Finance Bill

Ian Swales Excerpts

Tuesday 1st July 2014 Commons Chamber

[Rushanara Ali]

I will not give way again as I am conscious that others wish to speak. I will conclude.

The Government’s so-called long-term plan should not be pursued at the expense of those in lower and middle-income families. That is why the new clause would rightly force the Chancellor to publish how much extra tax would be paid by high earners under the 50p rate. That would establish how much those earning more than £1 million per year would contribute. That would go a long way towards giving us the clarity we need.

Our vision is to work towards cutting taxes for the 24 million people on middle and lower incomes through the introduction of a 10p starting rate of tax. That is not only the way to a fairer system of taxation but the only way to nurture sustainable growth for all. After three years of flatlining, the growth that we are beginning to see is welcome, although it is still coming much slower than it is to countries such as the US and Germany.

Opposition Members have a vision for a broad-based recovery forged through the efforts of all people from all backgrounds. We must remember that average wages will have fallen by 5.6% by the end of this Parliament. How does that make our society one in which we are all in it together? I do not hear members of the Government or Government Back Benchers use that phrase any more. I challenge them to use it today if they still believe that it is not a joke as far as most people in this country are concerned. Only Labour’s plans for a fairer and more progressive taxation system will support the return of wages to a level seen before 2010.

In conclusion, I return to the basic premise of Labour’s argument. It is simply not acceptable or fair for millions of people to pay more in tax while millionaires pay less. Since 2010, tax rises and cuts to benefit have left average households worse off. Real-terms decreases in wages across this Parliament have made the financial plight of ordinary people across the UK tougher. People have become dependent on food banks as they have never been and there is rising homelessness in cities such as London. There is rising poverty—child poverty in particular—not only in my constituency, but up and down the country, but this Government still find the energy and will to reward the top 1% of earners while everyone else suffers.

The Government have pandered to the worst suggestions of their critics, namely that they are out of touch, have failed to spread any meaningful recovery to those who desperately need it and are out for the few and not for the many. For those reasons I support Labour’s proposals on the tax cut and support the new clause.

[Ian Swales (Redcar) (LD)]

It is a pleasure to follow the hon. Member for Bethnal Green and Bow (Rushanara Ali). I agree that we should be aiming for a tax system that is as fair as possible and accept that the timing of the top rate cut was not good for public relations or for feelings throughout the country. But let us examine the genesis of this situation.

In 2010, 6 April was an important day. It was the day that the top rate of tax was raised from 40p to 50p. It was also the day that Parliament was dissolved—the very last day that Labour Members sat on the Government Benches. They were sat on these Benches for one day with the top rate of tax at 50p. Clearly, as the right hon. Member for Wokingham (Mr Redwood) said, the rate was raised in the full knowledge that Labour was likely to lose the general election. It was the then Chancellor’s leaving present, which he knew would keep leading to headlines and would be the gift that kept on giving. Listening to the speeches made by Opposition Members today one would imagine that there had been a 50p tax rate throughout their time in government, and not simply on the last day on which they sat on the Government Benches.

[Frank Dobson]

Does the hon. Gentleman, as a Lib Dem, not recall that that date was significant in another way, as it was the day that the leader of the Liberal Democrats signed a pledge to get rid of tuition fees?

[Ian Swales]

Mr Deputy Speaker, I am sure you would call me out of order if I responded to that point.

Labour’s Chancellors were not slow to raise taxes—in fact, there is a long list of almost 100 taxes that they raised in 13 years—but strangely enough, they did not raise this one. Again, as the right hon. Member for Wokingham eloquently said, they knew that it was dubious that raising the top rate of income tax would lead to actual benefits. He mentioned the experiments of the 1980s in this country; François Hollande is conducting a live experiment right now across the channel and is getting very much the same results, with one prominent French citizen, Gérard Depardieu, moving all the way to Russia to avoid penal tax rates.

The hon. Member for Birmingham, Ladywood (Shabana Mahmood)talked about the need for analysis. I make two suggestions. First, I presume that during the 13 years of the previous Labour Government a great deal of analysis was carried out on whether raising the top rate was the right thing to do—as I said, they were not slow to look at new ways of raising money and clearly kept on rejecting it as an option. The Institute for Fiscal Studies has now studied Labour’s proposal to raise the top rate back to 50p and has said that it is of dubious benefit. In fact, I think the hon. Lady herself said that it could cost money and would not be drawn on whether that would make her change the policy.

We ought to take what the Labour party says with a pinch of salt. It cut taxes every single year for millionaires.

