabled people for qualifying charities. Charities are not charged VAT on the costs of advertising in public media. In addition, they qualify for zero rating on the construction of certain buildings to be used for charitable purposes. All those zero rates are derogations from the normal EU VAT rules and represent benefits not enjoyed by charities elsewhere in Europe.
Mrs Jenny Chapman (Darlington) (Lab)
Will the Minister comment on the issues faced by charities when they charge one another for back-office functions, when we are trying to encourage them to become more efficient and deliver services in the most entrepreneurial and efficient way possible?
Mr Gauke
I am grateful to the hon. Lady for raising that specific point. I can assure her and other hon. Members that the Government will continue to look at options for cost sharing within the VAT system where these are available to us and where they represent an effective and efficient means of delivering support to the sector. We are currently looking at the implementation of the EU VAT exemption for cost sharing. The Government recognise efficiencies that can be achieved by organisations such as charities working together efficiently, but we also recognise the potential VAT barriers such organisations face when they share services in exactly the way the hon. Lady mentioned. We said in the Budget that we would work closely with charities and other affected sectors to consider options for implementing the exemption, which would help to remove some of the barriers ahead of a formal consultation that we will launch later in the autumn. I hope that that provides some reassurance to the hon. Lady.
Returning to the issue of zero rates, as the hon. Member for Wrexham will be aware it is not open to us under our European agreements to extend or amend the zero rates, but we recognise how valuable they are to charities, so we are committed to retaining the zero rates that we already have. Charities also benefit from certain specific VAT exemptions that apply to goods and services used in connection with fundraising events, providing further support for all charities.
VAT reliefs are just one element of the support that the Government provide through tax. Within the wider tax system, existing reliefs for charities are worth something like £3 billion a year, of which gift aid is the largest single relief. Gift aid is now worth nearly £1 billion a year to charities, and such payments to charities are increasing. Gross donations made under gift aid amounted to almost £4.6 billion in 2009-10—an increase of 6.5% over the previous year. We fully recognise the importance of improving gift aid. Charity representatives have been exploring proposals for reform with Treasury and HMRC officials on the gift aid forum. We will be exploring the forum’s recommendations before deciding on the best way forward.
The hon. Member for Wrexham wants us to go further and provide support for all charities to relieve them in respect of their irrecoverable VAT. As I have already explained, there is realistically very little that can be done within the VAT system itself. It is possible in principle to introduce a measure that would deliver refunds of VAT to charities in respect of their non-business activities. However, such refunds, which are a matter of Government expenditure rather than taxation, would represent a very significant cost to the Exchequer, especially given the current fiscal position.
We also have to consider that many charities are engaged in activities where they are in direct competition with private sector organisations, such as in the provision of care and welfare services, and it would be difficult to refund VAT that charities incurred in respect of those activities, as that would represent an unfair distortion of competition. Any scheme that could be devised might well be complex and administratively burdensome for charities to operate. In our view, it is far better for the Government, instead of introducing further complexities for charities, to focus on improving charities’ capabilities to improve their own affairs, and I will turn to this in more detail shortly.
Yvonne Fovargue (Makerfield) (Lab)
The charities that are engaged in competition with the private sector tend to be the larger ones, which go for contracts and are registered for VAT on their services It is the smaller charities which cannot get the VAT exemption that need the VAT to be paid back, because they are the ones that are suffering.
Mr Gauke
The hon. Lady is right to suggest that the problem is most acute for the smaller charities, but I do not think that that entirely detracts from the fact that in some circumstances those charities may well be in competition with the private sector in the delivery of welfare and care services. There may be a distortion of competition, and we ought to examine that very closely.
We fully recognise that the increase in the rate of VAT is unwelcome, but it is necessary to sustain public finances and ensure long-term fiscal stability. The burden of deficit reduction must be shared. It simply would not be right to single out one sector over another for special treatment, especially in view of the generous tax reliefs that have already been provided.
The hon. Gentleman and his party oppose the increase in VAT to 20%—which will raise £13.5 billion—but want to do more to reduce the deficit by raising taxes, which leads to the question of how those taxes should be raised. The last Government’s proposed solution in the form of a tax rise—which has been reversed—was the increases in national insurance contributions, which would also have affected charities.
Ian Lucas
The last Government also raised £3.5 billion from a tax on bankers’ bonuses. That is an alternative way of raising tax. Let me, however, return to the issue of the additional burden of VAT that the Government have chosen to impose on charities. The Minister has listed a number of the tax exemptions that already apply to charities. Why are the Government refusing simply to pass back to charities the additional revenue that they are receiving from the tax hike that was imposed on them?
Mr Gauke
I return to the central point. A refund system, whether for the recently announced increase in VAT or the irrecoverable VAT across the board—which, as the hon. Gentleman fairly pointed out, is a long-standing issue—would involve a considerable cost to the Exchequer. We must consider both the public finances and the most effective way in which we can help charities.
I want to say something about the Government’s support for the voluntary and charitable sector in addition to the generous tax relief provided, especially through gift aid. However, Members will appreciate that much of the detail is a matter for tomorrow’s spending review statement. The Government are proceeding with a new programme of activity to build the big society. The big society agenda requires the state not only to pull back when services can be provided more cost-effectively and successfully by charities, mutual organisations and co-operatives, but to help social entrepreneurs and voluntary groups to work in partnership with the state and gain access to the support and finance they need in order to provide innovative, bottom-up solutions where expensive state provision has failed.
Mrs Chapman
I wholeheartedly support the notion of the big society and encouraging charities to provide services. Among the key sources of income for those charities are philanthropic donations. Does the Minister not agree that people wishing to make donations are sometimes put off by the thought that some of the money they are giving is not being spent on the charitable objectives of the organisation concerned, but is finding its way back to the Treasury?
Mr Gauke
I imagine that exactly the same argument could apply if we increased national insurance contributions, which I understand is Labour party policy.
Ahead of tomorrow’s spending review statement, it is not possible for me to say how much of the overall Government budget will go to the sector, but we are providing structural support designed to make it more efficient and resilient, and reforming commissioning and procurement, which currently hamper its involvement in public service delivery.
During the spending review 2010 period, we want there to be more opportunities for the sector to be involved. We want to help the sector to access a wider range of funding to increase its strength and independence. We are establishing a big society bank to lever additional social investment into the sector, and we are reviewing ways to incentivise further philanthropy and charitable giving. The Government are keen to progress this project as quickly as possible. Any progress will, however, be subject to the availability of dormant account funds.
In conclusion, the Government are committed to making it easier for the sector to work with the state and to strengthening relations between the two. That will not happen overnight, but a stable, strong and independent voluntary sector is needed if we are to deliver on the big society and give power back to citizens and communities.
Question put and agreed to.
Oral Answers to Questions
David Gauke Excerpts(13 years, 7 months ago)
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Nia Griffith (Llanelli) (Lab)
1. What steps his Department is taking to increase the level of tax compliance.
The Exchequer Secretary to the Treasury (Mr David Gauke)
The Chief Secretary to the Treasury announced £900 million of investment in Her Majesty’s Revenue and Customs to tackle avoidance, evasion and fraud, sending a clear signal that the spending review will be focused on both fairness and deficit reduction. It will include an increase in prosecutions and steps to tackle organised criminal excise smuggling. HMRC also recognises the importance of helping businesses to get their tax right and has launched additional education and guidance packages in order to do so.
Nia Griffith
Given the enormous importance of reducing the tax gap, and thereby reducing the deficit, what assurances can the Minister give that actually he will be taking on more tax officers and ensuring a good geographical spread to make sure we get in the maximum tax revenues possible?
