Finance Bill

Gareth Davies Excerpts

Committee of the whole House
Tuesday 10th December 2024 Commons Chamber

[Madam Deputy Speaker (Ms Nusrat Ghani)]

Just before I call the shadow Minister, I remind Members that, in Committee, I am Madam Chair or Madam Chairman.

[Gareth Davies (Grantham and Bourne) (Con)]

Thank you very much, Madam Chair. It is always a pleasure to see you in Committee and to serve under your chairmanship.

On behalf of the Opposition, I rise to speak to new clauses 4 and 5, which stand in the name of my right hon. Friend, the shadow Chancellor. Before I do so, let me set the scene for clauses 7 to 12.

When announcing these changes in her Budget, the Chancellor said:

“We need to drive growth, promote entrepreneurship and support wealth creation”.—[Official Report, 30 October 2024; Vol. 755, c. 818.]

She said something similar to the BBC in 2023:

“We want Britain to be the best place to start and grow a business”

and that was why, she said

“I don’t have any plans to increase capital gains tax.”

This Bill corrects the record. Labour wants to increase capital gains tax, so clearly it does not have any plans for Britain to be the best place in which to start and grow a business. Is it any wonder that business confidence is now at the lowest level we have seen since the pandemic?

Clause 7 increases the main rates of capital gains tax from 10% and 20% to 18% and 24% respectively, with schedule 1 making consequential changes to reflect that these rates are now equal to those on residential property. The Office for Budget Responsibility rates the costings on this policy as “highly uncertain”. It says that

“these costings are among the most uncertain in the policy package, reflecting the range of potential behavioural responses.”

This Government are far too quick to ask others to explain how they would pay for Labour’s policies, when they are clearly failing to explain convincingly how their own policies would pay for themselves.

I wish to take this opportunity to highlight an issue raised with me by the Chartered Institute of Taxation. First, let me place on record my thanks to the organisation for its invaluable support. It has been informed by His Majesty’s Revenue and Customs that it is too late to change the format of the relevant 2024-25 tax return pages to accommodate this in-year change. I would therefore be very grateful if the Minister could provide the following assurances to HMRC: first, that it will be properly equipped to implement this measure; secondly, that the changes will be published as widely as possible; and, thirdly, that an appropriate level of understanding will be shown to taxpayers contending with these complications.

Clauses 8 and 9 increase the rates for gains that qualify for business asset disposal relief and investors’ relief. From 6 April 2025, the 10% rate will increase to 14%. From 6 April 2026, it will rise again to 18%. As the Chartered Institute of Taxation has highlighted, because the increase to the main rates of capital gains tax is effective immediately, this leaves a window where people selling their business can save up to 14% in capital gains tax until April 2025. In other words, the tax changes in this Bill do not cultivate a start-up Britain; they incentivise British business owners to sell up and sell up soon. This could have been avoided—along with the administrative complications that I have already outlined—had measures in clause 7 been implemented from the start of the new financial year.

Will the Minister explain why the timings of these provisions appear to be so untidy, and, for that matter, how exactly they drive growth, promote entrepreneurship and support wealth creation? I simply say that if hon. Members are not satisfied with the Minister’s explanation, I encourage them to vote for new clause 5, which would require a proper assessment of the impact of this perverse incentive.

Clause 10 reduces the lifetime limit for investors’ relief from £10 million to £1 million, while clause 11 and schedule 2 bring in transitional rules and anti-forestalling provisions. On those anti-forestalling provisions, the Chartered Institute of Taxation notes that the anti-avoidance measures risk being “unfairly retrospective”, capturing those who entered into commercial contracts in good faith before the Budget, on the grounds that they do not satisfy the stringent requirement put down by the Treasury to be “wholly commercial”. Will the Minister tell the House why the wording is so tight? Widespread concern over being hit with “unfairly retrospective” taxation would have a chilling effect on parts of the economy. It would exacerbate uncertainty among those who already feel that they have been blindsided by this Government.

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[The Chairman of Ways and Means (Ms Nusrat Ghani)]

We come to the Front-Bench wind-ups. Does the shadow Minister wish to speak?

[Gareth Davies]

indicated dissent.

[The Chairman]

I call the Minister.

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[Gareth Davies]

I am very grateful to the Minister for explaining all the things she has just set out, but I did not quite get an answer to the specific question of why it costs HMRC £4.5 million to execute this tax rise, which will not raise any money in the next year or the year after. Could she explain why this specific measure that only affects 3,100 people costs HMRC £4.5 million, but other tax increases cost hundreds of thousands of pounds?

[Tulip Siddiq]

If the shadow Minister looks carefully at the documents we have published, he will find all his answers written out very clearly there.

New clause 5 would require the Government to publish an impact assessment of the changes to business asset disposal relief, and to compare the impact of those changes with the number of claims that would have been expected if the rate had not been changed. Every year, the Government publish capital gains tax statistics, which include the number of business asset disposal relief claims for the most recent tax year with available data. The number of claims in 2024-25 compared with upcoming tax years will therefore become public information in time. Meanwhile, the fiscal impact of the changes are is out in the tax information and impacts note for this measure, which has been published online.

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[The Chairman of Ways and Means (Ms Nusrat Ghani)]

I call the shadow Minister.

[Gareth Davies]

I rise to speak on behalf of the official Opposition on new clause 3, which stands in the name of the shadow Chancellor, my right hon. Friend the Member for Central Devon (Mel Stride).

Clauses 15 to 18 concern the taxation of the oil and gas industry, which meets 75% of the UK’s household and industrial energy needs, with 50% of that need being met by the North sea. The sector supports more than 200,000 high-skilled jobs in this country, and that talent, along with the rest of the supply chain, will be crucial to our domestic energy transition. These realities underscore the imperative of a smooth and efficient transition and a fiscal regime that facilitates that, not least because the timeline for investment in the oil and gas industry is so long. If the fiscal regime is not calibrated correctly, the damage may be irreversible and the costs will be significant.

To recap the measures in the Bill, clause 15 increases the rate of the energy profits levy from 35% to 38%, bringing the headline tax rate on the sector up to 78%. Clause 16 removes the 29% investment allowance and reduces the rate of the decarbonisation investment allowance to 66%, so that the cash value of that allowance remains the same. Clause 17 extends the energy profits levy to 2030, at which point the Government are committing to implementing a successor regime to respond to price shocks once the levy expires. Clause 18 and schedule 3 legislate for certain payments into decommissioning funds to be treated as decommissioning expenditure so that they can attract tax relief.

The question that many are asking is this: do these measures add up to a fiscal regime that facilitates a smooth and efficient energy transition? Not according to the Office for Budget Responsibility, which concludes that on average over the forecast period, capital expenditure will be 26% lower, oil production 6.3% lower and gas production 9.2% lower compared with our March forecasts. Those are dramatic movements. The University of Aberdeen has warned:

“A rise in the EPL and loss of investment and capital allowances may have the unintended effect of accelerating decommissioning and decelerating the energy transition as companies face an additional cost burden.”

The Government have thankfully carried out a partial U-turn, retaining the decarbonisation allowance and the 100% first-year allowance introduced by the Conservative party, but if they were persuaded of the importance of those investment allowances and that removing them would do more harm than good, why persist with removing the main 29% investment allowance? What was it about that relief compared with the others that made them want to scrap it?

The Government talk about closing loopholes—we saw how well that went with carried interest—but these measures will contribute just 1% of the new revenue raised by the Budget across this Parliament. Does the Minister really think it is worth jeopardising some 50% of our domestic gas supply for that? The measures in the Budget essentially throw a massive spanner in the works for oil and gas, and it is unclear exactly what the Government’s rationale is for doing that.

When we brought in the levy, it was to tax extraordinary profits in extraordinary times. The revenue that we raised contributed to our efforts through policies such as the energy price guarantee and the energy bills support scheme to reduce energy bills for the British people. Today, as those extraordinary circumstances subside, Labour is ratcheting up the levy. That sends a mixed message to the industry ahead of the consultation on a successor regime. The terms of that regime will supposedly be set by the need to respond to price shocks, yet the Government’s justification for these measures has nothing to do with price shocks. Instead, they are all dressed up in language about the sector making a “fair contribution”, as the Minister said, to the Energy Secretary’s environmental ideological ambitions. What is the Government’s vision for the taxation of oil and gas in this United Kingdom—temporary windfall taxes or permanent climate levies? The Bill suggests the latter. I would be grateful for the Minister specifically commenting on that when he responds.

One way in which the Minister could give an indication and provide some long-term certainty would be to confirm further the future of the energy security investment mechanism, which he mentioned. As he kindly said, we introduced the ESIM so that when prices returned to normal levels, the energy profits levy would end; no more windfall profits would mean no more windfall tax. Will he confirm that the ESIM will remain in place up to 2030? I think he said so at the Dispatch Box, but I would be grateful for his reconfirming its end date. Will he go further and confirm that it will remain in the same condition as today? Will the price floor continue to be consumer prices index-adjusted?

The Treasury and the Minister have said that the ESIM will be retained, but the industry would like further confirmation, as I have set out. Will he also write to me with the Treasury’s latest modelling of future oil and gas prices to prove that the expected revenues are not at the expense of the ESIM? That modelling will be important for us to understand and get that reassurance and certainty on the ESIM. Having been in the Treasury, I know that that modelling is continually reviewed and produced; I would be grateful if he would write to me with that.

These are not purely academic questions. Our concern is for the hundreds of thousands of people employed by the UK oil and gas industry, for the UK’s energy security and for the efficient and smooth energy transition that we all care about. The Government should be not ideological but empirical in their approach, which is why we have tabled new clause 3, which would require a review of the impact of these measures on employment, investment, production, demand and the whole Scottish economy. If the Government have already made detailed assessments on those specific areas, we would be grateful for the Minister publishing them.

On every measure, the Budget has not survived contact with reality. Growth has been downgraded, real incomes depressed and business investment reduced, with broken promises and credibility completely shattered. It is not so much that the Labour Government take a different view on economic matters; it is that they take the wrong view. Labour is the party of the tax rise that loses money. We are the party of the tax cut that raises revenue. That is why Labour Governments always leave office with more unemployment, larger debt and higher taxes. They always run out of other people’s money, and this Government are set to do so in record time.

[The Chairman of Ways and Means]

I call the Liberal Democrat spokesperson once again.

Finance Bill (First sitting)

Gareth Davies Excerpts

Committee stage
Tuesday 28th January 2025 Public Bill Committees

[The Exchequer Secretary to the Treasury (James Murray)]

It is a pleasure to serve on the Committee with you as the Chair, Mr Mundell. Clauses 1 to 3 impose a charge to and set the rates of income tax for 2025-26, and clause 4 maintains the starting rate for savings limit at its current level of £5,000 for the ’25-26 tax year.

Income tax is the largest source of Government revenue and helps to fund the UK’s schools, hospitals and defence, and other public services that we all rely on. In ’25-26, it is expected to raise around £329 billion. The starting rate for savings applies to the taxable savings income of individuals with low earned incomes of less than £17,570, allowing them to benefit from up to £5,000 of income from savings interest before they pay tax. It specifically supports those taxpayers with low levels of earned income.

As Committee members will be aware, both the income tax rates and the starting rate limits for savings must be legislated for each year. The Bill will not change the rates of income tax. We are confirming that they will remain the same, thereby meeting our manifesto commitment not to increase the basic, higher or additional rates of income tax.

Clause 1 imposes a charge to income tax for the year ’25-26. Clause 2 sets the main rates of income tax, namely the basic rate of 20%, the higher rate of 40% and the additional rate of 45%. These will apply to non-savings, non-dividend income of taxpayers in England and Northern Ireland. Income rates in Scotland and Wales are set by their respective Parliaments.

Clause 3 sets the default rates at the same levels as the main rates, namely 20%, 40% and 45%. These rates apply to the non-savings, non-dividend income of taxpayers who are not subject to the main rates of income tax, Welsh rates of income tax or Scottish rates of income tax. For example, they might apply to non-UK-resident individuals. The clause also sets the savings rates of income tax—again at 20%, 40% and 45%.

Clause 4 will maintain the starting rate limit at its current level of £5,000 for the ’25-26 tax year. The limit is being held at this level to ensure fairness in the tax system while maintaining a generous tax relief. In addition to the starting rate for savings, whereby eligible individuals can earn up to £5,000 in savings income free of tax, savers are also supported by the personal savings allowance, which provides up to £1,000 of tax-free savings income for basic rate taxpayers. Savers can also continue to benefit from the annual individual savings account allowance of £20,000. Taken together, as a result of these generous measures, around 85% of savers will pay no tax on their savings income.

Finally, I should mention the Government’s efforts to encourage those on the lowest incomes to save through the help to save scheme. We recently extended the scheme until 5 April 2027, and we have extended the eligibility to all universal credit claimants who are in work from 6 April 2025. I encourage Committee members to do what they can to promote the scheme to their constituents.

New clause 3 would require a review of how many people who receive the new state pension at the full rate are liable to pay income tax this year and in the next four tax years, and specifically what the tax liability of their state pension income will be. The Government consider the new clause to be unnecessary, given the information that is already publicly available.

His Majesty’s Revenue and Customs has published statistics for this tax year and past tax years that cover the number of income taxpayers, including breakdowns by marginal rate, tax, band and age, and the Department for Work and Pensions has published figures for pensioners’ average incomes. The Office for Budget Responsibility is the Government’s independent economic forecaster and most recently published projections of the number of income taxpayers for future years in its “Economic and fiscal outlook” at autumn Budget. Those projections include a breakdown by marginal rate.

Income tax is a vital revenue stream for our public services and the clauses will ensure that that remains the case in 2025-26, while also retaining the starting rate of savings at its very generous existing value. I therefore commend clauses 1 to 4 to the Committee, and I urge the Committee to reject new clause 3.

[Gareth Davies (Grantham and Bourne) (Con)]

It is a great pleasure to see you in the Chair, Mr Mundell. This is one of many Finance Bill Committees that I have participated in. The subjects have changed somewhat each time, but something has remained consistent: the presence of the hon. Member for Ealing North. It is a pleasure to see him in his place, and I hope that his experience as the Treasury Minister in a Finance Bill Committee is as unpleasurable as mine when I was facing him.

As the Minister rightly set out, clause 1 imposes a charge to income tax for the year 2025-26, which is a formality. Clause 2 sets the main rates of income tax in England and Northern Ireland for 2025-26—the 20% basic rate, the 40% higher rate and the 45% additional rate—leaving them unchanged. Clause 3 sets the default rate and savings rate of income tax for the tax year 2025-26 for the whole of the United Kingdom. Clause 4 freezes the starting rate limit for savings at £5,000.

Of course, the Government’s big announcement on income tax in the Budget was that they would not extend the freeze to income tax thresholds beyond April 2028. Committee members will be aware that that announcement does not need to be legislated for, as the income tax personal allowance and the basic rate limit are subject to consumer prices index indexation by default, unless Parliament overrides that via a Finance Bill, and Parliament has not overridden indexation beyond the 2027-28 tax year.

As the current legislative framework did not allow the Government to enact their announcement on income tax thresholds at the Budget, we must take them at their word that they will keep their promise and not succumb to the temptation to override the thresholds in future. Given the possibility that rising borrowing costs have eliminated the Chancellor’s headroom under the Government’s own stability rule, I would be grateful if the Minister could reconfirm that they will allow CPI indexation to resume from 2028-29 and that they will not renege on that promise.