[David Wright]

The hon. Gentleman is making an interesting speech. Is he making the commitment today that the Liberal Democrats will not have this proposal in their manifesto for the next election?

[Ian Swales]

I am not sure which proposal the hon. Gentleman is referring to.

[David Wright]

The 50p tax rate.

[Ian Swales]

I am not committing anything for our next manifesto, just as the hon. Gentleman’s party is not as yet. Our manifesto is being discussed now.

[Ian Murray]

I will check Hansard to make sure that this is accurate, but I think the hon. Gentleman said that some of the figures were dubious. If he genuinely believes that, why does he not vote for the new clause so that we get figures that are not dubious? Perhaps we can then assess whether a 50p tax rate is correct. Indeed, while he is going on about tax rises, will he confirm to the House whether he thinks a VAT increase is a Tory tax bombshell?

[Ian Swales]

I do not see VAT mentioned in the new clause. I was pointing out that, as the hon. Gentleman’s own Front Benchers say, the analysis of the benefits of the policy comes out as plus or minus zero: it could have a large cost or be a significant benefit. If we are in that sort of ballpark, we are clearly not talking about huge measures that will cut the deficit.

Under this Government, the wealthy have been paying a lot more every year in income tax than they ever did in any year under Labour. They are paying more in many other ways as well. The Labour Government thought it was okay for the wealthy to pay £250,000 in pension contributions and get full tax relief; the coalition Government have reduced that to £40,000, making £95,000 a year of tax benefits that the Labour Government were happy to give but this Government are not. Capital gains tax was at the derisory level of 18%, and is now 28%. The level the Labour Government charged on capital gains was lower than the rate of income tax, so hedge fund managers could be paying a lower rate of tax than the people who cleaned their offices, a truly shameful record.

If anyone is lucky enough to be spending £1 million a year, they will be paying £25,000 more in VAT. To answer a point made by the hon. Member for Newcastle upon Tyne Central (Chi Onwurah) earlier, people on low pay spend very little on standard rate VAT items. Once again, the right hon. Member for Wokingham mentioned this: most of the day-to-day living costs of most people—housing, energy, food and many other costs—do not carry standard rate VAT, so the wealthy are paying more there.

The thresholds for inheritance tax were going up under Labour but have been frozen under this Government through the efforts of the Liberal Democrats. We know that the party with which we are in coalition would like to return the level to £1 million, as it campaigned on that during the last election and I believe it will do so again next time. We are pleased that the threshold for inheritance tax has been frozen throughout our time in Government, because we feel it is the right thing to do at this time. We also saw industrial-scale tax avoidance under the previous Government, and many cases now arriving in court go back to the days when they were in power. The idea that this Government are not taxing the wealthy does not stand up to examination.

[Mark Field]

Will the hon. Gentleman give way?

--- Later in debate ---

[Mark Field]

I am sure that the right hon. Member for Birkenhead (Mr Field) would agree.

The hon. Member for Redcar (Ian Swales) is making an important and courageous speech from the Liberal Democrat Benches. It is one that many of us on the Conservative Benches could have made, and I thank him for putting some of the issues that have been raised today into perspective. There has been a lot of outrage on the Opposition Benches but it is important that the history of precisely what went on during the previous Labour Government is put on the record.

[Ian Swales]

I thank the hon. Gentleman for that. I agree that it is important: the narrative that Labour taxes the rich until the pips squeak and that we do not does not stand up to examination.

[Sir Andrew Stunell (Hazel Grove) (LD)]

May I add some grist to my hon. Friend’s mill by asking whether he agrees that it is astonishing that during 13 years in government the Labour party never found the time to impose VAT on the purchase of private jets? The coalition Government have introduced that.

[Ian Swales]

My right hon. Friend’s remarks stand on the record. Perhaps what he has said can tell us something about the travel movements of a previous Business Secretary, whom I will come back to in a moment.

The new clause also refers to levels of bank bonuses. As I understand it, the Opposition want in future to tax bank bonuses at 100%, with 50% on the individual and 50% through the bank. What assessment have they done of what that policy will do to the level of bank bonuses? It seems like another example in which the headline comes first and the policy follows behind.

The Opposition had 13 years to deliver their vision for the country. If we look at all the various levels of tax that they presided over, they carried out the wish of the former Secretary of State for Business to whom I have just referred, the former right hon. Member for Hartlepool, who said that he was

“intensely relaxed about people getting filthy rich”.