Mr Gauke
As was made clear in the Chief Secretary to the Treasury’s statement, the Government are determined to reduce the tax gap. It currently stands at £42 billion. It is too high, but we are determined to take measures to address it and we have already announced proposals by which we can reduce the tax gap.
Kevin Brennan (Cardiff West) (Lab)
2. What representations he has received on variations between the English regions and constituent parts of the UK in respect of the effects of the measures in the June 2010 Budget.
Mike Freer (Finchley and Golders Green) (Con)
11. What steps his Department is taking to simplify the tax system.
The Exchequer Secretary to the Treasury (Mr David Gauke)
The Government are committed to simplifying the tax system. To help to achieve that, the Government have established the independent Office of Tax Simplification. Business and tax professionals have also consistently pointed to the way in which tax policy is developed, legislated and implemented as a contributing factor to overall complexity. We published a discussion document alongside the June Budget setting out proposals for a new approach to tax policy making.
Mike Freer
Will the Minister advise on the progress of the interim reports for the Office of Tax Simplification, specifically on IR35 and tax reliefs?
Mr Gauke
The OTS is looking at two areas. One is reliefs and exemptions, and although the timing of the publication is to be finalised and that is a matter for the OTS, there will be an interim report, I believe in November, on this area. With regard to the reform of small businesses, including IR35, the OTS intends to report in time for the Chancellor to take into account its views in preparation for the Budget.
Lorely Burt (Solihull) (LD)
12. What steps he is taking to make the tax system fairer.
The Exchequer Secretary to the Treasury (Mr David Gauke)
The Government believe that the tax system should give more support to those on low to middle incomes and reward the efforts of those who choose to work. At the June Budget, we announced a £1,000 increase in the personal allowance for 2011-12, which will remove 880,000 of the lowest-income taxpayers from tax altogether. Our longer-term goal is to raise the allowance to £10,000, with real-terms steps in that direction every year.
Lorely Burt
I am grateful for that answer. May I ask my hon. Friend what the coalition Government can do for my constituent Kath Hemmings and many like her? Kath is a single mum who has raised her daughter Victoria with no support and has at the same time worked hard and built her career. She is on the higher rate of tax by just a few pounds. Many children in Victoria’s class have two parents who earn under the top rate and have kept their benefit. What can we do to make things fairer for Kath, Victoria and many like them?
Mr Gauke
I understand the concern that my hon. Friend raises. The situation that we face is that there will be difficult decisions to get the deficit down—a point that Government Members appreciate. The difficulty is that looking at the issue on a household basis would mean creating a complex and large bureaucracy. We have come up with a proposal that will ensure that the poorest households are protected and will continue to receive child benefit.
Mr Angus Brendan MacNeil (Na h-Eileanan an Iar) (SNP)
I welcome the Chief Secretary to the Treasury’s weekend announcement about a rural fuel derogation, which will make the tax system infinitely fairer in the islands and is a victory for common sense. I first raised the issue a few years ago. Does the hon. Gentleman feel that time was wasted by the previous Labour Government, who sat on their hands and did nothing for the islands?
When will the fuel derogation come into being? Will the Minister acknowledge that, despite that welcome step, we in the islands will still be paying more tax per litre than those on the mainland?
Simon Kirby (Brighton, Kemptown) (Con)
13. What recent representations he has received on the time taken by Her Majesty’s Revenue and Customs to provide VAT numbers to new small businesses.
The Exchequer Secretary to the Treasury (Mr David Gauke)
Treasury Ministers receive representations on a range of subjects from organisations and individuals about aspects of service delivery.
Simon Kirby
I thank the Minister. A number of businesses in Brighton have waited a very long time to receive their VAT numbers. Does the Minister agree that the prevention of fraud is as important as providing a prompt service?
Mr Gauke
My hon. Friend is right. There is a need to balance the desire for a quick service with ensuring that we do not allow fraudulent registrations. Between April and September this year, 57.4% of applications were processed within the target 10 calendar days. There was an improvement in the rate during August and September, when 71.4% and 79.7% of applications were processed within the 10 days.
Karen Lumley (Redditch) (Con)
14. What assessment he has made of the effect on GDP of proposals to increase the level of economic growth in the June 2010 Budget.
Karl Turner (Kingston upon Hull East) (Lab)
15. What representations he has received on the new arrangements for child benefit which will apply to one and two-parent families.
The Exchequer Secretary to the Treasury (Mr David Gauke)
The Chancellor has received a number of representations on the planned changes to child benefit. It is not the Government’s practice to provide details of all such representations.
Karl Turner
Does the Minister agree with my constituent Christopher Sumpton, who points out that it is grossly unfair for a single mother earning £44,000 a year and supporting three children to lose her child benefit, given that the next-door neighbours earning £80,000 will not? Will Treasury Benchers explain why the Government are attacking women in this savage way?
Mr Gauke
As I said earlier, we do not currently have the capability to examine the situation on a household basis, but we do need to make difficult decisions. If the Opposition want to oppose each and every cut, including in the child benefit that is given to some of the wealthiest in society, they can take that position, but we are prepared to take those tough decisions.
Andrea Leadsom (South Northamptonshire) (Con)
Does my hon. Friend think that the Opposition believe it would be fairer to tax the lower-paid and give the tax revenue to the higher-paid?
Kerry McCarthy (Bristol East) (Lab)
I am afraid that the answers that the Minister is giving are simply not good enough. Can he explain the logic behind the child benefit proposal, if there is any? Why is the assessment not being made on household income rather than just on the highest earner’s income? Will it apply to a cohabiting high earner or just to married couples, and why will there be a phenomenally high marginal deduction rate? Is it not true that this is just another “back of a fag packet” policy that the Government have not thought through at all?
Mr Gauke
I congratulate the hon. Lady on her appointment to her shadow ministerial position, but I point out what her former colleague Alan Milburn has said:
“In times of plenty, giving child benefit to high earners is a luxury the country can afford; in times of want I don’t think it is. We would be wrong to oppose it. I can’t see it having an adverse impact on social mobility.”
I know Alan Milburn belongs to the centre ground, but the Opposition really should not abandon it.
Andrew Bridgen (North West Leicestershire) (Con)
16. What recent estimate he has made of the proportion of the central Government tax take from residents of the east midlands which is spent on that region.
Katy Clark (North Ayrshire and Arran) (Lab)
18. How much tax revenue each enforcement and compliance officer in Her Majesty’s Revenue and Customs collected on average in the last financial year.
The Exchequer Secretary to the Treasury (Mr David Gauke)
HMRC’s enforcement and compliance officers engage in a wide range of activities, from dealing with relatively low-value errors made by small businesses and individuals to addressing significant risks among the largest corporate bodies, as well as countering criminal attacks on the tax and duty system. For that reason, HMRC does not collect statistics on the average revenue collected by an enforcement or compliance officer. Results of HMRC’s compliance activity were published in its 2009 autumn performance report.
Katy Clark
Given that we have already lost more than 9,000 enforcement and compliance officers, and I am told that each officer raises more than £600,000 after their salary, does the Exchequer Secretary not think that he should get those statistics and start recruiting people rather than sacking them?
Mr Gauke
As I said earlier, my right hon. Friend the Chief Secretary made an announcement a couple of weeks or so ago of about £900 million-worth of investment in HMRC over the spending review period. It is important to tackle compliance, and the Government, perhaps more than our predecessors, will be determined to do that.
Bob Stewart (Beckenham) (Con)
19. What assessment he has made of the effect on GDP of proposals to increase the level of economic growth in the June 2010 Budget.