On a point of clarity, I would be grateful if the Minister could confirm whether the unfreezing of income tax thresholds in 2028-29 will involve an increase to the fixed portion of the income tax higher limit, which he will be aware of. The limit is set at £100,000 plus twice the personal allowance, and that £100,000 is not indexed to CPI by default. Should we expect the additional rate to rise only in so far as the personal allowance rises, or will that £100,000 be unfrozen too? I would appreciate an explanation on that.

I leave it to others to interpret what it says about this Labour Government and Budget that a non-binding commitment merely not to raise some tax thresholds in three years’ time is presented as a big win for the British taxpayer. On income tax, as with most of the Government’s more positive policy announcements, the benefits are prospective and entirely speculative.

Meanwhile the pain, as we have seen with national insurance contributions and in other areas, is very much immediate and certain. Pensioners left out in the cold by the Government this winter will recognise that all too familiar pattern. A pensioner who receives the full rate of the new state pension without additional income—whose income from April is roughly £12,000—is now in most cases no longer receiving the winter fuel payment. The Government have defended that decision by referring to the triple lock.

Will the Minister update the Committee on when the Government now project the full rate of the new state pension to exceed the income tax personal allowance, and how many pensioners they expect will be newly taken into income tax as a result of the development? If he cannot tell the Committee, perhaps he and his colleagues will vote in favour of new clause 3, which would require the Treasury to produce and publish forward projections for the number of people receiving the full rate of the new state pension who are liable to pay income tax, and specifically what the tax liability of their state pension income will be.

Pensioners cannot easily alter their financial circumstances, yet they were given less than six months’ notice of the withdrawal of the winter fuel allowance. They must not be blindsided for a second time by the taxman—especially not those who are just about getting by without additional income beyond the state pension. I urge Members and the Minister to vote for new clause 3 to prevent that from happening.

[James Murray]

I thank the shadow Minister for the comments at the beginning of his speech, if not for all the questions subsequently. First, on the question about whether the £100,000 threshold will be unfrozen in due course, that threshold does not move, and it sets the personal allowance taper beyond that level.

The shadow Minister asked broader questions about the personal allowance and our decision to change the policy we inherited from the previous Government. In the many Finance Bill Committees that he and I served on before the general election, the personal allowance would routinely be frozen for more and more years into the future. That is what we have inherited: the personal allowance is frozen up until April 2028. We made clear that we would do things differently. As well as not increasing the basic higher and additional rates of income tax, as we set out, we did not freeze the personal allowance beyond April 2028, which means that it will continue to rise with inflation.

The shadow Minister asked specific questions about how the change affects pensioners, and referred to new clause 3, which I addressed earlier. I will repeat what I said: new clause 3 is not necessary because the data the shadow Minister requests is already in the public domain. We need to ensure that as the personal allowance begins to rise from April 2028, that will benefit not just people in work but pensioners, because they will see the personal allowance that applies to their pension income rising as well. That is underlined by the fact that we are maintaining the triple lock, which will see generous increases in the state pension as the bedrock of state support for pensioners.

Question put and agreed to.

Clause 1 accordingly ordered to stand part of the Bill.

Clauses 2 to 4 ordered to stand part of the Bill.

Clause 5

Appropriate percentage for cars: tax year 2028-29

Question proposed, That the clause stand part of the Bill.

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[Gareth Davies]

As the Minister set out, clauses 5 and 6 set the appropriate percentage used for calculating the taxable benefit for a company car for tax years 2028-29 and 2029-30. In those tax years, the appropriate percentage for EVs will increase by 2% to 7% in 2028-29 and 9% in 2029-30. For most other vehicles, the appropriate percentage will increase by a further 1% in each year, up to a maximum of 39%. Hybrid vehicles are the standout exception. The effect of these clauses for vehicles capable of operating on electric power while producing between 1 gram and 50 grams of CO₂ per kilometre is to introduce a steep increase in the appropriate percentage of as much as 13% in 2028-29 to reach 18%, before rising to 19% in 2029-30.

Whereas previously the appropriate percentage for cars with emissions between 1 gram and 50 grams of CO₂ per kilometre would rise as the electric range reduced, from 2028-29 that system will be replaced with a single flat rate, regardless of the electric range. That means that hybrid cars with the greatest electric range, which are presumably the least polluting, will see the steepest tax rise. Any distinction between hybrid vehicles will be eliminated for the purposes of these provisions. Indeed, as the explanatory notes make very clear, rates for hybrid vehicles will align more closely with the rates for internal combustion engine vehicles, as the Minister just pointed out.

It will not have escaped Members that these new rates take us to 2030. The Government have confirmed their intention to ban the sale of new petrol and diesel cars by that date. What has not yet been confirmed is the future of hybrid vehicles. The Department for Transport is consulting on which hybrid cars can be sold alongside zero emission models between 2030 and 2035. The Minister, naturally, will not pre-empt the outcome of that consultation, but these measures effectively do just that. While the Department for Transport parses the differences between plug-in hybrid electric vehicles and hybrid electric vehicles, the Treasury is eliminating that distinction altogether by 2028, let alone by 2030.

Not only that, but the Treasury is effectively lumping all hybrid vehicles in with those powered by internal combustion engines. Treasury Ministers will be aware that the manufacturing of hybrid vehicles and engines supports thousands of British jobs, as my hon. Friend the Member for Gordon and Buchan alluded to, and car manufacturing firms operate on a multi-year investment cycle. The contradictions between the Bill and the Department for Transport’s consultation send a less than clear signal, which puts those jobs at risk. I would therefore be grateful if the Minister clarified the Government’s intention in making these changes, especially when the House of Lords Environment and Climate Change Committee has heard that these rates have been the single most effective intervention to date in changing consumer behaviour around different types of vehicles.

I would also be grateful if the Minister outlined what steps the Treasury and HMRC are taking to make the general public aware of these changes. I grant they are quite technical, but they could impose a significant additional tax bill on certain taxpayers with plug-in hybrid vehicles. The Chartered Institute of Taxation raised that as a key area of concern, which could confront unsuspecting taxpayers—those seeking to do the right thing by purchasing a less-emitting vehicle— with a massive and steep tax rise. A higher rate taxpayer on £51,000 whose company car is a plug-in hybrid VW Golf could face an additional tax bill of as much as £1,600 in 2027-28. That strikes me as neither fair nor proportionate.

It has been reported that this Labour Government ordered no fewer than 10 petrol hybrid Jaguars upon assuming office to supplement the existing departmental, chauffeur-driven pool cars. If the Minister is confident that the consequences of the changes have been communicated and fully understood, I am sure he will be able to inform the Committee of the extra tax liability in 2028-29 of someone on a salary similar to that of a Treasury Minister—£110,000—whose full-time work car is a plug-in hybrid Jaguar F-Pace valued at roughly £60,000 with an electric range of just under 40 miles.

As the Committee can tell, we have serious reservations about the communication of the changes, the unfair overnight tax hikes they impose on taxpayers just trying to do the right thing, and the mixed messages they send to vehicle manufacturers by contradicting other areas of Government policy and consultation. The measures concern the ’28-29 and ’29-30 tax years, so the Government have time to think again and to bring back a better calibrated policy in a future Finance Bill. For the reasons that I have set out, we will vote against the clauses.

[James Murray]

I listened to the shadow Minister’s comments, and he must have a different definition of “overnight” from me. Legislating now for changes that will come in in 2028 does not feel like overnight. Some Budget changes come in on the day of the Budget—had he called one of those overnight, I might have had some sympathy with the description, but not for legislating now for changes that will come in in 2028, toward the end of this decade. Part of the point of legislating now for changes that will happen some years down the line is precisely to give that signal to consumers and manufacturers, to ensure that the consumers are aware of what is to happen and manufacturers know what is planned.

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[James Murray]

Clause 13 sets the charge for corporation tax for the financial year beginning April 2026, setting the main rate at 25%; and clause 14 sets the small profit rate at 19% for the same period. As Members know, the charge for corporation tax must be set every year, so it is important to legislate on the rate for 2026 now to provide certainty to large and very large companies, which will pay tax in advance on the basis of their estimated tax liabilities. That is also why we have committed to cap corporation tax at 25% for the duration of the Parliament, as set out in the corporate tax road map published at the autumn Budget. The changes made by clause 13 will establish the right of the Government to charge corporation tax from April 2026. The clauses maintain the current rates of 25% and the small profits rate of 19%. Tax certainty is of great importance to businesses, and clauses 13 and 14 ensure that they continue to benefit from stable and predictable tax rules. I commend both clauses to the Committee.

[Gareth Davies]

As the Minister set out, clauses 13 and 14 set the charge and rates of corporation tax for financial year 2026. The main rate remains unchanged at 25%, with the standard small profits rate at 19%, and the standard marginal relief fraction remains three 200ths.

In Committee on the last Finance Bill, the Exchequer Secretary to the Treasury, who was then the shadow Financial Secretary to the Treasury—a great Opposition role—told the House that if Labour won the election, they would bring certainty back for businesses by capping the rate of corporation tax at 25% for the whole of the next Parliament. At that point, he spoke of capping corporation tax and publishing a business taxation road map as though they were two separate things.

This year’s Budget makes clear that there is no cap outside the road map, and once again, as with income tax, we must take Labour at their word that they will stick to a non-binding commitment, which is not legislated for in this Finance Bill. It is unclear how much certainty or stability such a loose commitment will bring, especially when the Budget blindsided businesses with a £25 billion tax hike. Not only that, but the corporate tax road map itself says that, while the Government are committed to providing stability and predictability in the business tax system, they cannot rule out changes to the corporate tax regime over the course of this Parliament.

Given the Government’s ongoing worries about headroom and the uncertainty and instability that has created, will the Minister reconfirm for the parliamentary record the Government’s commitment, first, not to raise the headline rate of corporation tax for the duration of this Parliament; secondly, not to raise the small profits rate or reduce the marginal relief currently available; and thirdly, to maintain full expensing and the annual investment allowance, as well as writing down allowances and the structures and buildings allowance without meaningfully altering their eligibility?

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[James Murray]

I am glad the hon. Lady has read it, because it sets out our approach to business rates in the coming year, from April 2026, and what we want to do over this Parliament. Businesses want stability and certainty from Government; they recognise that, over a five-year period, things will happen that cannot be predicted on day one, but they want that certainty and predictability. That is why, in the corporate tax road map, we give certainty on capping the main rate and on the small profits rate, marginal relief, full expensing and the annual investment allowance—everything on which we can give full certainty. However, where there are areas that we seek to explore or consult on, we are also clear about that. We developed that approach in partnership with business to make sure that we give as much certainty up front as we can, while also signposting those areas that we want to discuss.

[Gareth Davies]

Let us be clear: it is good when a Government set out a tax rate over a multi-year period; we accept that that is a good thing. However, does the Minister accept—to the point raised by my hon. Friend the Member for Gordon and Buchan—that although a road map has been set out on corporation tax, the Labour party has created uncertainty by saying, before the election, that it would not increase national insurance contributions and then, immediately after the election, hitting businesses with a £25 billion tax rise, including not only a rate change but a threshold change that brings many new businesses into the tax regime? Does the Minister accept that the problem is about more than corporation tax? It is about the entire business tax ecosystem. On that basis, the charge is very clear: his Government have caused great uncertainty and great damage to British businesses.

[James Murray]

Although I am mindful that the clauses are on corporation tax, Mr Mundell, let me briefly respond to the shadow Minister’s comments. This Government were elected to bring an end to the instability that had become endemic under the previous Government. I like the hon. Gentleman a lot, but for him to imply that the previous Government had stability from day to day is for the birds. I was in the House of Commons Chamber so many times for debates on Finance Bills. I think we went through the entire introduction and repeal of the health and social care levy in the space of a few months. There was no stability under the previous Government, and that was a large part of what led people to vote for change at the last general election. They wanted us to sort out the public finances, get public services back on their feet and restore the economic stability that is the bedrock on which investment can rise and on which we can get the economy growing as we know it can, supporting British businesses, entrepreneurs and wealth creators to do what they do best.

To bring us back to the clauses, publishing the corporate tax road map shows our commitment to not just campaigning on the prospect of bringing stability but delivering it in our very first Budget. The corporate tax road map clearly sets out our approach to corporation tax, related allowances and other areas we will look at. I may have discerned support for it in the shadow Minister’s comments; it was bound up in other comments but, reading between the lines, I think he supports the publication of the corporate tax road map. He is welcome to intervene if he disagrees.

[Gareth Davies]

I will intervene anyway. As I said, any certainty that can be provided to businesses regarding the tax system is a good thing. The point I am trying to make—I will try again—is that corporation tax is just one tax paid by businesses. They also pay national insurance contributions. They also use reliefs such as the business rates relief the Minister talked about—by the way, the Government have cut that from 70% to 40%, although I am not sure that it was clear before the election that they would do that. The uncertainty has been caused by all the things that the British public were told would not happen, but that then did happen.

We are talking about corporation tax today, and I can see that you are, quite rightly, about to bring us back in scope, Mr Mundell. I will leave it here by saying that British businesses pay more than just corporation tax, and what they need is certainty across the board. We have a corporation tax road map, but why do we not have a holistic, comprehensive business tax road map that includes national insurance, business rates and other taxes borne by businesses? That is my point.

[James Murray]

With your indulgence, Mr Mundell, I would like to briefly address—

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[James Murray]

Clauses 23 and 24 make changes to extend the 100% first-year allowances for qualifying expenditure on zero emission cars and plant or machinery for electric vehicle charge points by a further year to April 2026. The first-year allowance for cars was originally introduced for expenditure incurred from 17 April 2002 for low CO₂-emission cars, including electric vehicles, and eligibility was later restricted to cars with zero CO₂ emissions from April 2021. The first-year allowance for electric vehicle charge points was originally introduced for expenditure incurred from 23 November 2016. These first-year allowances were introduced to support the UK’s transition to cleaner vehicles and were due to expire in April 2025.

The changes made by clauses 23 and 24 will extend the availability of the capital allowances for a further year to 31 March 2026 for corporation tax purposes and 5 April 2026 for income tax purposes. This ensures that investments in zero emission cars and charge point infrastructure continue to receive the most generous capital allowance treatment. By extending the first-year allowances for zero emission cars and charge point infrastructure, the measure will provide continued support for the transition to electric vehicles.

[Gareth Davies]

As the Minister set out, clauses 23 and 24 extend the availability of the 100% first-year allowance for business expenditure on zero emission cars and for expenditure on plant or machinery for an electric vehicle charging point. Both allowances are extended for a single year from April 2025. In their current forms, both allowances were introduced by Conservative Governments. Although we will not oppose the clauses, there are a few questions that I would like the Minister to address.

The first relates to a point that has been highlighted by the Association of Taxation Technicians concerning clause 24. The ATT has queried why the specific allowance for charging points is being extended when this expenditure has been covered by both the annual investment allowance and full expensing since the Conservative Government made those reliefs permanent in 2023. That means that the allowance is really relevant only to unincorporated business—for example, a partnership or sole trader— that has already used its annual investment allowance in full, which is a scenario that the ATT considers to be quite rare.

According to the ATT, we should be able to tell how rare this is from the number of claims made for this specific allowance on tax returns. Will the Minister provide any information that he has to hand on that? HMRC has said it expects 6,000 unincorporated businesses to be impacted by clauses 23 and 24. Does the Minister have a figure for clause 24 alone and for specific unincorporated businesses that have exhausted their annual investment allowance? At the very least, I would be grateful if the Minister explained to the Committee the rationale behind that specific extension, given the context that the ATT has so clearly set out.