--- Later in debate ---

[Ian Swales]

The right hon. Gentleman makes a fair point. Throughout the last Parliament, that fair share was deemed to be 40% on the top rate until the very last day. We should judge the Labour party on what it did, not on what it now says.

On the new clause, I am not sure that we state in Bills that there should be reports. It betrays a desperation that we should all reject.

[Several hon. Members]

rose—

--- Later in debate ---

[Mr Gauke]

It is striking that time and again senior figures in the Labour party went around describing this as a tax cut for hedge funds. It is to the credit of the hon. Member for Kilmarnock and Loudoun that she refused to repeat that accusation. Although she did not quite go as far as she might have done towards putting the record straight, at least she did not repeat the accusation despite being given multiple opportunities to do so. I do worry about the understanding of some issues within the Labour party. Just today, we have seen the example of the confusion about how many jobs have been created inside and outside London. I understand that the Leader of the Opposition is standing by his position this morning, although he did not quote that in his speech—but there we go. I am afraid that this is an example of somewhat shoddy thinking from the Opposition.

[Ian Swales]

On the same theme, did the Minister share my concern about the number of speeches made in Committee by Opposition Members that appeared to suggest that the benefits of the policy would accrue to the managers of the funds rather than the funds themselves?

[Mr Gauke]

Yes, I did. There was a complete absence of any understanding of tax incidence and of who ultimately bears a tax, but that, I am afraid, is all too typical.

The removal of schedule 19 is a welcome measure that will ensure that we have a competitive investment funds management set-up in the UK. It will help savers and those investing in their pensions and remove a distortive and uncompetitive tax. It is a great pity, although not a great surprise, that this further measure to improve our competitiveness and to help savers is opposed by the Opposition, and I certainly urge my colleagues to vote against amendment 67, assuming that it is pressed to a vote.

Question put and agreed to.

New clause 7 accordingly read a Second time, and added to the Bill.

Clause 107

Abolition of SDRT on certain dealings in collective investment schemes

Amendment proposed: 67, page 90, line 33, at end insert—

‘(5A) The Chancellor of the Exchequer shall, within six months of this Act receiving Royal Assent, publish and lay before the House of Commons a report setting out the impact of changes made to Schedule 19 of the Finance Act 1999 by this section.

(5B) The report referred to in subsection (5A) must in particular consider—

(a) the impact on tax revenues;

(b) the expected beneficiaries; and

(c) a distributional analysis of the beneficiaries.”—(Cathy Jamieson.)

Question put, That the amendment be made.

--- Later in debate ---

[Ian Swales]

I certainly accept the Minister’s point about the timing for reporting back on the scheme. However, we are starting to see examples of the very few companies that are taking it up, and they seem to be focused on high earners in industries such as private equity, who arguably are not very worried about their employee rights anyway. For example, eight managers at European Capital each received the maximum £50,000 recently when they sold one of their businesses. Can the Minister say what kinds of companies are registering and how the scheme is working so far?

[Mr Gauke]

We have been consistent throughout. No one argues that the arrangement is right for everybody; it will be suitable only in particular circumstances. It is more likely to be relevant for fast-growing areas involving a relatively small number of highly valued individuals who benefit from arrangements that incentivise performance but who are not necessarily looking for extensive employment rights.

It has been said before in the context of this debate that there are employees who benefit in full from employment rights; there are the self-employed, who have essentially no rights in this area; and there is a gap in the middle. Part of the thinking behind the arrangement is about ensuring that something appropriate falls in between—something useful for fast-growing small and medium-sized companies that want to create a flexible work force.

--- Later in debate ---

[Catherine McKinnell]

I, too, took great interest in what the Minister said, because he seemed to disown the figures that were published by the Office for Budget Responsibility on this policy, as though they were in some unknown ether in the future. He appeared to be saying, “It’s nothing to do with me, guv.” The figures that the OBR predicts are very clear. It will cost £1 billion and a quarter of that can be attributed to tax planning and, if the concerns of the hon. Member for Redcar (Ian Swales) are borne out, tax avoidance.

[Ian Swales]

I am sorry to have missed some of the erudite contributions to this debate, especially that of the hon. Member for Islwyn (Chris Evans), whom I always enjoy hearing. I do not know whether these points have been mentioned. Is the hon. Lady concerned about the effect on competition between businesses if one business uses this process and another does not? Secondly, is she aware that the Office for Budget Responsibility thinks that existing share schemes may be shoehorned into the new process, meaning that people who are already in share schemes and who have employee rights might suddenly find themselves forced into the new arrangements?