Karen Bradley (Staffordshire Moorlands) (Con)
T2. Many small businesses in Staffordshire Moorlands tell me that they have enough to deal with without the intricacies and complications of the tax system. Will the Minister provide more information to the House about how the work of the Office of Tax Simplification will help those small businesses?
The Exchequer Secretary to the Treasury (Mr David Gauke)
My hon. Friend is right to raise the concerns of business. We have a complicated tax system and the longest tax code in the world. The Office of Tax Simplification will make a very useful contribution to assisting the Government to identify unnecessary complexity and finding areas of reform.
Luciana Berger (Liverpool, Wavertree) (Lab/Co-op)
T4. Many pensioners in my constituency are concerned about the indexation of pensions changing from the retail prices index to the consumer prices index. A pensioner who currently receives a pension of £10,000 will be more than £800 worse off by 2016. Does the Minister think that it is fair for pensioners to be hit in that way?
Mike Freer (Finchley and Golders Green) (Con)
T6. Although my constituents accept the need to tackle Labour’s legacy, many of them have large families and are concerned about the changes in child benefit. Will the Minister consider transitional arrangements to help families to adjust?
Paul Blomfield (Sheffield Central) (Lab)
T9. Will the Chief Secretary to the Treasury welcome the backing given by Olympic champion Jessica Ennis to the U-mix centre, which is a sports and leisure facility in Sheffield designed by Urban Mixtures, an inspiring group of young people who represent the real big society at work? Funding has been allocated for the project under the myplace programme, but has been frozen pending the comprehensive spending review. Will he share my hope that that funding will be unfrozen and allocated shortly?
Penny Mordaunt (Portsmouth North) (Con)
Does the Minister think that we will stand a greater chance of having fairer taxation now that Finance Bills are published and properly consulted on, and will that stop appallingly unfair policies such as the abolition of the 10p tax rate ever being introduced again?
Finance (No. 2) Bill
David Gauke Excerpts(13 years, 7 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
I beg to move, That the Bill be now read a Second time.
As observant Members will note, this is the second Finance Bill of this Parliament and the third one this year. The date of the general election earlier this year reduced the time available for scrutiny of technical measures in advance of that election, and the short timetable available between our emergency Budget and the summer recess has made it necessary to have a third Finance Bill to address various technical measures.
Given the content of this Bill, I suspect that there will be a fair amount of cross-party consensus on the matters in it but, in any event, I would like to congratulate the newly appointed shadow Treasury team. In particular, I congratulate the hon. Member for Wallasey (Ms Eagle), the shadow Chief Secretary to the Treasury, both on her election success as a member of the shadow Cabinet and on her appointment to her current position. She will bring considerable experience of Finance Bills to the shadow Treasury team, both as a former Minister and from the Finance Bill earlier this year.
Although he is not present, I should like also to congratulate the newly appointed shadow Chancellor, the right hon. Member for Kingston upon Hull West and Hessle (Alan Johnson). He stated over the weekend that his first task was to read an economics primer, but he also expressed the need to hit the ground running, because of the Finance Bill today. Whatever his education programme, I suggest that he should not necessarily begin with the scrip dividend treatment of real estate investment trusts or the taxation of long cigarettes. However, we wish him well in that process.
At the emergency Budget in June, my right hon. Friend the Chancellor set out this Government’s fiscal mandate, acting swiftly to tackle the deficit and restore credibility to the public finances. In the short, summer Finance Bill, we quickly put the core elements of the Budget on to the statute book, reassuring the British people and the financial markets that we would not allow Labour’s debt to spiral out of control.
Kelvin Hopkins (Luton North) (Lab)
The Minister mentioned cigarettes. Are the Government going to do anything to tackle the £4 billion that is lost through cigarette smuggling? That is four times the amount of money that they are apparently hoping to save by cutting benefits to the better off.
Mr Gauke
The hon. Gentleman makes the fair point that there is too much cigarette smuggling, and this is a matter that we are keen to address. My right hon. Friend the Chief Secretary to the Treasury has already announced proposals to provide additional funding to Her Majesty’s Revenue and Customs to tackle cigarette smuggling, among other things. I very much welcome the hon. Gentleman’s intervention but, let us be honest, it would be unrealistic to say that we could prevent all cigarette smuggling. We can, however, take steps to reduce it. That would be to the benefit of the Exchequer, and I am pleased that the Government are moving ahead and doing that.
It is our determined actions that have restored confidence in the economy, stabilised the nation’s credit rating and halved interest rates on Government short-term borrowing. We are saving money today so that we can invest in tomorrow. Ours is the right approach for the country, and that has been widely recognised. Only a fortnight ago, the International Monetary Fund said that our deficit plan was essential to restoring confidence in the UK’s public finances and “supports a balanced recovery”. That is the approach that we will take forward, including in the spending review.
Ms Angela Eagle (Wallasey) (Lab)
I should like to take this opportunity to thank the Minister for his kind remarks about me and the new shadow team. If he is so convinced that the actions that the Government took in June have stabilised the economy, can he explain why a survey reveals today that confidence among Britain’s financial chiefs has slumped to a fresh low, with 34% of finance directors polled by Deloitte believing that the economy will go back into reverse? Those findings demonstrate that optimism has dropped to its lowest level for 18 months.
Mr Gauke
The fact is that the measures that the Government have taken have had the support of the IMF, the OECD, the World Bank and the Governor of the Bank of England. We are getting widespread support for taking these tough measures. We also have the support of the director general of the CBI. There is an increasingly large consensus—it even includes Tony Blair—that if we simply deny the existence of the deficit and avoid taking these tough decisions, we shall face a worse problem later on. It is absolutely right that we should take these measures.
John Mann (Bassetlaw) (Lab)
On the Deloitte survey, does the Minister agree that business people make investment decisions based on how they see the future? What will happen if those business people see a murky future? Will they not invest less? Would not that result in the Government’s optimistic predictions of private sector growth, on which they are relying, not coming to fruition?
Mr Gauke
I shall tell the hon. Gentleman what would drive down investment: the fear that the Government were not prepared to take the tough decisions. Taking decisions for the long term to tackle the deficit will encourage private sector growth, and this Government are confident that we are taking steps in the right direction. We are also confident that a policy of reducing public expenditure rather than increasing taxation—which is the forecast of our plans to reduce the deficit—is the right way forward. Spending that is funded by borrowing is just a recipe for higher taxation and bigger cuts in the future, burdening future generations with the problems created by this one. That approach would drive down investment. Simply ignoring the matter would not help investment; it would not be fair and it would not be progressive.
Alec Shelbrooke (Elmet and Rothwell) (Con)
Does my hon. Friend agree that the protests that we are hearing from those on the Opposition Benches are in stark contrast to the fact that the measures taken by this Government have secured our triple A rating?
Mr Gauke
My hon. Friend is absolutely right. The fact is that the Moody’s triple A credit rating was deemed to be at risk, and has now been stabilised. Our market interest rates have fallen, and we are restoring confidence in the long-term capability of this country. If we refused to take these measures, we would be taking the most enormous risk.
It may be helpful if I give some of the background. As I said earlier, there remain some technical changes that we could not include before the summer, and the Bill provides for those changes to be made.
I think it safe to say that Members on both sides of the House will agree on the contents of the Bill. I should be disappointed if they did not, given that within the last year all but one of the measures that we are debating were proposed by the last Government I am glad that we have reached a consensus on that, if not on other matters. None the less, we wanted to ensure that the public and interested parties had an opportunity to provide input.
In the Budget we set out our approach to tax policy making, with consultation at the heart of the strategy. In the spirit of that new process, we published the Bill in draft over the summer. That has not only allowed key interest groups to comment, but reassured those affected by the Bill. More than 60 responses were received, and nine clauses have been modified as a result. Furthermore, many groups have voiced their approval of the provision of a draft Bill to allow for additional scrutiny, which has made the Bill better, clearer and easier to apply.