The cost to HMRC of implementing the clauses is a cool £1.2 million—a relatively high figure for the extension of a pre-existing allowance for a single year. If clause 24 is largely redundant, this hardly seems good value for money on HMRC’s part. I therefore ask the Minister to provide a clause-by-clause breakdown of the £1.2 million of taxpayers’ money that HMRC will spend to be able to execute the relief.

Turning back to clause 23, electric vehicles, unlike charging points, are not in scope of the annual investment allowance or full expensing, so I will not question the extension of that specific allowance, which we welcome. However, given the Government’s ambition to accelerate our transition to electric vehicles, I cannot help but wonder why they are putting a brake on the allowance after just a single year.

The Red Book states that the allowance will

“help drive the transition to electric vehicles”,

yet from April 2026, a business investing in these cars will receive relief only through annual writing-down allowances of either 18% or 6%, depending on the car’s emissions—those incentives are less generous and less immediate. At Budget 2020, we extended the EV allowance by four years to provide the support and certainty to businesses that the Minister says he so desperately wants. This Labour Government have declined to do the same, creating what some—not me—may call a cliff edge. As Labour increases the pace and the burden of the transition to net zero, they are also shifting the burden away from His Majesty’s Government and on to British businesses and British consumers. Once again, it is they who will pay the price for the Government’s obsession with decarbonising our grid and imposing net zero policies on the British public.

--- Later in debate ---

[James Murray]

We know that in any local area there needs to be a balance between visitor accommodation and long-term accommodation. I am sure that the hon. Member and others recognise the tension inherent in getting that balance right. We need to ensure not only that we are supporting our visitor economy, but that the tax system supports long-term accommodation for people who live in those areas—not least because those who work in the tourism sector need somewhere to live near their place of work. It is about the balance between supporting visitor economies and long-term residential lets. We agree with the previous Government, who introduced the reform, on this point. The tax treatment of FHL landlords is better if brought more in line with standard residential lets.

I will briefly mention the anti-forestalling rule, which is also introduced as part of the Bill. It will prevent the obtaining of a tax advantage through the use of conditional contracts to receive capital gains relief under the current FHL rules. That rule applies from 6 March 2024.

In summary, the changes made by the provisions will make the tax system fairer by eliminating tax advantages for landlords who let out their properties as short-term furnished holiday lets compared with those who let out properties for longer periods. FHL landlords will now be treated the same as other residential landlords for the purposes of income tax, corporation tax and capital gains tax. We are grateful to all the stakeholders who have already fed in following the publication of the draft legislation and supporting documents.

[Gareth Davies]

As the Minister set out, clause 25 and schedule 5 repeal special tax rules relating to the commercial letting of furnished holiday accommodation. The changes were first announced in our Government’s Budget in March 2024, and we will not oppose them. However, it is important to view the measures in the context of the wider changes to the circumstances of the hospitality sector as a result of Labour’s Budget—most notably the hike in national insurance contributions.

--- Later in debate ---

[The Chair]

Order. Can we keep the discussion within the context of the clause and the schedule?

[Gareth Davies]

Thank you, Mr Mundell. I am grateful for the hon. Member’s intervention; we all want to see people able to get on the housing ladder, particularly younger people. There is much work to be done on that. However, I would say two things. First, I question how much of an impact the measures will have on that, but I am happy to see evidence and data from the Treasury to prove her point. Secondly, we cannot deny that the hospitality sector is in different circumstances to when the previous Government announced the measures in March 2024. As I will discuss, the measures will have an impact on the sector. I think the hon. Member would agree that it is important to support our hospitality sector, hear their concerns and for me, as the official Opposition spokesperson, to make remarks on their behalf.

As I was saying, this is not just about national insurance contributions, but the reduction in the secondary threshold for that tax, as well as the reduction in business rates relief, which has gone down from 70% to 40%. Each of those measures creates significant new costs for the hospitality sector, which is crucial to rural and coastal economies across the country. It is those same rural and coastal economies that will be disproportionately affected by the provisions of clause 25 and schedule 5.

--- Later in debate ---

[Blake Stephenson]

Does my hon. Friend think that, by suggesting that farmers should diversify into holiday lets, the Environment Secretary intends that farmers should pay even more tax to the Treasury?

[Gareth Davies]

It is clear that the Government have launched an attack on farmers across rural communities in our country. The family farm tax is a disgrace. Farmers have protested and tried to make their voices heard, but still cannot get a meeting with the Chancellor of the Exchequer. I urge the Minister, who is very open to meetings, to have a word with his Chancellor, who is consistently in hiding and running out of the country when things get difficult as a result of her decisions.

Perhaps it is true that the Environment Secretary wants farmers to pay even more tax. Why else would he say to farmers in Oxford, “Convert your barns into holiday lets,” while over the road the Treasury is taking away these reliefs and making it more tax inefficient for them to do so? This is yet another area where the Labour Government seem intent on cancelling out genuinely pro-growth deregulation, which we welcome, with anti-growth taxation.

[Yuan Yang]

Will the hon. Gentleman give way?

[Gareth Davies]

Does the Labour Member who is about to intervene on me support holiday lets?

[Yuan Yang]

I am glad that we have returned to this topic, because I was about to ask the hon. Gentleman whether he might clarify the relationship between his remarks and the commercial letting of furnished holiday accommodation—[Interruption.] But of course I support the equalisation of tax measures provided for by the clause.

[Gareth Davies]

I am sorry, but there was a very loud cough when the hon. Lady intervened. Would she repeat her intervention?

[Yuan Yang]

I was simply hoping to get us back on to the topic of the commercial letting of furnished holiday accommodation.

[Gareth Davies]

Oh, so it was more of a heckle than an intervention, but that is very welcome too; it makes it a bit more lively for the very large audience we have today.

I would be grateful if the Minister could set out the policy of this Labour Government. Do they support holiday lets? The Environment Secretary clearly supports them and wants farmers to diversify into them, while at the same time the Treasury—yes, we announced the policy in March—clearly wants to tighten up the rules on taxation. It would be great to hear the Minister clarify that, but it seems that the answer depends on which Minister one talks to on any given day. Let us see what the answer is in this Committee, from this Minister, today.

Clause 25 also touches on a long-standing issue of whether letting constitutes a trading activity or a property business. The FHL regime created a clear distinction by deeming a letting business to be considered a trade for certain purposes. Some organisations, such as the excellent Chartered Institute of Taxation, are concerned that removing the regime removes this distinction and could open up a whole can of worms, leading to costly disputes for both the taxpayer and HMRC. Can the Minister clarify what defines a letting as a trading activity in the absence of the FHL regime, or at least commit to the publication of updated, clearer guidance for the industry on that subject? The Chartered Institute of Taxation is also seeking confirmation on the following points—

[Rachel Blake (Cities of London and Westminster) (Lab/Co-op)]

I am confused as to why a party that brought in the proposals is now arguing so vehemently against them—perhaps it is still attached to its chaotic approach to government. What I am not following in the hon. Gentleman’s remarks is the argument that the equalisation of the taxation could have negative consequences. Has the hon. Gentleman interrogated the evidence that has been brought forward by those people who are letting out their holiday lets, and does he really think that there would not be an economic benefit to supporting a change in use of those homes?

[Gareth Davies]

These sittings are long, but I did say at the beginning of my speech that we announced in March 2024 that we would bring in this same measure and that we will support it today.

I am not saying that we are against it, but I am saying two things. First, as I was saying at the beginning of my speech, the context in which the measure is being introduced is very different from the context in March 2024. The context today is that hospitality businesses across the country, but particularly in rural communities, are being hit by a series of taxes that they did not ask for, did not vote for and were told would not happen. That is the context in which we find ourselves.

Secondly, His Majesty’s official Opposition have a duty to communicate the concerns of the British public and the sectors that will be directly impacted by this measure. It is vital that His Majesty’s Opposition scrutinise whatever policies are put in front of us, with a forward look at how that will economically damage or benefit communities. As you can tell, Mr Mundell, and as the hon. Member for Cities of London and Westminster can tell, I take a constructive tone. When we do support measures, we will say so, and when we do not, or we feel that additional scrutiny is needed, Members better believe that I will be there. That is what I am doing today. I hope that addresses the intervention from the hon. Member for Cities of London and Westminster.

In the interests of scrutiny on behalf of the many thousands of people that will be impacted by the measure and in a context of a wider hammering through the tax system by this Labour Government, let me continue my questions on behalf of the Chartered Institute of Taxation.

First of all, I seek confirmation from the Minister that an FHL disposal must be made before 6 April 2025 in order for a qualifying replacement asset to be eligible for roll-over relief, even though the replacement asset itself can be purchased up to three years after FHL disposal. Secondly, I seek confirmation that lettings must cease altogether before 6 April 2025—not just furnished holiday lettings, but even unfurnished long-term rentals—for an FHL disposal to qualify for business asset disposal relief. Thirdly, I seek confirmation that married couples or civil partners who jointly own an FHL must make an election if they are to continue to split the income unequally, rather than reverting to the normal 50:50 rule, and make a declaration to HMRC before 6 April 2025 if this is to have effect in the 2025-26 tax year. I ask those questions constructively, on behalf of the Chartered Institute of Taxation, and if the Exchequer Secretary is not able to answer them, of course I will take a written answer by way of letter following this sitting.

In addition to the confirmation on those three points, I would be grateful if the Minister could provide reassurance that HMRC guidance has been specifically and sufficiently clear on these points, so that those affected are aware of the implications of the changes. It is important to remember that when the Government make changes and when we made changes, we were very conscious—I am sure he is too—that the public are aware. He should take all measures possible to ensure that people are aware of these changes, but I appreciate his guidance on what measures are being taken.

Finally, on the case of joint ownership—

Finance Bill (Second sitting)

Gareth Davies Excerpts

Committee stage
Tuesday 28th January 2025 Public Bill Committees

[The Chair]

I remind the Committee that with this we are considering schedule 5.

[Gareth Davies (Grantham and Bourne) (Con)]

I will pick up where I left off by asking the Minister to provide confirmation on the three points I listed, and to provide an assurance that the guidance from His Majesty’s Revenue and Customs is sufficiently clear on those points that those affected are aware of the full implications of the changes.

Finally, in the case of joint ownership, the Chartered Institute of Taxation is calling for an administrative easement to allow declarations to be backdated. Has the Minister considered the possibility of such an easement being implemented? I have not been able to raise all of the many points that the institute has raised with me, and I apologise to it for that. I am sure the Minister is engaging with the institute. I know that in opposition he spent a lot of time with it, as he will be doing with industry. I encourage him to speak to the Chartered Institute of Taxation and get its guidance and input, as I have tried to lay out in my remarks.

[The Exchequer Secretary to the Treasury (James Murray)]

I start by putting on the record my thanks to the Chartered Institute of Taxation. It was a great support to me in opposition and continues to be an important stakeholder for us in government.

I will try to respond to some of the shadow Minister’s points. First, he raised concerns articulated by the Chartered Institute of Taxation about trading and property income boundaries. There are established principles that underline what is trading and what is income from property. The bright-line tests that have been put forward distort those principles rather than clarify them. Whether activity is income from property depends on the nature of the activity undertaken, and specifically how the profit is derived. If the profit is derived from the exploitation of land, the income is taxable as property income. The furnished holiday let rules provided for specific reliefs, but for tax purposes it has always been property income, not trading income. Categorising some property income arbitrarily as trading would give more reliefs than FHLs previously had.

The shadow Minister also raised concerns about how the repeal of the FHL rules will apply practically to landlords and how that may affect them. I reassure him that HMRC has already published guidance on the changes and will be publishing more ahead of April, when the changes come into effect. We have also engaged with the industry since the announcements to ensure that we are aware of its reaction.

On the shadow Minister’s other points in relation to business asset disposal relief and roll-over relief, we have considered the impacts of the changes on those two reliefs. It will depend on an individual’s personal circumstances, but broadly each person would need to dispose of the whole or part of an FHL business, or dispose of assets that were used for the purposes of an FHL business that has ceased, before April 2025. We have been fair in our approach not to restrict relief where someone has had an FHL before repeal. Individuals should consult online guidance or a tax adviser before making any decisions.

The shadow Minister asked about married couples. We have considered the impact of the changes on married couples and civil partners. The removal of the FHL rules will mean that a married couple is subject to the same rules as other landlords. For married couples, income is assumed to be split 50:50 unless a declaration is made to split the income in a different proportion, which must be the same as the proportion of ownership between the couple. If they want to change the proportions, married couples will have to make an election for joint ownership arrangements as per the usual process. There will be a deadline of April for married couples to adjust to the changes as we cannot backdate such elections. That was already set out online following the consultation on the draft legislation. Further online guidance will be available.

I hope I have covered most of the shadow Minister’s points. I conclude by recognising my gratitude to him for not opposing the provisions; it would be noteworthy if he had changed his mind since he was in government. I am not sure whether all his colleagues are on exactly the same page as him, but I will not pry at this stage of our consideration of the Bill. Perhaps his slightly caveated response to the clauses reflects some of the discussions happening among Members on the Opposition Front Bench. Notwithstanding whatever is happening behind closed doors, I welcome their support for the clause.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 26

Films and television programmes: increased relief for visual effects

Question proposed, That the clause stand part of the Bill.

[James Murray]

Clause 26 makes changes to maximise the potential of the UK’s world-class visual effects industry, and clauses 27 and 28 make changes to ensure continuity for companies claiming expenditure credits for film, TV and video game production, by aligning the legislation with equivalent provisions in the previous tax reliefs.

The UK is a strong performer in visual effects production and is home to several Oscar-winning companies, but in recent years there have been reports of visual effects activity moving overseas. Stakeholders report that that is because of the 80% cap on qualifying expenditure relating to the audiovisual expenditure credit, or AVEC. Currently, companies can receive AVEC on up to 80% of their production costs, including visual effects costs. Visual effects work is done virtually, so companies may place 80% of their production costs in the UK and place their visual effects costs overseas, particularly in countries such as Canada and France, which offer special tax incentives for visual effects.

In November 2023, a call for evidence on the visual effects industry was published. It provided substantial evidence that visual effects work was moving overseas because of the 80% cap and because of increased competition from countries that offer targeted visual effects tax incentives. Separately, previous tax reliefs for film, TV and video game production are being phased out and will be fully replaced with expenditure credits from 1 April 2027. Indeed, companies can already claim expenditure credits instead of the tax reliefs if they wish.

The changes made by clause 26 will increase the amount of AVEC awarded to UK visual effects costs in film and high-end TV production by 5 percentage points, to a total credit rate of 39%. The changes remove AVEC’s 80% cap on qualifying expenditure for visual effects costs, so that all those costs, including those that are above the 80% cap, may receive the enhanced 39% rate of relief. Around 1,300 companies claim film or high-end TV tax relief and stand to benefit from the changes, and the additional tax relief is expected to cost £75 million per year from 2028-29.

Clause 27 sets out that the previous tax reliefs and the new expenditure credits both require companies to provide cultural certificates from the British Film Institute to support their claims for relief. HMRC requires the certificates to be in force at the time a claim is made. The new expenditure credits legislation is less clear on that requirement than the previous tax reliefs legislation; it requires certificates to have effect at the end of each claim period, rather than only at the time the claim is made. The changes made by clause 27 will therefore align the expenditure credits legislation with the tax reliefs legislation, to clarify that cultural certificates must be valid when claims are made, and ensure continuity of treatment between the previous tax reliefs and the new expenditure credits.