We also increased opportunities for consultation by creating the Office of Tax Simplification over the summer. We need to increase transparency for businesses and the tax profession: that is a message that we hear frequently. We also hear about the importance of greater predictability, stability and simplicity in the tax system. The Office of Tax Simplification will identify areas in which complexity in the system can be reduced, and we will publish its findings for the Chancellor to consider before he presents his Budget. Simplifying the tax system is not just a means in itself, but a vital sign that Britain is once again open for business.
The Bill is not just a good example of engagement with the public; it also supports our aims of helping businesses and promoting fairness. Clause 10 provides support for real estate investment trusts by relaxing their distribution requirements. Clause 13 removes intellectual property conditions linked to research and development tax credits, enabling more small companies to claim. Clause 11 fixes issues in the worldwide debt cap regime to allow it to operate properly. The changes affect businesses large and small. Clause 9 removes an unintended tax charge from company distributions, and clause 7 makes changes to the venture capital schemes to guarantee state aid approval.
The coalition Government are committed to ensuring that the decisions that we make are fair, and that we protect the most vulnerable in our society. The choices that we have made to date, and the actions that we will take as part of the spending review, will help to make Britain fairer. Clauses 1 and 2 play their part by easing the tax rules for carers and extending the scope of the current tax relief. Clause 31 provides tax relief for trusts that compensate sufferers from asbestos exposure. I am sure that many Members will particularly welcome that clause. Clause 16 guarantees that those providing support under an adult care placement do not suffer capital gains tax as a result of sharing their home. Those too are small measures, but they provide significant and welcome support for those affected.
One clause has not been included in the Bill, although it was intended to feature. The aggregates levy credit scheme in Northern Ireland was introduced in recognition of the impact of the levy on legitimate businesses as a result of tax evasion on imports from Ireland and illegal quarrying. Over the summer, we consulted on legislation to be included in the Bill to extend the scheme beyond April 2011 to March 2021. Since then, the European General Court has annulled the Commission's state aid approval for the scheme, for the period covering April 2004 to March 2011. In those circumstances, it would not be appropriate to extend the scheme and we therefore decided to remove the clause from the published Bill. However, the Government strongly support the scheme and, if the Commission were to come to a fresh decision that the aid was approvable, legislation to extend it can be introduced in the Finance Bill in 2011.We will continue to work closely with the Commission, the authorities in Northern Ireland and representatives of the quarrying industry to find a solution that provides a level playing field for legitimate quarry operators in Northern Ireland, while maintaining environmental standards.
The other clauses help to align HM Revenue and Customs’ interest and penalty regimes; enable the National Employment Savings Trust to operate as a registered pension scheme; assist with the correct allocation of overpayments of tax to settlers of trusts; and tackle evasion of excise duties. Although those clauses could not make it into the previous Government's final Finance Bill—although 71 clauses did make it into their four-hour Bill—we are ensuring that these necessary but less glamorous changes are made.
This is a simple, straightforward Bill that eases burdens on individuals, businesses and HM Revenue and Customs. It is one that the previous Government all but enacted themselves. In brief, it is an important but, I hope, uncontroversial Bill, and I commend it to the House.
Ms Eagle
I am anxious to get on. I have given way a lot and many other Members wish to speak.
The Irish example demonstrates the risks of focusing on getting the deficit down—too high a cost to the growth potential of the economy. The Irish have had deep and fast cuts as well as tax rises, but growth has been hit, which is making getting the deficit down harder rather than easier.
Mr Gauke
I am grateful to the hon. Lady for giving way and I am listening carefully to her somewhat gloom-laden speech. I can see why her military role model is not so much General Kitchener as Private Frazer. May I press her on one particular point? The position of her party at the general election was in favour of spending cuts of 20% over the Parliament and halving the structural deficit over four years. Does she still support that position?
Ms Eagle
That is our starting point as we move forward to judge what the Government will announce in a few days’ time. The issue here is the scale and speed of the deficit reduction, and how that impacts on our approach to being able to see some kind of economic recovery sustained, given what is happening in the rest of the world. The worry that we have always had about the Budget judgment implicit in the June announcements and soon to be reinforced in the forthcoming spending review is that the medicine being fed to the patient runs a higher risk of killing it off. We do not want the deficit reductions to be too soon and too deep to sustain a recovery. The Irish example demonstrates the risks of focusing on getting the deficit down at too high a cost to the growth potential of the economy. The Government have a particular view on those judgments, but we disagree with them on the necessity for speed and the ferociousness of the deficit reductions. We are not saying that deficit reductions will not be necessary. The Chancellor used to mention the Irish example all the time as the Irish Government made their extremely deep and fast cuts, but lately he appears to have stopped referring to it at all. I wonder why.
The Government are gambling on their outdated and dogmatic view that if only the state would get out of the way, the private sector would spontaneously move to fill the gap and quickly create the 2.5 million extra jobs that the Office for Budget Responsibility has calculated would have to be created to get the deficit down as forecast. Thus our economy is meant to perform better in job creation terms than it has ever done before, even in much more benign economic circumstances than those we face.
We have just lived through the most dramatic example of the limits of that market fundamentalism that any of us are likely to see in our lifetime. It was not the private sector that rescued the world financial system from meltdown in the credit crunch; it was the co-ordinated action of Governments. Governments have a crucial role to play in fostering economic growth and helping to encourage the emergence of a better, more balanced economy, yet the Bill does nothing to restore the support for industry that the Government have already cut. It does nothing to reverse the £3.6 billion tax hike that will hit our manufacturers in order to pay for the corporation tax cuts announced in the June Budget, £1 billion of which will go straight back to the banks.
Abolishing allowances and reliefs effectively hits businesses with a tax hike when they invest. It benefits investment-light industries such as financial services over investment-heavy industries or new sectors looking to grow. That change penalises companies that need to make sustained investment to establish themselves and grow. It is a strange way for the Government to signal that they wish to see a rebalanced economy and the creation of new industry. Little wonder, then, that the plans have been described as “a disaster” by the senior economist at the Engineering Employers Federation and that the Institute for Fiscal Studies has said:
“Cutting investment allowances to fund a cut in the mainstream corporation tax rate would help companies which make large profits with little investment, at the expense of businesses that are investing heavily in the UK but making only marginal returns.”
There is no sign of a serious growth strategy.
Finance (No.2) Bill 2010
David Gauke Excerpts(13 years, 8 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
The Finance Bill will be published on Thursday 30 September.
Explanatory notes on the Bill will be available in the Vote Office and the Printed Paper Office and placed in the Libraries of both Houses on that day. Copies of the explanatory notes will be available on the Treasury’s website.
Amendment of the Law
David Gauke Excerpts(13 years, 8 months ago)
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The Exchequer Secretary to the Treasury (Mr David Gauke)
I beg to move,
That—
(1) It is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance.
(2) This Resolution does not extend to the making of any amendment with respect to value added tax so as to provide—
(a) for zero-rating or exempting a supply, acquisition or importation,
(b) for refunding an amount of tax,
(c) for any relief, other than a relief that—
(i) so far as it is applicable to goods, applies to goods of every description, and
(ii) so far as it is applicable to services, applies to services of every description.
The resolution and the others on the Order Paper enable the House to embark on its third Finance Bill of the calendar year. As Members will be aware, the general election and the need for an emergency Budget meant constrained timetables in legislating for tax measures this year. We have the opportunity in this Bill to examine the technical measures that will benefit from the intense debates Upstairs that I know so many of my colleagues enjoy. I will look forward to seeing many of them on the Benches with me.
The first Finance Bill introduced by this Government legislated for the key measures in our emergency Budget. The Government needed to take quick and decisive action to reassure the country and the markets that we would not allow debt to spiral out of control. However, there remain a number of minor and technical measures that we inherited from the previous Government, which must be legislated for before 2011. The resolutions before us today form the foundation for such a Bill.
It is perhaps worth pointing out that, alongside the Budget, I set out a proposed new approach to tax policy making that we have been discussing with interested parties over the summer. As part of this new approach to making tax policy, the Government are committed to being more transparent and to improving the scrutiny of tax legislation. As a first step towards that, we published all the legislation that will be included in the Bill in draft for consultation on 12 July. Representative bodies described that as a “welcome move” and the consultation has received more than 40 comments, leading to a number of technical changes to the legislation. That approach provides additional scrutiny, which we believe is essential in demonstrating that the Government are genuinely listening to how the tax system can be improved.
Detailed examination of the Bill is for another day, but I want briefly to explain some of what is before us. The Bill will provide for improved treatment of company distributions and ease restrictions on research and development tax credits. It will relieve carers of unnecessary tax and assist trusts to help victims of asbestos exposure. Although small in nature, the Bill will introduce important measures to ensure better compliance with a better tax system.
In conclusion, the Bill on which the resolutions are based will take forward many necessary changes in the tax system that make a difference to the broader public. The Government are making these changes responsibly, having consulted on all the legislation. I hope it will find support among Members on both sides of the House.
Mr Gauke
With the leave of the House, let me respond briefly to the points that have been made. First, the hon. Member for Dundee East (Stewart Hosie) asked whether this Bill sets a precedent for future Finance Bills. The intention is to return to the usual one annual Finance Bill; that is probably enough for most Members of the House—even him. As I outlined earlier, the Bill is needed because of the general election and to take decisive action on the deficit.
In response to the comments of the shadow Minister, I should say that it was important that the Government took decisive action and implemented the measures. Indeed, one reason for the fall in long-term interest rates in recent months might be that the Government have been determined to take decisive action and have demonstrated that by passing legislation to enable us to do so. It is right that we should take further time this year to go through some of the technical measures, and that is exactly what we will do with the Bill.
The hon. Member for Nottingham East (Chris Leslie) asked about the interest regime, the provisions for HMRC in relation to the late payment of tax due and the interest that applies when HMRC owes money. He will know that the provisions in the resolutions and in the Finance Bill are intended very much to tidy up and bring consistency to some areas. The overall interest structure and a unified interest rate was introduced in the Finance Act 2009, which the right hon. Member for East Ham (Stephen Timms) might have taken us through, and we are not departing from what was in that.
The hon. Gentleman is right about the comments of senior HMRC officials at the Treasury Committee this morning regarding the regime for those who have underpaid tax of more than £2,000. HMRC has said throughout that a sympathetic approach would be taken in matters of hardship, but what has been announced today is the intention to make sure that everyone has an opportunity to pay off the underpaid amount without interest or penalties being applied. I am sure that will be welcomed by Members on both sides of the House.
Having responded to the specific points that have been raised in this very short debate, I am grateful that the motions have the support of the House.
Question put and agreed to.
The Deputy Speaker put forthwith the Questions necessary to dispose of the motions made in the name of the Chancellor of the Exchequer (Standing Order No. 51(3)).
PAYE Contributions
David Gauke Excerpts(13 years, 8 months ago)
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Urgent Questions are proposed each morning by backbench MPs, and up to two may be selected each day by the Speaker. Chosen Urgent Questions are announced 30 minutes before Parliament sits each day.
Each Urgent Question requires a Government Minister to give a response on the debate topic.
This information is provided by Parallel Parliament and does not comprise part of the offical record
Mr Speaker
Order. I should be grateful if hon. and right hon. Members who are leaving the Chamber would do so quickly and quietly so that the Minister, Mr. David Gauke, can respond to the urgent question.
The Exchequer Secretary to the Treasury (Mr David Gauke)
I am grateful for the opportunity to make a statement to the House about the action that HMRC is taking to rectify overpayments and underpayments in the PAYE system.
The PAYE reconciliation process occurs every year to reflect the changes in people’s earnings and employment status that happen over the course of a tax year. In previous years, HMRC employed a system of manually joining up separate pieces of information through PAYE. Each case of potential overpayment or underpayment had to be reviewed individually before reconciliation could be finalised. That was inefficient and clerically intensive work, and it resulted in a backlog of open cases. HMRC now employs a new computer system that matches records automatically to ensure that the correct amount of tax is paid.
The coalition Government have already started to look at how to reform PAYE further and make it more efficient. As part of the Government’s strategy to create the most competitive tax system in the G20, we are consulting on options to improve PAYE. The PAYE system was introduced at a time when people had one job—perhaps the same job for their whole career—and one source of income in retirement. However, that world has now gone and it is common for people to have earnings from multiple sources. That is well known, but it is something that the previous Government failed to address.
No reconciliation process was undertaken last year, so this year HMRC had to complete the reconciliation for two years instead of one. The preliminary assessment of this year’s reconciliation was first brought to my attention earlier in the summer, and while the majority of PAYE records are correct, we are acting promptly to put right the situation that we inherited, which has contributed to the number of individuals required to make payments and the size of payments owed. About 4.3 million taxpayers will receive repayments between now and Christmas, while 1.4 million will be sent letters specifying how any underpayment has been calculated and how such payments can be reviewed.
To begin the process of reconciliation, HMRC has sent out the first set of taxpayer notifications to individuals throughout the UK. Those individuals who have overpaid will receive a full refund. Those who have underpaid will make additional payments through the PAYE system, provided that the payment due is less than £2,000. If the payment due is more than £2,000, HMRC will contact the individual to discuss the issue. All payments will begin next year and no immediate one-off payment will be required. HMRC will review the responses to the first set of notifications and make any changes needed to operational plans before going ahead with the rest. Staggering the process between now and Christmas will help to ensure that HMRC can deal with all queries efficiently.
The Exchequer is owed a total of approximately £2 billion. The fact that we were left with the worst deficit in peacetime history means that we simply cannot afford to write off all the underpayments. To ensure that the tax system is fair for everyone and that everyone pays their fair share, we are taking action to recoup the funds as painlessly as possible. In cases of genuine hardship, HMRC will allow payments to be spread across a period of three years. As was already the case, it will not pursue cases when the amount owed is less than £300—that is an increase from the previous threshold of £50—which applies to 40% of all underpayments. Of course, in specific circumstances, HMRC will consider writing off underpayments where it can be shown that HMRC was provided with all the information necessary—although I have to tell the House, from historical experience, that that is unlikely to apply to many cases. We do not want to build up people’s hopes unrealistically.
This Government understand that there is an urgent need to reform our PAYE system. In opposition and from day one in government, we have sought ways to improve it. The system is outdated, inefficient and burdensome to the Exchequer and taxpayer alike. We need PAYE to reflect the employment issues that the 21st century presents, and that will be a focus of reforms that we take forward as part of our wider strategy for reform.
Stewart Hosie
I thank the Minister for his technical explanation of the problem. I say at the outset that, given the scale of the problem—6 million people owing or owed perhaps £6 billion—it is disappointing that a Minister was brought here to make that statement and that the Government did not volunteer one earlier.
May I ask for more clarity? Is the number of people affected around the 6 million previously reported, and does the Minister discount the figure of 23 million reported in some of the press today? Is he confident that the previously reported figure for mispayments of £3.8 billion are correct, and does he give any credence to reports in the press today of an additional £3 billion of mispayment error? In short, I am trying to understand the full extent of the problem.