On clause 28, the previous tax reliefs and the new expenditure credits both have rules on the treatment of expenses that are not made within four months of the end of the accounting period in which they are incurred. The tax relief rules allow for such expenses to be deducted from profits, but do not allow additional relief on them until they are paid. The expenditure credit rules prevent the expenses from being deducted from profits at all—that is, until they are paid. The changes made by clause 28 will align the expenditure credit rules with the tax relief rules, so that the unpaid amounts can be deducted from profits that are still ineligible for relief until they are paid. This will ensure continuity for companies that are used to the treatment of unpaid amounts under the previous tax reliefs.

In conclusion, the changes to the audiovisual expenditure credit will boost the UK’s offer in visual effects in an increasingly competitive international environment, and incentivise more visual effects work on UK productions to be done here in the UK. Furthermore, the changes to the expenditure credits legislation will align it with the more familiar tax relief provisions, ensuring continuity for film, TV and video game companies. I commend the clauses to the Committee.

[Gareth Davies]

As the Minister set out, clauses 26 to 28 create an additional relief for video effects expenditure while making administrative changes to align audiovisual and video games expenditure credits with older reliefs for film, TV and video games.

We announced the additional relief for VFX expenditure at the spring Budget 2024, as part of a wider package to support our world-leading creative industries—which, by the way, grew at more than one and a half times the rate of the wider economy between 2010 and 2019, a remarkable success for any sector. The consultation we launched on the design of the policy directly informs the clauses, and we will not oppose them.

However, one suggestion raised in the consultation that the Government have not chosen to take forward was to allow companies that claim the independent film tax credit to also claim the additional tax relief for visual effects. The Government have said they do not believe this exclusion will have an adverse impact on companies, but it would be helpful to hear from the Minister what assessment was made of the benefit to smaller visual effects studios had the scope of the relief been widened in the way in which many suggested as part of the consultation.

The spring Budget 2024 also announced a 40% relief from business rates for eligible film studios in England for the next 10 years. My understanding is that this has not yet been implemented by the new Government, and has in fact been referred to the subsidy advice unit. I understand that in the last couple of hours, over lunch, the unit has reported its findings. I would be grateful if the Minister could update the Committee on what those may mean for the future of the measure and the expected timeline for delivery.

[James Murray]

I thank the shadow Minister for his comments and for setting out some important context around the tax reliefs and expenditure credits, and around why they are so important in supporting growth in the UK economy.

On his question about the independent film tax credit, as he I am sure understands, films that claim the independent film tax credit will receive a 53% rate of audiovisual expenditure credit on up to 80% of production costs. That includes visual effects cost. The independent film tax credit therefore provides generous support for visual effects costs within independent films. Separating the additional tax relief for visual effects from the independent film tax credit helps to ensure that both schemes are simple and easy for companies to understand.

On the publication that the shadow Minister says happened in the last few hours, that is so hot off the press that I am not even authorised to speak about it yet. I have not been briefed on it because I have been getting ready for this Committee. I am sure that if it has been submitted, the right officials and Ministers will look at it as soon as possible.

Question put and agreed to.

Clause 26 accordingly ordered to stand part of the Bill.

Clauses 27 and 28 ordered to stand part of the Bill.

Clause 29

Research and development relief: Northern Ireland companies

Question proposed, That the clause stand part of the Bill.

[James Murray]

Clause 29 makes small changes to the rules for enhanced support for research and development-intensive companies with a registered office in Northern Ireland. At the spring budget 2023, the previous Government announced an enhanced rate of relief within the R&D small and medium-sized enterprise scheme applying from 1 April 2023. Separately, from April 2024 slightly different rules applied for R&D-intensive companies with a registered office in Northern Ireland, allowing them to continue claiming relief on a wider range of overseas expenditure than companies in Great Britain, while introducing a cap on the amount of relief that can be claimed.

Clause 29 amends the rules introduced last April to reflect the particular market conditions in Northern Ireland and ensure consistency with the UK’s international obligations. This will introduce some additional requirements around the cumulation of aid and reporting, which will apply to claims made on or after 30 October 2024 by eligible companies with a registered office in Northern Ireland. A very small number of claimant companies in Northern Ireland are expected to be affected, while the vast majority will continue to be better off compared with their counterparts in Great Britain. This is because their claims are too small to be affected by the cap, but they will still be able to claim on overseas expenditure, as before.

The Office for Budget Responsibility has certified this measure as having a negligible impact on the cost of the relief. The Government are committed to supporting R&D investment across the UK through the R&D tax reliefs, which play a key role in supporting the mission to kick-start economic growth. The changes will ensure that the R&D reliefs reflect the particular market conditions in Northern Ireland and ensure consistency with the UK’s international obligations. I commend the clause to the Committee.

[Gareth Davies]

As the Minister set out, clause 29 amends the measure in Northern Ireland to set in law a new cap of €300,000 on a three-year rolling basis, alongside other sources of relevant aid. The existing cap of £250,000 is currently defined in regulations. Will the Minister inform the Committee why the provisions have been moved from regulation into law? What are the implications of the change?

HMRC notes that when claiming enhanced R&D-intensive support, companies with registered offices in Northern Ireland now need to take into account other relevant aid that they have received. What steps have been taken to ensure that those companies are aware of this change and are equipped to satisfy the new requirement?

[James Murray]

I thank the hon. Gentleman for his questions. It is worth emphasising that this is a small change compared with the rules that already applied from April 2024. In practice, we expect a very small number of companies to be affected by the change, with very few claims to be made before April 2025. Since the change will be a key qualification to the tax rules for a part of the UK, it should be legislated for in the Finance Bill and as part of the Budget process. I hope that helps to explain the process we are taking to implement the changes and reassures the hon. Gentleman that they are small and will affect a very small number of companies.

Question put and agreed to.

Clause 29 accordingly ordered to stand part of the Bill.

Clause 30

Research and development intensity condition: transitional provision

Question proposed, That the clause stand part of the Bill.

[James Murray]

The clause makes small changes to the higher rate of relief available for R&D-intensive SMEs to ensure that the R&D reliefs remain fit for purpose while providing clarity to businesses. The Government recognise the important role that R&D plays in driving innovation and economic growth, as well as the benefits it can bring for society. The R&D tax reliefs play a key role in this. That is why I was pleased to announce in the corporate tax road map published at the Budget that the Government are committed to maintaining the generosity of the rates in both the merged R&D expenditure credit scheme and the enhanced support for R&D-intensive SMEs to increase certainty for companies when making investment decisions.

In the Finance Act 2024, the R&D intensity calculation for the enhanced rate of relief did not take account of any expenditure for which a company was entitled to claim research and development expenditure credit. That meant that some companies that were supposed to qualify as R&D-intensive might not meet that threshold. The change made by clause 30 will therefore ensure that research and development expenditure credit-qualifying expenditure is included in the calculation of the R&D intensity ratio, as was always intended.

This change will apply to all claims for the enhanced rate of relief from its introduction in April 2023, and to all expenditure incurred from 1 April 2023 in an accounting period that began before 1 April 2024. It will affect some small and medium-sized enterprises that have a high R&D intensity and claim the enhanced rate of SME-payable R&D tax credit relief. This is a small technical change and so it is not anticipated to have any Exchequer or economic impacts.

The Government are committed to supporting R&D betterment across the UK through the R&D tax reliefs, which play a key role in supporting our mission to kick-start economic growth. The changes made by this clause will ensure that all companies originally intended to benefit from the higher rate of relief will now be able to do so. I commend clause 30 to the Committee.

[Gareth Davies]

The clause amends the transitional provision, clarifying that expenditure that would qualify for R&D expenditure credit is relevant R&D expenditure when calculating the R&D intensity ratio, which determines eligibility for enhanced R&D intensive support, as was always intended. This provision has a retrospective effect, and I would be grateful if the Minister could therefore tell the Committee what steps the Treasury is specifically taking to ensure that all those who missed out on the relief, but may now be eligible, are aware and equipped to claim this new support.

[James Murray]

I reassure the shadow Minister that, as Ministers and Treasury officials, we are routinely in conversation with the industry and those companies that benefit from R&D support. We will ensure that all changes to legislation and all opportunities available for us to support the industry are communicated with clarity, and we will ensure that everyone is aware of what support we can offer for their economic growth ambitions.

Question put and agreed to.

Clause 30 accordingly ordered to stand part of the Bill.

Clause 31

Employee-ownership trusts

Question proposed, That the clause stand part of the Bill.

[James Murray]

The clause and the schedule make changes to the taxation of employee ownership trusts to prevent opportunities for abuse and to ensure that the regime remains focused on encouraging employee ownership. The Government are committed to supporting employee ownership as a viable and sustainable business model. Employee ownership gives employees a greater stake in the business in which they work, improving working conditions and in turn driving productivity and growth.

Tax reliefs are currently available for company owners who transition their companies into an employee ownership trust, which is set up to hold and manage the company for the benefit of all employees of the company, rather than for individual shareholders. This model has proven successful, with over 1,500 UK companies held by employee ownership trusts today, improving the working conditions of some 200,000 employees. However, while the success of the employee ownership model is to be applauded, the Government are concerned that the tax regime is vulnerable to exploitation. We are therefore determined to close loopholes to ensure that the reliefs are available only to those who are motivated by a genuine desire to transform their companies into employee ownership trusts.

The changes made by clause 31 and schedule 6 therefore amend the conditions for obtaining capital gains tax relief on disposing of a company to the trustees of an employee ownership trust to ensure that the former owners cannot retain control of the company following disposal. The trustees must be UK residents and they must take reasonable steps not to pay more than the fair market value for their shares. These changes are necessary to prevent opportunities for abuse and to protect the long-term integrity of these reliefs.

Individuals will also be able to provide additional information to HMRC at the point of claiming the relief, and the period of time within which HMRC can take action, if the relief conditions are breached post-disposal, will be increased. HMRC will be given additional powers to monitor the reliefs and to take action when non-compliance is identified.

Lastly, this measure makes technical changes to provide clarity on the tax treatment of contributions paid to the trustees from the company in order to meet costs associated with purchasing the company from the former owner, and also adjusts the conditions for income tax relief on employee bonus schemes. Overall, these changes will simplify the process of setting up and operating employee ownership trusts.

Government amendments 39 and 41 confirm that the relief is available only with respect to contributions paid to the trustees from a company for the purposes of meeting the trustees’ acquisition costs. In doing so, they clarify the policy intent and remove any potential ambiguity within the legislation as drafted. Government amendments 38 and 40 ensure that the distributions relief is available in circumstances where the capital gains tax relief was not claimed because the vendor was a company, rather than an individual, provided that the conditions for obtaining the relief were otherwise met.

Government amendments 42 and 43 expand the scope of the costs that qualify for the relief to include other expenses that may reasonably be incurred by trustees in connection with the acquisition of the company. These amendments make technical clarifications and address the concerns expressed by key stakeholders that the scope of the relief as announced at the autumn Budget was too narrow to reflect the reality of how employee ownership trust acquisitions are funded.

Overall, the clause protects the future of employee ownership in the UK by ensuring that the tax reliefs available to encourage it continue to operate effectively and by preventing opportunities for abuse. I commend clause 31, schedule 6 and Government amendments 38 to 43 to the Committee.

[Gareth Davies]

Clause 31 and schedule 6 alter the conditions for obtaining tax reliefs for employee ownership trusts. The current regime was introduced by a Conservative Government, following the independent Nuttall review in 2012, which set out the many strengths of the model and how it could become more widespread in our country.

Since the current regime was implemented in 2014, its tax incentives have achieved great success in encouraging the creation of employee ownership trusts, which have become the predominant model for employee ownership. Today, more and more companies are making the transition to that model. I was pleased to hear the Minister tell us that there are about 1,500 examples in the country. In 2023, we launched a consultation to review the regime, and it has fallen on this Government to respond to it.

The package of changes that the Minister has set out aim to prevent opportunities for the relief to be abused while ensuring that employee ownership continues to be incentivised and supported. We share those objectives, and we warmly welcome these measures, which largely reflect the recent consultation. We will not oppose them but, as hon. Members would expect, I have a few questions.

I would be grateful if the Minister can explain why a few suggestions put forward during the consultation have not been taken forward. For instance, a large number of respondents asked for the tax-free bonus limit for employees to be increased from the current level of £3,600. Had that kept pace with inflation, the maximum today would be close to £5,000. The Government have made it clear that they have no plans to increase the tax-free bonus amount, but they have not said why. A little more detail would be welcome, as would some reassurance that the Government will keep that element of the regime under review so they can react speedily if the weakening of the incentive begins to undermine the overall policy goal that we all share.

Another point raised in responses to the consultation was the issue of double taxation upon the sale of an EOT-owned company to a third party. In that event, trustees would be liable to pay capital gains tax on the disposal, and employees would be charged income tax on their share of the net proceeds. When responding, the Government did not acknowledge that point about double taxation, which the Chartered Institute of Taxation also highlighted. We understand that that concern must be weighed against the main abuse that the Government are rightly trying to prevent with these measures: the exploitation of EOTs by company owners to reduce their CGT liability when ultimately selling their business to a third party.

Surely the second layer of taxation—the income tax charged to employees—does not act as a major disincentive to that kind of behaviour, however, especially in the context of the additional restrictions being introduced in part 1 of the schedule to prevent such abuses. I would therefore be grateful if the Minister can address that point or write to me later with clarification about why that was not taken forward.

The Minister will be aware of concerns about the implementation of the statutory relief for distributions in part 2 of the schedule. As originally drafted, the schedule allowed for only specific costs—for example, payments made by companies to the EOT to fund the share purchase, interest on outstanding considerations, and stamp duty—to be tax deductible, a process which previously would have taken place through a non-statutory clearance request to HMRC.

That had the effect of excluding other costs that many thought would be reasonable to cover. I am glad that the Government have listened and have tabled some amendments to widen the scope of the relief, and I thank the Exchequer Secretary for his letter setting them out—it was a great read. Other costs, however, such as payments to cover the fees of professional trustees and advisers for ongoing services, unfortunately remain excluded. Moreover, HMRC has limited flexibility to provide relief for any excluded cost, now that the relief is on a statutory footing.

--- Later in debate ---

[James Murray]

Clauses 37 to 39 make changes to ensure that from April 2025, individuals moving to the UK who have not been tax resident in the UK for the 10 previous years will not pay tax on their foreign income or gains for the first four years of UK residence.

For context, the Government are removing the outdated concept of domiciled status from the tax system and replacing it with a new, internationally competitive, residence-based regime from 6 April this year. Currently, where a non-UK-domiciled individual moves to the UK, they are able to access the remittance basis of taxation, under which foreign income and gains are not taxable unless they are brought into the UK. Similarly, when undertaking work abroad, newly UK resident, non-UK-domiciled individuals are able to access overseas workday relief, which means that overseas employment income is not taxable unless brought into the UK. The arrangements create a disincentive to invest in the UK and are being changed as a result of these measures.

The changes made by clauses 37 and 39 will provide full tax relief on foreign income and gains for new arrivals to the UK for their first four years of tax residence, provided that they have not been UK tax resident for 10 years before their arrival. To align with the new regime, clause 38 and schedule 8 extend the period of overseas workday relief to four years, and decouple overseas workday relief from domiciled status to align it with the new foreign income and gains regime. Claims to the relief will be capped at the lower of £300,000 or 30% of an individual’s total employment income. Furthermore, the removal of the remittance basis means that it will no longer be necessary to keep income offshore to benefit from relief.