Can the Minister tell the House when those due to receive payments from the Revenue will get them? He confirmed the procedure for the Revenue requesting payment from those who have underpaid, and I am pleased that the offset is now £300, but can he give a cast-iron guarantee that those whose circumstances have changed dramatically—perhaps they have lost their job—will not be hounded for modest payments that they can no longer afford to make?
What action is the Minister taking to ensure that taxpayers are not now the target of fraudsters and scams? To get to the bottom of the matter, although he explained how the problem occurred, can he explain how long such errors have been occurring and when Ministers first knew about them? How could a system so flawed have been allowed to operate as it did? He spoke a lot about PAYE and his intention to reform it, but the public, employers and employees have a right to trust and believe that the PAYE system is reliable and works. What guarantees can he give us today that, after work is done on PAYE, it will be trusted and people’s family and household incomes and budgets will not be shredded, as they may be in the coming year, with demands for back tax because of miscalculations by the Revenue?
Mr Gauke
First, let I say that I am perfectly happy to answer these questions and I am genuinely grateful for the opportunity to do so.
The hon. Gentleman asked about the backlog of cases. That matter has been well known—I believe that he and I have debated it in the past, and a National Audit Office report published on 30 June gave the most recent update on the position. There is nothing new in the backlog that has emerged in recent weeks. There is a problem and we and HMRC are seeking to deal with it, but it is a problem that has existed for many years and we are critical of the previous Administration for the lack of progress in resolving it. A specific concern that has featured very recently is that it has emerged that, in the last two tax years, 4.3 million people have overpaid tax and 1.4 million have underpaid. Our aim is to send cheques to all those who have overpaid over the course of the rest of the year—in dramatic contrast with previous delays in addressing overpayments.
The hon. Gentleman is right to raise the question of changed circumstances, and it is absolutely right that HMRC considers hardship cases. That is why we have announced today that HMRC will show flexibility in some cases to spread payment over three years. As I said, we are not seeking to pursue the matter mindlessly, without taking account of individual circumstances, especially of those owing large amounts.
The hon. Gentleman also rightly raises the subject of fraudsters, and I am grateful to have the opportunity to reiterate that HMRC will not send e-mails to members of the public; communication will be in writing. Of course, people should be cautious.
How long has this problem persisted? The fundamental problem with PAYE, in the sense of there being too many open cases, and underpayments and overpayments, is a long-standing issue. In part it has to be recognised that, inherently in the PAYE system, there will sometimes be underpayments, because not all the information will be available in-year. For example, all the information about benefits in kind, company cars and so on, will not necessarily be available to HMRC or to employers. That will come to light at the end of the year, and then there will be a need for reconciliation, but that problem has always existed.
The hon. Gentleman specifically asked how long Ministers have been aware of the problem. This Minister has been aware of a problem with PAYE since day one, and that is one reason why we made proposals for reform when in opposition.
The hon. Gentleman asked also about future reform. It is important that there is trust in the PAYE system, and it is right to say that in 85% of cases PAYE is correct in-year, but there are still problems, and we are consulting on proposals so that information is more up-to-date—if you like, so that it is real-time information. That means that HMRC will be able to respond to changed conditions much more quickly, and that we will have a system that is fit for the 21st century, in which people move around, change jobs and have multiple sources of income. We think that that is the direction in which we need to move.
Michael Fallon (Sevenoaks) (Con)
Is it not rather revealing that this question was not tabled by the Labour party, which presided over such a decrepit system for so long? Does not the sheer number of incorrect payments illustrate the need to move to a system that reflects modern working and allows tax payments in real time, rather than on the basis of either guesswork in advance of the tax year or reconciliation a year or two later?
Mr Gauke
My hon. Friend is absolutely right. As the Government, we are seeking to address the short-term issue, which is the overpayments and underpayments. We cannot just brush them to one side or park them for another year; we need to address them. However, we must also look at the longer-term solution, and that, as my hon. Friend rightly says, means moving towards a much more up-to-date system so that the information is more up-to-date and we are able to respond accordingly.
Stephen Timms (East Ham) (Lab)
I understand that tax experts were briefed last week and told that a small number of notifications would be sent out in the next few weeks as the start of a process over the coming months, so why was the House not told, still less the public, what was intended? Why did HMRC’s website initially say absolutely nothing at all? Why has that arrangement, which was set out to a few experts last week, apparently now been abandoned and replaced, if we are to believe the reports over the weekend, with a headlong rush, whereby 6 million new calculations will be sent out in the next few weeks? Where is the plan for handling that huge exercise?
The Minister will have seen the questions that I tabled yesterday, but let me put four of them to him specifically. He has told us that HMRC will consider writing off demands when taxpayers can demonstrate that they provided all the necessary information to calculate their tax correctly. What exactly will they have to show, and how can they do so? If a problem arises because the employer, rather than the employee, has made a mistake, can he confirm that the employer will be held liable for the tax that is due?
Crucially, if people are required to pay more tax for a past year, their net income for that year will be reduced. In many cases, that will mean that they would have been entitled to more benefits—pension credit, housing benefit and council tax benefit—than they were actually paid. Can the Minister confirm that the rule will be changed so that those higher amounts will be paid to those individuals or offset against the extra tax that is due?
Anecdotal evidence suggests that HMRC call-response times have become much worse over the past few months, with many more people not being able to get through. Can the Minister confirm that the deadline for tax credit renewals has been extended from 31 August as a result? Clearly, sending out all those notifications will hugely increase the demand on those call centres, so how will that extra demand be managed? The press reports all refer to tax paid over the past two years. Does the Minister intend that, in due course, HMRC will look at earlier periods as well, or is the exercise limited to those two years?
Of course, it is a good thing that the previous Government’s investment has provided a system that is better able, in particular, to keep track of tax obligations, when people change their jobs or have multiple sources of income, but it is the Minister’s job now to ensure that the extra information that he has is used fairly.
Mr Gauke
I think we now know why Labour Members did not table an urgent question on this matter.
The right hon. Gentleman asked many questions—although there was not a word of apology for a tax system that is clearly encountering some difficulties—and I will endeavour to answer them all. First, there has been no change of plan. We have pursued the same proposal all along, namely to write to 45,000 to 50,000 taxpayers. We will use the information and the lessons learned from this relatively small sample to guide how correspondence will be undertaken with the remaining taxpayers affected. Let me reassure him that his fears about that are wrong. He also expressed concern about the public not being informed about the exercise, but we made great efforts to inform them over the weekend immediately after the decision was taken to proceed with writing those first letters to affected taxpayers.
The right hon. Gentleman referred to a concession that may be available, and he may recall that the A19 concession is available in circumstances where all the information has been provided to HMRC and it has had the opportunity to address it. We have looked into this. The A19 concession, which is well established—he will remember it from his time in the Treasury—does not apply that often in practice, and I do not want people to build up their hopes that it will offer some kind of panacea; that would be unfair on taxpayers.
The right hon. Gentleman questioned whether employers have made mistakes. In some circumstances, employers will have made the mistake that caused the overpayment or underpayment, but the principle remains the same—we have to collect the right amount of tax.
The right hon. Gentleman asked about means-tested benefits. In some cases, because net income was higher in a previous year, certain means-tested benefits would not have been available in that year, so sums are now having to be paid back. In those particular cases where tax underpayments are being recovered through the tax coding system, the corresponding fall in the net income for the taxpayer will increase the availability of means-tested benefits in that relevant year.
The right hon. Gentleman asked about the extension of tax credit renewals’ deadline, and I can confirm that it has been extended to provide additional time for claims. I have to point out to him, however, that the idea that call centres are under strain and that it is difficult to get through to HMRC is not entirely a new phenomenon: it is a long-standing problem. Let me take this opportunity to say to taxpayers who are understandably concerned about their position that they should wait until they receive a letter before contacting HMRC, as only then will it be able to deal effectively and efficiently with their concerns. Nevertheless, he raises a legitimate issue about call centres. We are providing additional staff—there is additional capacity now and there will be after the tax credit renewal process has been completed. We are taking steps to ensure that HMRC is able to deal effectively with those calling in with concerns.
Mr Speaker
Order. I understand that the Minister is trying to help the House with informative replies, but I am afraid they are rather prolix and they need to get shorter.
Nadhim Zahawi (Stratford-on-Avon) (Con)
Does my hon. Friend agree that the previous Government ignored not only the crippling budget deficit but the serious problem with PAYE? That is evidence as to why the coalition’s setting up of the Office of Tax Simplification is so important.
Mr Gauke
My hon. Friend raises an important point. One of the stresses and strains that HMRC has had to deal with has been the complexity of the tax system. If we can address that, we can establish a simpler PAYE system and reduce the demands placed on HMRC so that it can focus on these very matters.
Mr George Mudie (Leeds East) (Lab)
It would be a disservice to the many millions of people affected—certainly the 1.4 million who are being chased for repayments—if we allowed this matter to be passed over in gaining party political points on either side. [Laughter.] It is not amusing to the 1.4 million people. The report says that it was the Minister who noticed the disparity in the figures and asked for a review. The result is sad, but I commend him for uncovering the problem. This issue raises important questions, and that is why party political point scoring would be wrong. It is not the first debacle from this department. As the Minister looks into it, can the House expect some resignations or disciplinary action in respect of the highly paid chairman and chief executive and board?
Mr Gauke
I appreciate that the hon. Gentleman has consistently raised concerns about HMRC. In my view, we need to focus on moving forward. The fundamental problem is the PAYE system and the inability, over many years, to bring it into the 21st century. In my view, the days of Treasury Ministers throwing staplers around should be past. We need to work with HMRC constructively to ensure that we have an improvement in our tax system.
Sir Alan Beith (Berwick-upon-Tweed) (LD)
While recognising that the Government had to deal with this inherited problem, will my hon. Friend give me an assurance that the Revenue will assist those who have a reasonable basis for showing that they provided the necessary information in good time and that they will not face obstruction or lack of information? Will he assure me that these efforts will not detract from the measures that need to be taken to deal with those who actively evade their taxes, unlike most of the people this problem will affect?
Fiona Mactaggart (Slough) (Lab)
Will the Minister make sure that there are sufficient staff who are able to help vulnerable people unexpectedly facing big bills, with face-to-face discussions about how to deal with that? Last Sunday in my advice surgery, I spoke to a gentleman who is a courier earning £220 a week and has no bank account, but owes £18,000 in back tax because he has constantly had letters that he does not understand referring to extra charges, interest payments and so on. He has not been able to find anyone who can speak to him about the problem. Will the Minister ensure that there are enough staff to speak to people?
Mr Gauke
I am grateful for that question. It is absolutely right, particularly where those larger sums are involved, that HMRC deals with people sympathetically, and in order for it to do so there needs to be proper communication. That is a challenge for HMRC, but it is absolutely right that it focuses its resources on this matter.
Harriett Baldwin (West Worcestershire) (Con)
A couple of years ago, HMRC lost my personal information and that of 25 million other people on the child benefit disc, and in my constituency surgeries each week, HMRC problems consistently generate the most casework. In opening the boot—or the bonnet—of the car that is the computer system at HMRC, what other problems is the new mechanic going to find?
Mr Gauke
HMRC has faced many problems and challenges over recent years: a merger, coping with a complicated tax credits system, and a number of other issues. We need to be realistic about what can be done with our tax system—tax simplification is indeed important—and allow HMRC to focus on its key concerns and do the very important job that it has to do.
Mr Nigel Dodds (Belfast North) (DUP)
Can the Minister outline the costs of this entire operation, and may I endorse the call for people who have underpaid to have the opportunity of face-to-face meetings if there are big demands on them, so that their cases can be heard properly? Can he indicate whether interest will be paid on top of the money to be repaid to those who have overpaid?
Mr Gauke
On the last point, yes, interest is applicable and a statutory duty. We are not in a position to assess the costs to HMRC. It is worth putting the matter in perspective by saying that most people have had their tax calculated accurately through the PAYE system, and that more will receive repayments than will have to pay extra. People should wait until they receive their letters. It is worth pointing out also that the problem of underpayments has existed in previous years, and many hundreds of thousands of people have had to repay tax through the PAYE system, so the phenomenon is not entirely new, although the scale is somewhat greater now.
David Rutley (Macclesfield) (Con)
Have the appropriate risk assessments been undertaken of other key HMRC systems that were set up under the previous Labour Government to ensure that we do not have to clean up other messes such as this in future?
Mr David Hamilton (Midlothian) (Lab)
May I first congratulate the Minister on moving from the £50 limit to a £300 limit? That will be very helpful. However, many thousands of the 1.4 million people will have changed circumstances. They may now be unemployed, have mortgages or be on short-time working. Will that be taken into consideration? For ever the pragmatist, may I suggest that a direct line be set up for MPs? I imagine that I will have to put a revolving door in my constituency surgery.
Mr Gauke
I note the hon. Gentleman’s point about a direct line, and I will certainly put that to HMRC management. I reiterate that we accept that there may be hardship, and I am sure his constituents will welcome the announcement today about repayments potentially being spread over three years.
Matthew Hancock (West Suffolk) (Con)
The Minister said that one reason why some payments will have to be so big is that there has not been a reconciliation for two years. Can he explain why moneys were not required back from taxpayers up and down the country last year in the months running up to the general election?
Mr Gauke
My blood ran slightly cold for a moment when I thought that the TaxPayers Alliance had managed to get in here, but I know that my hon. Friend is a good representative for taxpayers. As for last year, it is fair to say that the introduction of the computer system was a relevant issue, but none the less the lack of a reconciliation has exacerbated the problem. The fact that nothing was done last year prior to the election has left us with a bigger problem this year. He can draw his own conclusions.
Mr Speaker
I apologise to the hon. Member for West Suffolk (Matthew Hancock); he is unmistakable.
Mark Durkan (Foyle) (SDLP)
May I ask the Minister whether these circumstances have given the Government any further thought about plans to cut the future capacity of the Revenue and Customs? If he is giving positive consideration to the very good suggestion that there be a helpline for MPs, may I suggest, since many of the people affected will not have accountants to hand or be able to go to them, that it be available also to citizens advice bureaux, which will get an awful lot of inquiries?
Charlie Elphicke (Dover) (Con)
The size of the problem, the number of people affected and the amount of money involved make it a real tragedy for this country. Some 2,000 of my constituents, and the constituents of each and every one of us, will have to stump up more money that is not planned for at a time when money is tight for everyone. May I urge Ministers to have compassion for those who find themselves in a difficult spot, and a review of HMRC, particularly its difficulties in operating computers?
Mark Lazarowicz (Edinburgh North and Leith) (Lab/Co-op)
I was a bit disappointed by the Minister being a little dismissive of my right hon. Friend the Member for East Ham (Stephen Timms) when he suggested that it was now getting harder to get through to HMRC. My experience, and that of many MPs, is that when people try to get through to tax credits staff, they just get an answer machine saying that they should phone back another day. They cannot even leave a message.