Government amendment 20 amends clause 37 to add an additional category of income to the list of eligible incomes, which will ensure that all eligible income for relief is referenced correctly. Government amendments 44 to 53 have also been tabled to schedule 8 to ensure that the relief on travel costs for qualifying newly resident employees in the UK functions as the legislation intended. Furthermore, Government amendment 54 amends schedule 8 to clarify that it is a general direction made by HMRC, rather than a public notice.

The Government are committed to ensuring that everyone who is long-term resident in the UK pays their taxes here. The new regime ensures that that will be the case, while also being more attractive than the current approach as individuals will be able to bring income and gains into the UK without attracting additional tax charges. That will encourage people to spend and invest those funds here in the UK.

I commend clauses 37 to 39 and schedule 8, along with Government amendments 20 and 44 to 54, to the Committee.

[Gareth Davies]

Currently, a person who is UK resident but not UK domiciled pays tax on any UK income and gains but can choose for their non-UK income and gains to be taxed on a remittance basis. Part 2 of the Bill provides for the abolition of non-domiciled status from April 2025, as the Minister points out, and for its replacement with a new regime for the taxation of foreign incomes and gains on the basis of UK residence. It therefore terminates the current tax regime for those who are resident but not domiciled in the UK, while creating a temporary repatriation facility for historical foreign income and gains to be brought into the UK over the next three years. Those changes will also be applied to trusts under the Bill and inheritance tax will also be brought into the new, residence-based system.

Although the shape of the overall package is much the same as the one the Conservatives announced in the spring Budget 2024, there are a few notable differences on the detail. Before I move through the chapters—we will spend a bit of time on that, starting with chapter 1—I will first provide some context by noting that, net of the reforms we announced in March, Labour’s adjustments to the new regime are forecast to raise £12.7 billion over the next five years. This means the measure we are considering is the second biggest revenue-raising new policy in this entire Budget. Labour’s adjustments to the temporary repatriation facility alone account for £10.6 billion.

These are significant sums, but also highly uncertain, according to the OBR. There is significant uncertainty in particular around the behavioural responses and the size of the tax base, according to the OBR’s assessment. The OBR also says it is unclear to what extent inflows to the temporary repatriation facility are additional over the long term rather than bringing forward disposals which would otherwise have attracted full rates of taxation.

When the second biggest revenue-raising new policy in a Budget is so uncertain, according to the OBR, bond market jitters come as no surprise. The emphasis Labour has placed on this policy, which makes up a massive chunk of the Bill, is compounding its conundrum ahead of the OBR’s March forecast. It exacerbates fiscal instability by adding to the risk that revenues will not be as high as anticipated. This brings us back to the same old questions we have been asking, including in the Chamber today: which taxes will Labour have to raise if there is a shortfall, or which services will they have to cut? The Minister will say that we need to wait for the OBR’s revised forecasts, but will those include an update on these highly uncertain figures?

Turning specifically to chapter 1, clauses 37 and 39 introduce the new four-year 100% relief on eligible foreign income and gains for those arriving in the UK who have not been UK tax residents in the 10 tax years immediately prior to their arrival. I acknowledge that that mostly mirrors the proposals we put forward in the March Budget 2024 but would be grateful if the Minister could none the less address the following points.

[Yuan Yang (Earley and Woodley) (Lab)]

The hon. Gentleman raises the question of estimates around the level of revenue that would be generated by this important measure. Is he familiar with the work of Andy Summers and Arun Advani at LSE and the University of Warwick? Three years ago, in 2022, they modelled the effect of the 2017 tax reforms on non-doms and used that as a basis for statistical estimates for the proposal before us. While economics is a science that does to the best it can with the data available, I think there are some quite substantial measures available on the table for this proposal.

[Gareth Davies]

I am afraid I have not taken the time to read the academic reports, but I greatly value and emphasise the work of the OBR, which the Conservatives established in government. The new Government have taken it forward and are already seeking to bolster its impact on the Treasury’s work. If the hon. Lady will forgive me, it is the OBR’s work that I look at, and that work says that this budgetary measure is highly uncertain. As I was pointing out, that leaves questions for markets and for the Labour parliamentary party when it comes to which taxation will have to go up and what spending will be cut if that figure is not met. I will leave that to the Minister to address.

[Harriet Cross (Gordon and Buchan) (Con)]

Regardless of the uncertainty, we know from the projections that, although the tax intake should peak at about £6 billion, it tails off by the end of the period to £95 million—a huge difference. By the time this spending and the costs have been worked into the system, no matter what happens in terms of uncertainty, at the end of that tax period there will be a huge amount of money that was in the system, but which now has to be filled. This policy, if implemented, will mean that there is a hole in the system at the end of the ’29 period that will need to be filled in some way.

[Gareth Davies]

That is a very good point—if only I had included it in my speech. That is a classic example of an intervention that adds to the content of the debate on behalf of all those who will be impacted by this measure. It is important to look at the projections over the five-year period on a year-by-year basis. It will be no surprise to the Minister that I look at them very carefully. I look at the timing of when the measures generate revenue, and when they do not. I could provide lots of examples of places where questions need to be asked of this Budget—indeed, we have been asking them today.

In claiming the 100% relief on foreign income and gains, an individual forfeits their eligibility for a whole host of allowances available to normal UK taxpayers, including the personal allowance'; yet even those who were previously taxed on a remittance basis for non-UK income and gains would still pay tax on their UK earnings, just like everybody else. That was surely an uncontroversial element of the old regime, which did not require any attention, so why have the Government taken it upon themselves to make the tax treatment of UK income less favourable as a condition of claiming the new 100% relief—which we of course welcome?

The biggest concern that has been raised with me regarding these new reliefs by the likes of the now-famous Chartered Institute of Taxation, which many of us have referred to, is the requirement to itemise and actively claim each income and gain. As far as I can recall, the technical note that we produced alongside our proposals in March 2024 did not insist on that level of specificity and detail, which is quite onerous on those applying. As a basic matter of fairness, it seems wrong that the window for making a claim is so much less than the 12 years available to HMRC to issue a compliance check, and even more so when the ability to make a consequential claim to correct an error is restricted.

The Budget claims to introduce a regime that is simpler and internationally competitive, as the Minister outlined in his speech, but those two requirements are neither of those things. I would be very grateful if the Minister can explain what exactly the benefit of doing things in that way are.

The main departure from our proposals comes with clause 38 and schedule 8, which introduce financial limitations for overseas workday relief. Is that to compensate for the additional year in which the relief will now be claimable? How significant does the Treasury expect the impact of the alteration to be? I would be grateful if the Minister can indulge me by outlining an explanation on those points.

[James Murray]

I thank the shadow Minister for his comments. I was going to thank him for his support for these measures, but I do not know whether he explicitly said that. I think he nearly did, so I will take it as support unless he jumps in to correct me.

One of the key measures that the shadow Minister highlighted in our package of legislative measures that is the subject of clause 37 is the temporary repatriation facility, an important feature of the system we are seeking to introduce. What it does—I say this so that all Members are aware—is to introduce a reduced tax rate for remittances to encourage individuals to bring their capital to the UK and to spend and invest it here. The fact that it will raise considerable revenue is beneficial to the public finances, but it is also critical to recognise that that is a consequence of people bringing money into the UK to spend and invest here, which is something I am sure the Opposition side of the Committee will welcome as well.

--- Later in debate ---

Obviously we had plenty of political debates around this in the previous Parliament where the previous Government introduced some of the measures, I would argue under pressure from us, although I am sure the shadow Minister would have a different recollection of how that transpired. The package of measures that we have suggested amend the proposals that we inherited to strengthen them and to make them internationally competitive.

[Gareth Davies]

To clarify, the point I am trying to make is that the Minister is rightly trying to ensure that this new regime makes the UK as competitive as possible so that assets flow into our country and we derive revenues from that. The first question I have is, why remove the personal allowance for those who seek to do so? The second is that although the point about the reporting is valid in terms of monitoring, does the Minister accept that that in itself could make the system more complicated and onerous to those who may consider moving their assets to this country? That may result in less money coming through the door, which is exactly why the OBR has rated this as highly uncertain revenue generation. That is the point that I am trying to make.

[James Murray]

I thank the hon. Gentleman for his further comments. To address his point regarding the OBR, we seek to strengthen that institution, inspired not least by some of his colleagues’ views of the OBR having damaged trust in it under the previous Government. We wanted to make sure that that could never happen again, by strengthening its standing in law.

As the hon. Gentleman will know, when the OBR is looking at suggested tax changes, particularly when they are more complex than simply changing a rate—when they are more involved—it is a matter of course for degrees of uncertainty to be associated with that revenue from different measures.

The point about the design of the scheme is best answered by explaining that this is about striking the right balance. The hon. Gentleman asked whether the reporting requirements are too onerous. It is a balance between making sure that we minimise the burden on individuals, and of course the businesses that they work for—we want to make sure that we are not putting any onerous requirements on them to report information that is not needed—while, at the same time, making sure that we have the information to be able to evaluate the regime, to identify any avoidance risks and to ensure compliance. It is a constant tension within the tax system to make sure that burdens are as low as possible while ensuring that we have adequate information to prevent non-compliance and so on. Those are the judgments that we have to take as Ministers, but we want to take them in the way that achieves the best possible outcome.

To conclude, the overall package that we are proposing, with the foreign income and gains regime, where foreign income and gains will see no income tax for four years, is more generous—is more attractive—than the remittance basis that is currently in place, because it means that those foreign incomes and gains will not be subject to income tax.

Therefore, I hope that our proposed package is not only positive for public finances here in the UK, but serves as an attractive regime for people around the world with talent and with entrepreneurial spirit, who want to work and invest in our country and help our economy grow, and that they can see that the scheme will help them to do just that. I commend these measures to the Committee.

Amendment 20 agreed to.

Clause 37, as amended, agreed to.

Clause 38 ordered to stand part of the Bill.

Schedule 8

Relief on foreign employment income: consequential and transitional provision

Amendments made: 44, in schedule 8, page 194, line 33, leave out “qualifying” and insert “non-resident or qualifying”.

This amendment is to make parenthetical description of sections 373 and 374 of ITEPA 2003 consistent with those sections as amended by Schedule 8.

Amendment 45, in schedule 8, page 194, line 39, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee must not be a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005 to benefit from a deduction under section 341 of ITEPA 2003, as well as not being a qualifying new resident for the purposes of ITEPA 2003.

Amendment 46, in schedule 8, page 195, line 4, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee must not be a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005 to benefit from a deduction under section 342 of ITEPA 2003, as well as not being a qualifying new resident for the purposes of ITEPA 2003.

Amendment 47, in schedule 8, page 195, line 11, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee can benefit from deductions under section 355 of ITEPA 2003 where the employee is a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005, as well as where the employee is a qualifying new resident for the purposes of ITEPA 2003.

Amendment 48, in schedule 8, page 195, line 13, leave out “qualifying” and insert “non-resident or qualifying”.

This amendment is to make the parenthetical description of section 373 of ITEPA 2003 consistent with that section as amended by Schedule 8.

Amendment 49, in schedule 8, page 195, line 36, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee can benefit from deductions under section 373 of ITEPA 2003 where the employee is a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005, as well as where the employee is a qualifying new resident for the purposes of ITEPA 2003.

Amendment 50, in schedule 8, page 196, line 7, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee can benefit from deductions under section 374 of ITEPA 2003 where the employee is a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005, as well as where the employee is a qualifying new resident for the purposes of ITEPA 2003.

Amendment 51, in schedule 8, page 196, leave out line 16.

This amendment reinstates section 375 of ITEPA 2003 which defines “qualifying arrival date” for the purposes of sections 373 and 374 of ITEPA 2003.

Amendment 52, in schedule 8, page 196, line 21, after “Part 2” insert—

“of this Act or Chapter 5 of Part 8 of ITTOIA 2005 (see section 845B of that Act)”.

This amendment provides that an employee must not be a qualifying new resident for the purposes of Chapter 5 of Part 8 of ITTOIA 2005 to benefit from a deduction under section 376 of ITEPA 2003, as well as not being a qualifying new resident for the purposes of ITEPA 2003.

Amendment 53, in schedule 8, page 197, line 17, at end insert—

“2A In Part 8 of Schedule 3 to the Social Security (Contributions) Regulations 2001 (S.I. 2001/1004), in paragraph 5 (travel costs and expenses where duties performed in the United Kingdom) —

(a) in the heading, for ‘non-domiciled’ substitute ‘non-resident or qualifying new resident’;

(b) in paragraph (a), for ‘non-domiciled’ substitute ‘non-resident or qualifying new resident’.”

This amendment makes the parenthetical descriptions of sections 373 and 374 of ITEPA 2003 contained in the Social Security (Contributions) Regulations 2001 consistent with those sections as amended by Schedule 8.

Amendment 54, in schedule 8, page 198, line 32, leave out “public notice given” and insert “general direction made”.—(James Murray.)

This amendment means that the requirements of notices under new section 690D will be specified in a general direction made by HMRC rather than a public notice.

Schedule 8, as amended, agreed to.

Clause 39 ordered to stand part of the Bill.

Clause 40

Remittance basis not available after tax year 2024-25

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Gareth Davies]

As the Minister said, clause 40 and schedule 9 abolish the remittance basis of taxation for foreign income and gains from 2025-26. Clause 41 and schedule 10 create a temporary repatriation facility, or TRF, to allow former remittance-based taxpayers to bring historical foreign income and gains into the UK at a lower rate of tax. Clause 42 and schedule 11 allow for foreign assets to be rebased to their value in 2017 for capital gains tax purposes.

On the TRF, I gently point out to the Minister that, given that this is the single biggest revenue-raising part of Labour’s policy—offering a reduced rate of tax on income and gains for a limited time—the Government are not so much closing loopholes in the tax system, as the Labour party consistently said to us when it was in opposition, and as was claimed at the Budget, but creating new loopholes, by their own definition of debates past. As the OBR has stated, there is great uncertainty over how much of that revenue is truly additional. Tom Josephs, one of the three members of the OBR’s Budget Responsibility Committee, told the Treasury Committee:

“most of the revenue that we have scored in the forecast comes from what are…essentially, three years’ worth of lower tax rates…The steady-state impact of the reform is much lower.”

As is so often the case, there is a mismatch between Labour’s rhetoric and the policy reality.

The same would appear to be true for the “tweaks” to the temporary repatriation facility that the Chancellor announced on the slopes of Davos just last week. That indiscretion would be more problematic had there been any substance to the Davos announcement. We are still none the wiser, because the relevant amendments have not appeared, as my hon. Friend the Member for Gordon and Buchan said. This is the Committee stage of a Finance Bill, when we scrutinise the measures of the Government of the day, line by line. The Chancellor of the Exchequer made a conscious decision to get on a plane, fly to Davos and make the announcement—not in this House, but overseas. Then, when she had the opportunity to table amendments for the scrutiny of this Committee, she decided not to do so. I feel sorry for the Minister who has had to explain this, but it is not good enough. The Minister said that we will debate it on Report, but what stopped the Chancellor from tabling amendments today, in Committee? What was it about the line-by-line scrutiny that meant she could not do so? I would be grateful if the Minister could try to explain it, but I think the Chancellor should be explaining it to the House.

Those points aside, the main grievance, which others have raised, relates to the changes to definition of “remittance” in schedule 9. The Chartered Institute of Taxation says the changes are badly drafted, that they should not be retroactive and that, at the very least, implementation should be delayed to allow for them to be rewritten and consulted on. Otherwise, the Minister needs to explain why, under paragraph 5(8), lending foreign income to a foreign relative outside the UK, to be kept outside of the UK, should be treated as a remittance to the UK. Paragraph 5(11), which makes it so that anything that has ever been remitted to the UK without being charged to tax under previous rules should now be treated as if it was a chargeable remittance, is described by the ICAEW as “unacceptable”; it states that the provision “should be deleted”. This is a matter on which I am not particularly expert, but the ICAEW is. I would be grateful if the Minister could explain those points, or follow up in writing to me, so that I can provide these industry bodies with an explanation.

[James Murray]

I am always happy to respond to queries from the Chartered Institute of Taxation—they were eloquently presented by the shadow Minister—and will I make sure that any responses to those queries are forthcoming.

However, I think the central point, which the shadow Minister focused on in his comments, is about the temporary repatriation facility and our changes to that. The Chancellor was very clear that these changes, which she mentioned at Davos, are designed to make the system simpler and more attractive. As he will know, Finance Bills are routinely amended both in Committee and on Report by the Government to ensure that the best possible legislation is in place before a Finance Bill gains Royal Assent.

The new temporary repatriation facility, which we are setting up under these clauses, includes rules concerning how income and gains in a trust structure are matched to beneficiaries. These are complex things and the amendments will simplify that process. To provide absolute clarity, the amendments to the temporary repatriation facility, which the Chancellor referred to, are separate from the amendments that we are debating today in Committee, which clarify specific aspects of the legislation and ensure that the policy works as intended.

Collectively, the Government amendments before the Committee ensure that the legislation works as intended, and the amendments the Chancellor mentioned at Davos are designed to make the system simpler and more attractive. If it is a win-win, where it does not have an impact on the income—

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[James Murray]

Clause 43 and schedule 12 make changes to ensure that the foreign income and gains arising within settlor-interested trust structures will no longer be protected from tax for non-domiciled and deemed-domiciled individuals who do not qualify for the four-year foreign income and gains regime, which we have been discussing in relation to earlier groups of clauses.

As we have established in previous debates in Committee, the Government are removing the outdated concept of domicile status from the tax system and replacing it with a new internationally competitive residence-based regime from April of this year. Currently, where a non-UK-domiciled individual settles an offshore trust, foreign income and gains arising within that trust are protected from UK tax, which remains the case even if the individual is later deemed domicile.

The changes made by clause 43 and schedule 12 will mean that from 6 April 2025, foreign income and gains arising in settlor-interested trusts will be taxed on the same basis as UK-domiciled settlors, unless the settlor is eligible for and claims the new four-year regime, regardless of when the trust was established. In addition, the trust protections will not apply to the legislation on the transfer of assets abroad. This will mean that all income arising in a settlor-interested trust or an underlying company can be taxed on a UK settlor as it arises if the transferor has the power to enjoy the income or receives capital sums from the trust or company.

Government amendments 60 and 61 ensure that the onward gifting provisions continue to operate effectively, as under the existing regime. These provisions ensure that taxpayers cannot avoid a liability to tax by diverting benefits to other persons not liable to that charge. The Government are committed to making the tax system fairer so that everyone who is a long-term resident in the UK pays their taxes here. The new regime ensures this while also being more attractive than the current approach, as individuals will be able to bring income and gains into the UK without attracting an additional tax charge. As we have debated already, this will encourage them to spend and invest these funds here in the UK. Therefore, I commend these provisions to the Committee.

[Gareth Davies]

Clause 43 and schedule 12 mirror the proposals that we set out in March 2024. The Minister will therefore be very pleased to hear that I have not picked up any significant murmurings of discontent on this clause, and I have no further comments.

[James Murray]

I thank the shadow Minister and encourage him to respond in similar terms in future.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Schedule 12

Trusts: connected amendments, transitional provision etc

Amendments made: 60, in schedule 12, page 238, leave out lines 21 to 23 and insert—

“(b) the original recipient—

is liable neither to income tax nor to capital gains tax by reference to the amount or value of the original benefit, or

is a qualifying new resident for the tax year in which the original benefit is provided,”.

This amendment expands the scope of the onward gifting rule to circumstances where benefits are routed via individuals who are UK resident but who are not themselves within the scope of the benefits charge (because they are not the settlor or a close family member).

Amendment 61, in schedule 12, page 239, line 41, at end insert—

“(5A) Where the original recipient is liable neither to income tax nor to capital gains tax by reference to the amount or value of part only of the original benefit, this section applies as if the two parts of the original benefit were separate benefits.”—(James Murray.)

This amendment supplements Amendment 60.

Schedule 12, as amended, agreed to.

Clause 44

Excluded property: domicile test replaced with long-term residence test

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

The Government are committed to making the tax system fairer, so that everyone who is a long-term resident in the UK pays their taxes here. The new regime therefore ensures that individuals, in the future, will not be able to keep their assets out of scope of inheritance tax indefinitely. At the same time, our approach ensures that non-UK assets in existing protected trusts will be kept out of the settlor’s or beneficiary’s death estate. I therefore commend clauses 44 to 46 and schedule 13, alongside Government amendments 62 to 65, to the Committee.

[Gareth Davies]

As the Minister set out, clauses 44 to 46 and schedule 13 bring inheritance tax into the residence-based system so that it applies to non-UK assets owned outright or held in trusts. This was our stated intention in March 2024, subject to consultation.

As the Minister set out, non-UK assets will now be in scope for inheritance tax where an individual is considered a long-term resident—that is, if they have been resident in the UK for at least 10 of the last 20 tax years that immediately precede the chargeable event. This is subject to a tapered 10-year tail where a person who was resident in the UK for 20 years or more would no longer be considered long-term resident after 10 consecutive tax years of absence, whereas a person with 19 years of UK residence in the last 20 years would no longer be considered a long-term resident after nine years, and so on down to a minimum of three years for those with between 13 and 10 years of residence in the last 20 years.

As far as I am aware, there are no details of consultations which have taken place and nothing has been published on this. I am told by the likes of the Chartered Institute of Taxation that certain provisions such as the tapering of the 10-year tail were put forward during that process. I would be grateful if the Minister could confirm to the Committee the nature and extent of the consultation that has taken place by the Government to inform the creation of these clauses.

One point made by the Chartered Institute of Taxation is that there is now an anomaly whereby individuals who leave the UK before the new regime begins on 6 April are considered long-term residents when the legislation comes into effect, meaning they will incur an inheritance tax exit charge for trusts they have settled when their long-term resident status ends. As the Chartered Institute of Taxation points out, it seems unfair that a person who has already left the UK should face an exit charge due to legislation that comes into effect after their departure. I would be grateful if the Minister could explain that anomaly, which seems a little unfair. According to the Office for Budget Responsibility, these clauses raise very little revenue—I think it is in the range of £100 million a year on average—so the Government can afford to get this right. I would really appreciate a fuller explanation.

[James Murray]

I thank the shadow Minister for his remarks. He asked about the consultation and how we developed these policies. It is worth pointing out that there has been quite extensive discussion about the legislation on non-domicile status. The Government published a technical note at the autumn Budget in October 2024 explaining the proposed changes to provide certainty ahead of the rules coming into force in April 2025. Officials have engaged extensively with interested specialists and individuals over the summer and throughout the development of this policy. Many elements, such as the tapered tail and the transitional arrangements, were proposed by representative bodies. Those representative bodies also told us that people want certainty about the proposed new rules as early as possible, which is why we published information ahead of the Finance Bill and discussed it with people who might be affected and have views to add.

I will write to the shadow Minister with details on the very specific question he asked, so he has that information for reference. The objective with this policy is to achieve our aim of making the tax system fairer while making the new regime as attractive as possible and internationally competitive to encourage people to come to the UK to invest here, work here, create jobs and wealth, and grow our economy. That is the balance that we seek to strike. We have done that in close consultation and discussion with those affected to get the legislation to the best possible place.

Question put and agreed to.

Clause 44 accordingly ordered to stand part of the Bill.

Clauses 45 and 46 ordered to stand part of the Bill.

Schedule 13

Inheritance tax

Amendments made: 62, in schedule 13, page 266, line 35, at end insert—

“(2A) In subsection (1)—

(a) in the definition of “excluded property”, for “6 and 48” substitute “6, 48 and 48ZA”;

(b) omit the definition of “formerly domiciled resident”.”

This amendment updates the definition of “excluded property” in section 272 of the Inheritance Tax Act 1984 in consequence of the amendments made by clause 45. It also removes the now-redundant definition of “formerly domiciled resident”.

Amendment 63, in schedule 13, page 266, line 36, at beginning insert “Also”.

This amendment is consequential on Amendment 62.

Amendment 64, in schedule 13, page 267, line 25, at end insert—

“28A “(1) Schedule A1 (non-excluded overseas property) is amended as follows.

(2) In paragraph 1, for “48(3)(a)” substitute “48ZA”.

(3) In paragraph 5(2)(a), for “or 48(3)(a), (3A) or (4)” substitute “, section 48(4) or section 48ZA”.”

This amendment is consequential on clause 45 (which amends section 48 of the Inheritance Tax Act 1984 and inserts new section 48ZA).

Amendment 65, in schedule 13, page 271, line 39, at end insert—

“(1A) In construing section 267 of IHTA 1984, so far as saved by sub-paragraph (1), the repeal of the definition of “formerly domiciled resident” by paragraph 28(2A)(b) is also to be disregarded.”—(James Murray.)

This amendment clarifies that the definition of “formerly domiciled resident”, which is being removed from the Inheritance Tax Act 1984 by Amendment 62, will still be relevant in construing section 267 (which by virtue of paragraph 48 of Schedule 13 will continue to apply for certain limited purposes).

Schedule 13, as amended, agreed to.

Clause 54

Alternative finance: land in England, Scotland or Northern Ireland

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

The hon. Member for Gordon and Buchan asked about one specific part of the system, but the two rates affected by clause 57 relate to the inheritance tax thresholds that apply to all estates. As I said in my response to her intervention, the reason why the Government are taking these decisions and taking forward measures like this is to repair the public finances, given our inheritance from the previous Administration. Fixing the inheritance tax thresholds for a further two years contributes to putting the public finances back on an even footing. I will defend at every possible opportunity our decision to restore economic stability to the public finances in the UK, because without economic stability, it is not possible to boost investment and growth in the way we are determined to do.

[Gareth Davies]

Clause 57 fixes the inheritance tax thresholds at their current levels for a further two tax years, as the Minister set out. The nil-rate band, which remains fixed at £325,000, has been unchanged since 2009. The residence nil-rate band, which comes into play when a person leaves a property to their direct descendants when they die, was introduced at £100,000 in 2017-2018 by a Conservative Government, before being increased by £25,000 in succeeding years. In reaching the current level of £175,000, we delivered on our manifesto pledge to create an inheritance tax threshold for married couples and civil partners of up to £1 million. Since then, the legislative default is for the thresholds to be increased in line with the consumer prices index, although Parliament agreed to override that provision in the aftermath of the pandemic and to maintain the current thresholds to 2027-2028.

Although we do not oppose the measures, HMRC has reported that the Labour Government’s decision to extend the freeze on the current thresholds for a further two years will, as the Minister just set out, increase the number of tax-paying estates by 1,400 in 2028-2029 and by 2,900 in 2029-2030. It was perfectly reasonable for my hon. Friend the Member for Gordon and Buchan to ask why this Labour Government have chosen to unfreeze income tax in 2028 but not inheritance tax. I am afraid the answer we got was not good enough in the context of a Budget and a series of measures that have spent £8 billion on GB Energy, an energy company that will not produce any energy or reduce any energy bills; £7 billion on a national wealth fund, which basically means repainting the UK Infrastructure Bank building; and £9 billion on union pay deals that came with no reform and no productivity gains, but massive pay rises that, by the way, the OBR has assessed as inflationary.

Sure enough, inflation has gone up and interest rates are going to stay higher for longer. It is mortgage payers who will pay the price. That is the state of the public finances that Labour inherited. While we are on the subject, Labour inherited the fastest growth in the G7, half the deficit—[Interruption.] It is true. Labour Members do not like facts, and we know they are not good with numbers, but being the fastest growing economy in the G7 is a pretty good inheritance. On top of that, the deficit was 50%—[Interruption.] Even the Liberal Democrats are reacting.

This is a very important point. People out there want to know why these difficult decisions are being made. It is important to set out the facts on how the economy was doing when the Government came into office. There was 2% inflation; it is now higher. The deficit was half of what it was. These are important factors. It was very reasonable of my hon. Friend the Member for Gordon and Buchan to point out the dichotomy and the choices that this Government have made.

[Oliver Ryan (Burnley) (Lab/Co-op)]

The election last year was momentous: it was a landslide election for the new Government. I note the hon. Gentleman’s glowing impression of the inheritance from the previous Government; where did it go wrong?

[Gareth Davies]

Where it has gone wrong is that the Labour party said pre-election that it would not increase national insurance, but has now gone back on that. Labour said it would not hit farmers and would support them, but we now have the family farm tax. We are slightly veering off topic, as Mr Mundell will point out, but I say gently to the hon. Gentleman that although I hope he retains his seat at the next election—[Laughter.] The Chancellor, who is completely out of her depth, has made his life a little more difficult. He is laughing now but I am not sure he will be in four years.

In the context of more drastic changes to inheritance tax elsewhere in the Budget, and the changes to agricultural relief in particular, my hon. Friend the Member for Gordon and Buchan asked about the Government’s assessment of how many of the estates being brought into the regime as a result of the threshold freeze are family farms. I did not quite hear an answer. On behalf of all the farmers we all represent, I say it would be good to hear the Treasury’s estimate as to how many family farms will be impacted.

Ministers frequently cite the inheritance tax thresholds in mitigation of their decision to introduce the family farm tax, but that mitigation is being steadily eroded by inflation. By the time the family farm tax comes into effect next year, Labour’s excuses will be worth even less than they are today, not least because the OBR forecasts that inflation will be higher for longer under Labour. It has already gone up in this short period. It is a shameful exercise in how not to govern, and we will be holding the Government to account going forward.

[James Murray]

That was a fairly wide-ranging response from the shadow Minister to what is quite a straightforward clause. I could not help but notice that he began by saying that he supported what we are doing in the clause, that he understood that we needed to take tough decisions and that he will not oppose the decision to extend the freeze to inheritance tax thresholds—which the Conservatives began—for a further two years. He then proceeded to explain why he did not support it. I know the Opposition have not made their policy on many things, but it seems that even individual Members have not made up their minds.

[Gareth Davies]

I was pointing out the discrepancy in how, as we covered earlier, the Government are unfreezing income tax—apparently, although they are not legislating for it—but keeping the freeze on inheritance tax, which I pointed out that we did, not least for public finance reasons. Not only that, but the freeze has also been used as a mitigation against the disgraceful family farm tax that has impacted many of our farmers. Every year that inflation goes up—and it is going up under Labour—that mitigation goes away. That was the point I was trying to make, and it would be great if the Minister could address it.

[James Murray]

The shadow Minister alleges that there is some discrepancy on this side of the Committee; I feel like there is some discrepancy within his own views. I return to the central point that he seemed to begin by saying that he welcomed our measures—that he supports them and understands why tough decisions have to be taken—but then seemed to explain why he did not support them.