The situation is getting worse, and although I do not want to blame the Minister for that, may I urge him to consider more than just additional call centres? He should also consider the possibility of providing not just a helpline but more support for bodies such as Citizens Advice and other information agencies. Does he agree that there is a danger of scam e-mails, with people trying to take advantage of those who will be in a difficult position, and that people will need somewhere reputable to get information and support so that others cannot try to get money out of their suffering?
Mr Gauke
I reiterate that additional resources will be provided for call centres—I believe there will be about 20% extra staff by the end of the month, with contingency for more if needed. HMRC is focusing on that. I welcome the hon. Gentleman’s remarks about tackling fraudsters, and we can take back to our constituents the message that they should be wary, particularly of e-mails. HMRC will not e-mail people about this matter.
Alec Shelbrooke (Elmet and Rothwell) (Con)
A lot has been said during these exchanges, and it may be confusing to some members of the public. May I ask my hon. Friend to give some ABC points to members of the public who have been affected or feel that they may have been, so that it can be recorded properly on tonight’s news?
Mr Gauke
First, I would say that people should wait until they receive a letter. When they receive one, if they are asked to pay money back they should go through the details carefully, and if they are concerned at that point, they should contact HMRC. They can be reassured that we are not demanding immediate payment, as there will be an opportunity either to spread it out over future months and years or at least to talk to HMRC about the details.
Mr Andrew Love (Edmonton) (Lab/Co-op)
How does the Minister respond to the reports in the national newspapers that certain accountants are suggesting that there is no need to pay back the money, and to the confusion that that will undoubtedly cause many people? He mentioned flexibility in the response to the problem, but are not fairness and consistency also very important, to ensure that everyone is treated exactly the same?
Mr Gauke
It is right that people pay the tax that is due. I have read the newspaper reports, and it is right to say that a concession is available in some circumstances, but I have been straightforward in making it clear that we do not believe that it will be widespread. People should pay the tax that is due, and given the state of the public finances, we are certainly not in a position to wave goodbye to £2 billion. That would not be fair on those who have paid the correct amount of tax.
Mr Ian Liddell-Grainger (Bridgwater and West Somerset) (Con)
My hon. Friend has said that the NPS—the national insurance and PAYE service—system is now up to date and working, within reason, but he has also admitted that PAYE is a 1940s system and not up to date. A consultation is currently going on and is due to shut in about two weeks. One of the problems that he identified was that information can be up to 18 months old. When will we reach the stage of real-time collection, and if it does come in, how and by whom will it be administered?
Mr Gauke
My hon. Friend is right that we are consulting on moving towards a real-time system. I do not pretend for a moment that it is an overnight solution, but we are examining it so that over the next few years, we can move to a system that gives HMRC, which will of course continue to administer it, information that is up to date and adjustable in-year. That will ensure that we get a much greater level of accuracy in our tax system.
Kevin Brennan (Cardiff West) (Lab)
Like all hon. Members, the Minister will have constituents visiting him who have underpaid tax and who will feel that that is no fault of their own, and yet, under the system as it exists, they will be expected to pay back in full. Has he given any consideration to recognising clearly in the amount that must be paid back that our constituents have acted in good faith and that the fault lies elsewhere?
Mr Gauke
As I said earlier, concession A19 is for taxpayers who have acted in good faith when HMRC has had an opportunity to respond. However, I should also make the point that PAYE has always involved circumstances in which information comes to light after the tax year is completed and an adjustment must be made. That has happened throughout the existence of PAYE, but it has increased over the years as working patterns have changed, which is why we need to look at more fundamental reform of PAYE.
Richard Graham (Gloucester) (Con)
Following earlier suggestions of hotlines, what advice would the Minister give to my constituents who feel that they might be affected, but who do not want simply to wait for a letter in their post?
Jim Shannon (Strangford) (DUP)
It would seem that the left hand of HMRC does not know of the information held in the right hand. What assurance can the Minister give to members of the public that such information can be better co-ordinated to ensure that such mistakes do not happen again?
Mr Gauke
The hon. Gentleman makes a good point. To be fair, the NPS system brings the information together, but unfortunately, that has highlighted more difficult cases. In fact, as we move forward with the NPS system and—potentially—further reforms, HMRC should have more accurate information and so be able accurately to assess the level of tax due.
Dr Julian Lewis (New Forest East) (Con)
I am tempted to ask whether the person who designed the computer system for HMRC is the same as the person who designed the computer system for claiming MPs’ expenses, but I shall resist, and instead ask the Minister this: why has he alighted on the period of only three years for people to make payments? Is it not the case that people on very low incomes may need longer if they are hit with particularly large bills?
Mr Gauke
The period of three years is one in which we have confidence that HMRC will be able to address the matter administratively. Beyond that, certain technical matters would need to be thought through. However, we are confident that HMRC is capable of addressing the matter over three years.
Gregg McClymont (Cumbernauld, Kilsyth and Kirkintilloch East) (Lab)
Does the Minister agree that the position of front-line staff in HMRC centres up and down the country is important? They do a stressful job at the best of times and regularly deal with frustrated taxpayers on the phone, but with the new problem, I am sure the Minister agrees that the staff’s position needs to be looked at. A statement of support for them from the Minister would be welcome.
Mr Gauke
I am grateful for the hon. Gentleman’s question. Some comments have suggested that the situation is the fault of HMRC staff who cannot add up, but those comments are ill-informed. The truth is that HMRC staff are committed to doing a good job. They are battling with a difficult system, and I give them my support. As a Minister, I have visited many HMRC offices, and I appreciate the hard work, enthusiasm and dedication of HMRC staff.
Jonathan Evans (Cardiff North) (Con)
Does my hon. Friend appreciate that if the head of HMRC was instead the finance director of a financial services company that was seeking to claw back that sort of money from customers, he would be obliged to take himself off to Canary Wharf and satisfy the Financial Services Authority that he had complied with the requirements to treat customers fairly? Is the Minister satisfied that the mechanisms that he has outlined, including the period for repayment and other things, would satisfy the same approach that the FSA would take in relation to a private company?
Mr Peter Bone (Wellingborough) (Con)
The Minister is responding excellently to the question, but I must say to him gently that it would have been better had he made a statement rather than being asked to come to the House.
PAYE has always been a collection of money on account towards the final tax liability, but the Minister has not made it clear to me whether a great number of people are affected by the current situation just because people’s lifestyles have changed. Was there also an error in the basic collection by the Revenue of the correct information given by taxpayers?
Mr Gauke
Our understanding is that the fundamental problem is changing working practices—that is the long-term issue. Of course, there may be circumstances in which HMRC has made errors, but changing working practices is the essential problem. It is also the case that the new computer system more accurately and rigorously picks up problems than happened before. That is why we have seen the increase in underpayments and overpayments. However, my hon. Friend is absolutely right that there have always been underpayments and overpayments under the payment-on-account PAYE system.
Jeremy Lefroy (Stafford) (Con)
I welcome my hon. Friend’s statement. The relationship between taxpayer and tax collector is extremely important. Many of my constituents find the fact that it is extremely difficult to get through to the Revenue at the moment very stressful, which they must do through no fault of their own, as other hon. Members have said. Will the Government look at that relationship and ensure that it is valued, so that both HMRC staff, who do an excellent job, and its customers, are treated the same way as we would expect in any public service?
Bob Blackman (Harrow East) (Con)
May I congratulate the Minister on taking prompt and appropriate action on this inherited fiasco? Much mention has been made of telephone hotlines and so on, but the vast majority of people who receive requests or demands for the return of unpaid tax will not have advisers or anyone to assist them. Will he make an effort to ensure that the letters that are sent to our constituents are in plain English and easy to understand, and that they contain appropriate calculations that the individual taxpayer can appreciate and understand, so that they can make their decisions without recourse to either MPs, tax advisers or accountants?