The shadow Minister asked why we decided to extend the threshold freeze for inheritance tax while not, for instance, increasing income tax rates; that is a political choice. It is a difficult choice, but it is a political choice. As a Government we have made the choice to make sure that we do not raise income tax. We went into the election saying that we would not raise taxes on working people, and we have kept that pledge through our policies on income tax, employee national insurance and the rate of VAT. We made those commitments and we are honouring them.

Finance Bill (Third sitting)

Gareth Davies Excerpts

Committee stage
Thursday 30th January 2025 Public Bill Committees

[James Murray]

Clauses 58 to 60 make changes to strengthen the conditions that must be met for transfers of shares into an employee benefit trust to be exempt from inheritance tax. An employee benefit trust is a trust that provides benefits and rewards to employees of a company, often in the form of shares in the company. Under certain conditions, such shares are exempt from inheritance tax. All or most employees need to be capable of benefiting from the trust for the inheritance tax exemption to apply, so it cannot be limited to shareholders of the company or family members, for example.

In 2023, the previous Government launched a consultation on employee ownership trusts and employee benefit trusts. The consultation set out concerns that such trusts were increasingly being used as a tax planning vehicle for shareholders and their families, rather than for a wider class of employees. At the autumn Budget, the current Government responded to that consultation and announced changes to strengthen the conditions that must be met for the transfer of shares into an employee benefit trust to be exempt from inheritance tax.

The changes made by clause 58 will mean that restrictions on shareholders and their family members benefiting from an employee benefit trust must apply for the entire lifetime of the trust. The clause will address cases in which the trust deed allows individuals who are closely connected with a shareholder to benefit after the participator’s death. The clause ensures that the Government’s position is explicitly clear in legislation. The change will come into effect on Royal Assent.

Previously, family members of the shareholder who were excluded from benefiting from the capital of the trust could still receive income payments from the trust. The changes made by clause 59 will ensure that no more than 25% of employees who can receive income payments from an employee benefit trust may be family members of the shareholder. This reinforces the original policy intent of employee benefit trusts to reward and motivate a wide group of employees.

Previously, an individual could set up a company, immediately make a transfer of shares to an employee benefit trust, and obtain an inheritance tax exemption. The changes made by clause 60 will mean that shares must have been held for at least two years before being transferred into the employee benefit trust. The provision will take into account shares held prior to any share reorganisation, and will strengthen protections against employee benefit trusts being used purely for inheritance tax planning purposes.

Clauses 59 and 60 are treated as having come into effect for transfers of value to new and existing trusts on or after 30 October 2024. The clauses will ensure that the tax treatment of employee benefit trusts is consistent with the original policy intent of rewarding and motivating employees, while minimising opportunities for abuse. I commend them to the Committee.

[Gareth Davies (Grantham and Bourne) (Con)]

It is, as always, a great pleasure to see you in the Chair, Ms Vaz.

As the Minister set out, clauses 58 to 60 make amendments to requirements for inheritance tax exemptions involving employee benefit trusts. Clause 58 provides that restrictions on shareholders and connected persons benefiting from employee benefit trusts will now apply for the lifetime of the trust. Clause 59 provides that no more than 25% of employees who receive income payments from an EBT can be connected to the shareholders in the company. Clause 60 provides that shares will now need to have been held for at least two years prior to being transferred to the EBT.

As the Minister said, the measures follow on from the consultation launched in 2023, which we referred to when we discussed clause 31 and employee ownership trusts. Although we will not oppose the clauses, I would be grateful if the Minister could comment on one specific issue that was raised during the consultation on the changes. In response to the measure introduced by clause 59, concerns were raised at consultation on behalf of smaller companies using EBTs that may now be forced to exclude certain employees from participating in share scheme arrangements in order to comply with the new requirement. What was the Minister’s assessment of that particular impact? Is he content that the benefits of the changes outweigh that particular risk cited in during the consultation?

[James Murray]

I welcome the Opposition’s support for the clauses, which build on the consultation that started when they were in office. The shadow Minister’s question related to what effect the changes might have on small businesses in particular. I will try to answer now, but he is free to contact me if he feels I have not covered his point fully.

The changes we are making to employee benefit trusts will not have an adverse effect on small businesses, because the original policy intent of exempting transfers of value to employee benefit trusts from inheritance tax was to encourage businesses to reward and motivate a wide range of employees. To qualify for the exemption, conditions need to be met that ensure that EBTs that benefit only shareholders and their families, or other people closely connected to shareholders, do not receive preferential inheritance tax treatment. Given that that is the aim in the principles behind the clauses, I am confident that they will not have the adverse effect that the shadow Minister fairly raised. I hope that provides him with some reassurance.

Question put and agreed to.

Clause 58 accordingly ordered to stand part of the Bill.

Clauses 59 and 60 ordered to stand part of the Bill.

Clause 61

Agricultural property relief: environmental management agreements

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[James Murray]

As the hon. Lady knows, because we have debated this many times, the data that we have published, based on His Majesty’s Revenue and Customs data, shows that the large majority of small farms will not be affected. I am sure she knows well the statistics on the 530 farms affected by the reforms to APR and business property relief in ’26-27, because she will have seen them in the Chancellor’s letter to the Treasury Committee and we have discussed them many times in this place.

Clause 61 relates specifically to land managed under certain environmental agreements, and was a measure proposed by the last Government. If the hon. Lady allows me to continue explaining why the clause is important, she might feel able to support it, given the benefits it will bring. The clause was welcomed by the sector, and the Government agree with the approach. I can confirm that there have been no changes to the design outlined by the previous Government in March 2024, which is why I hope to get the Opposition’s support for the clause.

As a result of the changes made by clause 61, from 6 April 2025 APR will be available for land managed under an environmental agreement with or on behalf of the UK Government, devolved Governments, public bodies, local authorities or approved responsible bodies. This includes but is not limited to the environmental land management schemes in England and equivalent schemes elsewhere in the UK, as well as any agreement that was live on or after 6 March 2024.

The Government are fully committed to increasing the uptake of environmental land management schemes in England, and we are providing the largest ever budget of £1.8 billion for this in 2025-26. The changes made by clause 61 will ensure that the tax system is not a barrier to uptake, thereby supporting farmers and land managers to deliver, alongside food production, significant and important outcomes for the climate and environment. I commend the clause to the Committee.

[Gareth Davies]

As the Minister said, clause 61 brings land managed under an environmental agreement—be that with the UK Government, devolved Governments, public bodies, local authorities or approved responsible bodies—within the scope of agricultural property relief.

I am afraid we have here Labour taking with one hand and providing far less with the other. For the £5 million, which we welcome, that they will give back to farmers each year with this measure, they will take away some £500 million a year through the family farm tax, if the Office for Budget Responsibility’s highly uncertain costings are to be believed. Many farmers, and bodies such as the National Farmers Union, have raised concerns about this. The Chartered Institute of Taxation has queried why the relief remains limited to schemes entered into with public authorities, rather than allowing enterprising landowners to enter into other schemes. I would be interested to hear the Minister’s thoughts on that, but we will not oppose the measure.

[James Murray]

I thank the hon. Gentleman for his support for the measure. He made wider points about reforms to agricultural property relief, which we have debated several times. The clause focuses in a targeted way on environmental land management schemes.

The hon. Gentleman asked why private environmental land management that is outside of agreements is not included. I confirm that relief will be available for land managed under an environmental agreement with or on behalf of the UK Government, devolved Governments, public bodies, local authorities or approved responsible bodies. This will ensure that the extension of the relief applies only where there are high, verifiable environmental standards.

Question put and agreed to.

Clause 61 accordingly ordered to stand part of the Bill.

Clause 62

National Savings Bank: statements from HMRC no longer to be required

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Gareth Davies]

The Minister may think that this is a minor issue—and he will be pleased to know that I agree with him. [Laughter.] I am just waking everybody up. The requirement is redundant and we will not oppose the clause.

[James Murray]

I applaud the hon. Gentleman’s theatre in delivering his response, and welcome his support.

Question put and agreed to.

Clause 62 accordingly ordered to stand part of the Bill.

Clause 63

Rates of alcohol duty

--- Later in debate ---

[The Chair]

Does the shadow Minister wish to speak?

[Gareth Davies]

My hon. Friend the Member for North West Norfolk will speak to this clause, Ms Vaz.

[James Wild (North West Norfolk) (Con)]

I apologise for the confusion on our side, Ms Vaz. The Committee will be pleased to know that I have lots to say on this clause, so we can all settle in for a while.

Clause 63 increases the headline rate of alcohol duty in line with the retail price index, provides a reduction to the rates for draught alcoholic products and cuts to the rates paid by eligible small producers. The Government have also chosen not to extend the temporary easement for certain wine products. I say at the outset that His Majesty’s Opposition is a strong supporter of the broader alcohol sector, and we have some concerns about the impact that some of the provisions will have on important sectors. As well as speaking to clauses 63 and 64, I will speak to new clause 4, which stands in my name and that of my hon. Friend the Member for Grantham and Bourne.

In 2023, the previous Government introduced a progressive strength-based duty system following the alcohol duty review, which was the biggest review of alcohol duties for more than 140 years. The new and simplified alcohol duty rates system was based on the common-sense principle of taxing alcohol by strength, with the aim of modernising the existing duties, supporting businesses and meeting our public health objectives. That was the first time that public health objectives had been inserted into the alcohol duty system. The reforms also introduced two new reliefs: the draught relief to reduce the duty burden on draught products sold at on-trade venues, and small producer relief.

At the autumn statement 2023, the previous Government froze alcohol duty rates until August 2024, and that was extended until February 2025 at the following Budget. According to the OBR, alcohol duty receipts are expected to raise £12.4 billion this year, falling by 0.6% compared with last year as the rates remain frozen, but receipts are then forecast to increase by 5% a year on average, to reach £15.9 billion by the end of the Parliament.

Pubs make a huge contribution to our culture, economy and communities. When the Conservatives were in government, we recognised that and introduced a raft of supportive measures, including draught relief, small producer relief and the Brexit pubs guarantee, which I am sure all hon. Members remember and welcome. I therefore welcome the increased draught relief from February, from 9.2% to 13.9%, and the fact that the relative value of small producer relief will be maintained. Although we welcome the inclusion of both reliefs, the increase to draught relief will mean that beer duty on a 5% pint of beer is reduced from 54p to 53p—a 1p saving. I fear that drinkers will not be toasting the Exchequer Secretary over that.

Turning to whisky—although it is a little early in the day for me—as the hon. Member for Inverness, Skye and West Ross-shire set out, Scotch whisky is one of our most iconic and successful industries. Some 43 bottles of scotch whisky are exported per second and the industry supports more than 66,000 jobs across the UK, many of which are in rural areas. The decision to uprate duty rates by RPI has been met with deep concern by the industry—indeed, the Scotch Whisky Association said that it represents a broken commitment, after the Prime Minister claimed last year that his Government’s trade strategy would

“back Scotch producers to the hilt.”

That sounds rather like the promise that he gave to farmers, which Labour’s family farm tax has broken. The managing director of Diageo said:

“This betrayal will leave a bitter taste for drinkers and pubs, while jeopardising jobs and investment across Scotland.”

I would be interested to hear the Minister’s response to those comments. Have the Government calculated the risk to jobs in the sector more widely?

A similar picture is painted by the cider industry, which supports more than 11,500 jobs and attracts more than 1 million tourists each year. The National Association of Cider Makers has raised fears that raising the headline rate, alongside the national insurance increases and the family farm tax, could put elements of the UK cider industry at risk. Has the Minister calculated the cumulative impact that these tax rises will have on the sector?

At this point, we should consider the wider context in which we are discussing these increases. Time and again we hear about the Budget placing a range of cost pressures on the hospitality industry, which is a key contributor to the UK economy. According to UKHospitality:

“In the past six years, hospitality has increased its annual economic contribution by £20 billion to £93 billion.”

The tax rises in the Budget, including the £25 billion a year jobs tax, will make it much harder for the industry to succeed. Just look at the impact of recent measures. Colliers, a professional property services company, reported that cutting the hospitality business rate relief from 75% to 40% means that restaurants will face a bill of, on average, over £13,000 a year, up from £5,500.

Finance Bill (Fourth sitting)

Gareth Davies Excerpts

Committee stage
Thursday 30th January 2025 Public Bill Committees

[The Economic Secretary to the Treasury (Emma Reynolds)]

It is a great pleasure to serve under your chairmanship, Ms Vaz. The clause makes changes to the main rates of the climate change levy, or CCL, with effect from 1 April 2026. The Government are increasing the main rates of CCL on gas, electricity and solid fuels by the retail prices index to maintain the incentive for businesses and the public sector to be more energy efficient.

Since 2001, the CCL has encouraged businesses and the public sector to be energy efficient by adding a tax on the non-domestic supply of energy. The Government have announced a national mission to make Britain a clean energy superpower and accelerate our journey to net zero, and improvements in energy and resource efficiency will play a significant role in reducing industrial emissions in the 2020s. Delivering on this mission will help to make the UK energy independent, protect billpayers, create good jobs and tackle the climate crisis.

The previous Government followed a trajectory of rebalancing the gas and electricity rates over a five-year period to reflect that electricity emissions are progressively lowering due to the increasing contribution of renewable and lower-emission energy in electricity generation. The CCL rates for electricity and gas equalised in April 2024, and at the autumn statement 2023, under the last Government, rates were frozen for the year 2025-26.

Now that the rebalancing has been achieved, uprating the main rates on gas, electricity and solid fuels from April 2026 will continue to provide an incentive for energy efficiency. At autumn Budget 2024, this Government also announced that the main rate of CCL on liquefied petroleum gas will continue to be frozen. This is to ensure better consistency between LPG and other portable fuels—for example kerosene, which is zero rated under fuel duty—for commercial premises not connected to the gas grid.

The changes made by the clause will increase CCL rates on gas, electricity and solid fuels by RPI with effect from April next year. Non-domestic energy supply users will see an increase on their CCL bill of around 0.025p per kWh of gas or electricity supplied. The rate on solid fuels will increase by 0.2p per kg. However, participants of the climate change agreement scheme are eligible to pay reduced CCL rates in return for meeting negotiated energy-efficiency and carbon targets. The CCA scheme enables energy-intensive industries to receive discounts of up to 92% on their CCL bill. The new six-year scheme, announced on 16 October, will provide an estimated £1.9 billion of relief to 2,600 businesses in 53 industrial sectors over its lifetime. Overall, we expect a reduction in greenhouse gas emissions as a result of the clause compared with freezing the rates.

In conclusion, the changes made by the clause will help to incentivise businesses to improve their energy efficiency, thereby progressing the Government’s climate objectives, which are vital for the UK’s long-term economic prosperity and energy security. I commend the clause to the Committee.

[Gareth Davies (Grantham and Bourne) (Con)]

As the Minister said, the clause amends the main rates of the climate change levy from April 2026, in line with RPI, for electricity, gas and other taxable commodities, while continuing to freeze the rate for LPG. We will not oppose the measures in the clause.

I was pleased to see the Government confirm their plans to extend the climate change agreement scheme at the Budget. The scheme allows energy-intensive industries to claim a discount on the climate change levy, subject to taking steps towards increasing their energy efficiency and reducing emissions. At autumn statement 2023, we announced a new six-year CAA scheme, and I am genuinely pleased that the Government have chosen to reaffirm our announcement and take that forward, following consultation.

However, as the Minister may expect, I want to raise an issue with her. It has been raised at oral questions, so will not be a surprise to her. There have been several reports in recent weeks about the UK chemicals industry that are directly relevant to climate change and the CCA scheme, as the Minister will know better than me. Sir Jim Ratcliffe has warned that the UK chemicals industry is at risk of “extinction”. His firm, INEOS, closed its synthetic ethanol plant at Grangemouth this month, which will result in the loss of many jobs. That was the last remaining synthetic ethanol plant in the country. Given the ongoing concerns, I would be grateful if the Minister could provide an update on what consideration has been given to the UK chemicals industry in calibrating these policies.

As the Minister knows, the UK chemicals industry is the third-largest manufacturing sector in this country. It contributes £30 billion to our economy and directly employs 138,000 people across the country in 4,100 businesses. I presume that the Chancellor has met representatives of the sector, but I would like to hear the Minister confirm that, given how topical this issue is, how concerned the industry is and how widely reported the issues have been.

[Mr Angus MacDonald (Inverness, Skye and West Ross-shire) (LD)]

As always, I speak on behalf of the highland industries. In rural areas, only electricity and kerosene are available; mains gas is not. Electricity users pay four times more for their energy than mains gas users, so a hotel on the island of Skye may pay £80,000, whereas one in a city may pay £20,000. That causes enormous issues for people in the windiest, coldest, darkest part of Great Britain. The reason for the big disparity is that the tariffs and taxes are largely on electricity, rather than gas, and of course electricity is largely renewable. In my constituency, people can see wind farms out of their window, yet we still pay four times more for our energy than people in cities. Will the Minister elaborate on what could be done to make us more competitive?

--- Later in debate ---

[Gareth Davies]

Clause 75 amends the landfill tax rates to increase them in line with RPI, adjusted to account for high inflation between 2022 and 2024. As the Minister knows, when in government, we uprated landfill tax in line with RPI in the 2023 and 2024 Finance Acts. We also reduced the landfill tax gap from £275 million in 2017-18 to £100 million in 2022-23. How will the Government continue those strong efforts to further reduce the gap? I know it particularly exercised the Minister when he was in opposition—he certainly asked me a lot of questions on it. We will not oppose the clause, and I cannot wait to find out the Lib Dem position on it.

[James Murray]

I thank the hon. Gentleman for supporting the clause. I fondly remember the questions I asked him about landfill tax when I was on the other side of this Committee Room, or a similar one on this corridor. I can reassure him that the current Government are considering the options for landfill tax reform, following the call for evidence that was undertaken in 2021. We will announce further steps in due course. The Government are considering options for landfill tax reform including opportunities to design out opportunities to commit waste crime, including landfill tax fraud. We will announce next steps in due course.

Question put and agreed to.

Clause 75 accordingly ordered to stand part of the Bill.

Clause 76

Rate of aggregates levy

Question proposed, That the clause stand part of the Bill.

[James Murray]

The clause increases the rate of aggregates levy from April 1 in line with the RPI as forecast by the Office for Budget Responsibility when the rate was announced at autumn statement 2023. Aggregates levy is charged on the commercial exploitation of virgin aggregate, which includes rock, sand and gravel. The object of aggregates levy is to encourage the use of recycled rather than virgin aggregate in construction. The changes made by clause 76 will increase the aggregates levy from £2.03 per tonne to £2.08 per tonne. The clause increases the rate of aggregates levy in line with RPI from April 1 to ensure that the real-terms value of the price incentive to manage aggregate more sustainably does not fall in future.

[Gareth Davies]

As the Minister said, the clause uprates the aggregates levy in line with inflation. These provisions in this Finance Bill are pretty much identical to those that we put forward in the Finance Act 2024. It is therefore right that we do not oppose them.

Question put and agreed to.

Clause 76 accordingly ordered to stand part of the Bill.

Clause 77

Rate of plastic packaging tax

Question proposed, That the clause stand part of the Bill.

[James Murray]

The clause makes changes to increase the rate of the plastic packaging tax from April 1 in line with the consumer price index. The plastic packaging tax was introduced on 1 April 2022 as part of the previous Government’s resources and waste strategy. The tax provides a clear economic incentive for businesses to use recycled plastic in the manufacture of plastic packaging, thereby stimulating the collection and recycling of plastic waste and diverting it away from landfill or incineration. Increasing the rate of the tax in line with CPI maintains the real-terms value of the price incentive to use recycled plastic.

The changes made by clause 77 will increase the rate of plastic packaging tax, as set out in section 45 of the Finance Act 2021, from £217.85 to £223.69 per tonne, with effect from 1 April 2025. The new rate will affect UK manufacturers and importers of plastic packaging containing less than 30% recycled plastic.

In conclusion, this clause increases the rate of plastic packaging tax in line with CPI from 1 April to maintain the real-terms price incentive to include recycled plastic in plastic packaging. I commend the clause to the Committee.

--- Later in debate ---

[Gareth Davies]

As the Minister said, clause 77 uprates the plastic packaging tax in line with inflation. The provisions in this Finance Bill are pretty much identical to those that we put forward in the Finance Act 2024, and we will not be opposing them; but on this particular tax measure, I seem to remember the now Exchequer Secretary to the Treasury questioning me about the possibility of an impact report or assessment, and I just wonder how much progress he is making with that.

[James Murray]

I reassure the hon. Gentleman that the Government are making progress across a whole range of issues every day, and we will update the appropriate authorities in the appropriate way at the relevant time.

Question put and agreed to.

Clause 77 accordingly ordered to stand part of the Bill.

Clause 78

Rates of soft drinks industry levy

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Emma Reynolds]

Clause 79 closes a known route for tax avoidance by making changes to the taxation of chargeable gains when a limited liability partnership is in liquidation, and clause 80 closes a loophole through which some taxpayers have attempted to avoid the company tax charge known as section 455.

On clause 79, the Government have become aware of a scheme that is being exploited by tax-avoidance promoters involving the transfer of assets into an LLP that is then liquidated. At the time a member contributes an asset to the LLP, they are not charged tax on the gain accrued since the asset was acquired. This is because it is intended that they are taxed when the asset is disposed of, rather than the LLP itself. This is similar to the position for conventional hardships.

However, when an LLP is liquidated, it ceases to be tax transparent and becomes treated like a company, but the LLP is only charged tax on its gains since the contribution of the asset. As part of the liquidation, the liquidator could dispose of the LLP’s assets back to the contributing member or to a party connected to them, washing out the gains made prior to the asset being contributed to the LLP.

The changes made by clause 79 will create the new occasion when a deemed disposal arises for chargeable gains purposes, and will have effect where an LLP enters liquidation on or after 30 October 2024. This will ensure that, where a member contributes an asset to an LLP that subsequently enters liquidation, and the LLP disposes of the asset back to the member or to a person connected to them, they are taxed on the gains on the asset up to the time of its contribution to the LLP. The gain will be treated as accruing at the time that the LLP disposes of the asset.

On clause 80, a close company is a company owned and run by a small number of people. In a close company, there are fewer restrictions and less accountability around how the company and its owners interact. The tax charge known as section 455 is a charge on loans to shareholders left outstanding after the company’s year end. The charge is remitted if the loan is repaid. The Government are aware of the attempted use of co-ordinated or circular loan arrangements by shareholders in close companies to avoid the section 455 charge and thereby extract funds from their companies untaxed instead of receiving taxable earnings.

As a result of the changes made by clause 80, where shareholders use circular loan arrangements to extract value from their companies, a tax charge will be applied on the relevant amount withdrawn. This will ensure that such arrangements do not avoid a tax charge. The targeted anti-avoidance rule will also be updated to protect against future exploitation.

In summary, clause 79 makes changes to ensure that LLPs are not used to avoid tax chargeable gains. It forms part of a package of measures announced at the autumn Budget 2024 that are aimed at closing the tax gap, cracking down on avoidance and evasion and strengthening the powers of His Majesty’s Revenue and Customs to tackle promoters of avoidance schemes. The changes made by clause 80 will close a loophole that is exploited by a minority and ensure that anti-avoidance rules are more robust.

I should be clear the vast majority of close companies and their participators are compliant and pay any tax due. Clause 80 makes a sensible change that is proportionate, ensures fairness and will affect only those few who seek to avoid tax. Our commitment is to ensure a fair and just tax system, and this measure is a step towards upholding that promise.

[Gareth Davies]

The clauses tackle tax avoidance in limited liability partnerships and their participants, as the Minister pointed out. Tax avoidance is something that we took very seriously when in government, and made some great progress on, so we will not oppose this latest measure.

[Emma Reynolds]

I thank the Opposition for their support.

Question put and agreed to.

Clause 79 accordingly ordered to stand part of the Bill.

Clause 80 ordered to stand part of the Bill.

Clause 81

OECD crypto-asset reporting framework

Question proposed, That the clause stand part of the Bill.

[Emma Reynolds]

The clause makes changes to ensure that the Treasury has the power to make regulations to implement the cryptoasset reporting framework, which is also known as the CARF. The CARF was developed at the OECD, and the previous Government supported its development and committed to the UK’s implementing it, so I hope the Conservatives will support the clause.

The CARF will require cryptoasset service providers to collect, check and report information that identifies their non-UK-resident customers and their non-UK-resident customers’ cryptoasset transactions undertaken from 2026. HMRC will then receive and share relevant data with participating jurisdictions for tax purposes from 2027. Other participating jurisdictions will share their data with HMRC where it relates to UK resident customers of non-UK cryptoasset service providers. The increased tax information that the CARF will bring to HMRC is expected to generate additional revenue of £315 million across 2026-2029. The Government intend to make the regulations in 2025 so that the CARF applies to UK crypto businesses in the UK from 1 January 2026.

The changes made by the clause will amend existing legislation so that the CARF is added to the list of international arrangements for exchanging information. This will give the Treasury the power to make the CARF regulations to implement the CARF regime so that it applies to UK cryptoasset service providers from 1 January 2026. The clause is essential so that the Government can implement the CARF.

[Gareth Davies]

The clause provides the Treasury with the powers to make regulations for the OECD cryptoasset reporting framework which, as the Minister pointed out, we signed up for when in government.

I have one question, which has come up quite a lot in the industry and perhaps even in the Minister’s previous role outside politics, and it relates to the name. It is called the cryptoasset reporting framework, but many in the outside world refer to cryptocurrency. What is the Government’s position on what a crypto is? Is it a cryptoasset or is it a cryptocurrency? What is the difference? A lot of people would appreciate that clarification on this complex subject. As I said, we do not oppose the clause; we signed up to the framework when in government.

[Emma Reynolds]

In my view, a cryptocurrency is a type of cryptoasset, but I will check that.

Question put and agreed to.

Clause 81 accordingly ordered to stand part of the Bill.

Clause 82

Duty on vaping products

--- Later in debate ---

[Emma Reynolds]

I hope the clause will not be controversial, although we are always surprised by Opposition Members. The clause will make changes to ensure that various errors and omissions in three pieces of legislation are corrected. I will go through them in turn.

First, subsection (1) will amend paragraph (d) of section 151I(1)—that is a confusing number—of the Taxation of Chargeable Gains Act 1992, which defines “financial inclusion” for the purposes of legislation on the provision of alternative finance in chapter 4. That definition includes persons who are authorised to provide credit. Authorisation of such persons was previously the responsibility of the Office of Fair Trading, but moved to the Financial Conduct Authority.

To reflect that change in responsibility, the definition of financial institution was amended in both the Income Tax Act 2007 and the Corporation Tax Act 2009. However, the mirror legislation found in the Taxation of Chargeable Gains Act 1992 was overlooked, and subsection (1) will make similar changes to the Act to ensure that the definition of financial institution is consistent across the relevant capital gains tax, income tax and corporation tax legislation.

Secondly, subsection (2) corrects the procedure for making regulations under part 14A of the Corporation Tax Act 2009. The current wording requires regulations to be made by statutory instrument, subject to annulment by either House of Parliament. That is incorrect, as financial regulations are a reserved matter for the House of Commons only. The clause corrects the error by requiring regulations to be laid before the Commons only—take back control.

Lastly, subsection (3) corrects a typographical error in section 4 of the Taxation (Post-transition Period) Act 2020, concerning excise duty on the removal of goods to Northern Ireland. The correction removes a reference to section 42 of the Finance (No. 2) Act 2023, and inserts the correct reference to section 47 of that Act.

In summary, the changes made by clause 84 will ensure that legislation accurately reflects the policy intent, and remove possible confusion for readers.

[Gareth Davies]

Let me just gather my speech. [Laughter.] Clause 84 makes some of the more technical and minor amendments to various pieces of legislation, so in the interests of good housekeeping if nothing else, His Majesty’s Official Opposition has no point to raise on the matter.

Question put and agreed to.

Clause 84 accordingly ordered to stand part of the Bill.

Clause 85

Interpretation

Question proposed, That the clause stand part of the Bill.

[James Murray]

This highly controversial clause sets out the legal interpretation, in the usual manner, of abbreviations in the legislation.

[Gareth Davies]

Thanks to clause 85, I do not think anything remains to be interpreted, so I will sit down.

Question put and agreed to.

Clause 85 accordingly ordered to stand part of the Bill.

Clause 86

Short title

Question proposed, That the clause stand part of the Bill.

[James Murray]

Clause 86—[Hon. Members: “Hear, hear!”] I thank hon. Members for their wholehearted support for this important clause, which, in the usual manner, sets out the short title of the legislation.

[Gareth Davies]

It will be no surprise that we have nothing to add, but as this is the last time I will speak, let me take this opportunity, before you get too emotional, Ms Vaz, to thank you and Mr Mundell, the Clerks, all the officials who have supported the Ministers and, in particular, on my behalf and that of my office, the Chartered Institute of Taxation and the Association of Taxation Technicians. I put on the record my thanks to Luke Pike in my office, who provided great support throughout the preparation stage, and to all Committee members—including the Lib and the Dem over there and my frenemies across the way.

In particular, I thank the hon. Member for Halesowen, who grabbed me on the way out of the first sitting and told me that this is the best Bill Committee he has ever served on. It is completely irrelevant that this is the first one he has ever served on—tell him it is all downhill from here. I will let my hon. Friend the Member for North West Norfolk take it from here.

Question put and agreed to.

Clause 86 accordingly ordered to stand part of the Bill.

New Clause 1

Rate of vehicle excise duty for haulage vehicles other than showman’s vehicles

“(1) In paragraph 7(3A) of Schedule 1 to VERA 1994 (which specifies the rate of vehicle excise duty applicable to haulage vehicles other than showman’s vehicles), for £350’ substitute ‘£365’.

(2) The amendment made by this section has effect in relation to licences taken out on or after 1 April 2025.”—(James Murray.)

This new clause provides for an increase in the rate of vehicle excise duty applicable to haulage vehicles other than showman’s vehicles.

Brought up, read the First and Second time, and added to the Bill.

New Clause 2

Review of sections 63 and 64

“(1) The Chancellor of the Exchequer must, within six months of the passing of this Act and every six months thereafter, review the impact of the measures contained in sections 63 and 64 of this Act.

(2) Each review must consider the impact of the measures on—

(a) Scotch whisky distilleries,

(b) small spirit distilleries,

(c) wine producers and wholesalers,

(d) the hospitality industry, and

(e) those operating in the night-time economy.

(3) Each review must also examine the expected effect of the measures on exports and the domestic wine trade.

(4) A report setting out the findings of each review must be published and laid before both Houses of Parliament.”—(Mr MacDonald.)

Brought up, and read the First time.

Question put, That the clause be read a Second time.