[Catherine McKinnell]

I share all those concerns and many more. Ultimately, it is for the Government to take on board what is being said to them so clearly, but they seem to be ignoring it. The hon. Gentleman will know that he has the opportunity to vote with the Opposition on new clause 11 and to get the Government to sit up and listen to the concerns that are being expressed. Perhaps the data will show that the scheme has had a fantastic take-up, that it is entirely fair and that it has created many new jobs. Perhaps it is the boost for growth and job creation that the Chancellor proclaimed it would be. Alternatively, they might show that it is just a tax avoidance opportunity that is unfair to the employees who are forced into it against their will.

The Conservative, Baroness Wheatcroft, said:

“Let us imagine a group of employees who have sold their rights—for a mess of pottage, as we have heard—and another group who have not. The company falls on hard times and has to declare redundancies. Who will be first in the line for redundancy? I would hazard a guess that it will be those who have shown the most commitment to the business by becoming employee shareholders under the new scheme. That is the sort of perverse effect that we are likely to see if the clause goes through.”—[Official Report, House of Lords, 20 March 2013; Vol. 744, c. 618.]

That is the sort of perverse effect that we want the Government to take action on by producing the data that will enable Members of this House to know the true impact of this employee shares for rights scheme.

I urge all hon. Members to vote for new clause 11.

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

--- Later in debate ---

[Shabana Mahmood]

My hon. Friend makes an excellent point. He is of course right that this is a huge sum of money and that people are rightly concerned that £35 billion-worth of tax is potentially going uncollected in our country.

[Ian Swales]

I am certainly no defender of the tax gap, and I am on record as having challenged the whole system of tax avoidance many times. However, does the hon. Lady know what the tax gap was in 2010 when the previous Government left office?

[Shabana Mahmood]

The truth is that any tax gap, however big or small, is unacceptable to the public, and strong action should always be taken to tackle it. I was about to say that I am grateful to the hon. Gentleman and that it was £32 billion. As I say, that is too high, and it has gone up to £35 billion under this Government. These large sums of money shake the public’s confidence when it comes to believing that the Government are doing everything they can to tackle tax avoidance.

--- Later in debate ---

[Shabana Mahmood]

No, I am going to make some more progress.

Tax avoidance and how to tackle it effectively and thereby close the tax gap remains a real problem for this Government, hence our new clause. We need more action from this Government, and where they fail the next Labour Government will step in. We are pushing the Government for greater action in three specific areas. Let me take each in turn.

[Ian Swales]

The hon. Lady talks about the next Labour Government. Does she wish to apologise for the slashing of the number of compliance and investigation staff by the previous Labour Government, to the point where this Government have had to add large numbers of people to carry out the work she so much wants?

[Shabana Mahmood]

Given the cuts at HMRC, this Government’s record on HMRC resources, which is a topic I regularly debate with the Minister, is not one for Members on the Government Benches to show off about.

First, let me take the issue of the quoted eurobonds exemption. That was originally implemented to make it easier for companies to obtain finance from the international bond markets by excluding corporate debt listed on recognised stock exchanges from UK withholding tax. Making it easier for companies to obtain finance on the international bond markets is a legitimate objective that we support. However, as covered in a spate of high-profile media stories last year, the exemption can also be used for tax avoidance purposes, allowing companies to shift profits out of the UK in the form of interest payments, without making any tax payment. As HMRC has noted:

“In recent years a number of groups have issued Eurobonds between companies in the same group, and listed them on stock exchanges in territories such as the Channel Islands and Cayman Islands, where they are not actually traded. In effect, the conversion of existing inter-company debt into quoted Eurobonds enables a company to make gross payments of interest out of the UK to a fellow group company, where otherwise deduction of tax would be required.”

The Government consulted on the issue in 2012, with HMRC proposing to amend the eurobond exemption so it would not apply where the eurobond is issued to a fellow group company and listed on a stock exchange on which there is no substantial or regular trading in the eurobond. HMRC stated:

“The effect of the amended rule would be to leave untouched the quoted Eurobond exemption for the overwhelming majority of Eurobond issues. It would deny the exemption only in the case of intra-group Eurobond issues that appear to be undertaken for the purpose of circumventing the requirement to deduct tax at source rather than being directed at the raising of third party finance.”

Despite HMRC estimating that the proposed restriction could have an extra impact of £200 million a year, in their response, the Government stated that they did not intend to proceed with it. Why not? Well, the Government said they made that decision in the “light of the responses” they received around a number of technical issues and after respondents questioned the positive Exchequer effect set out in the impact assessment.

That is simply not good enough. We say that abuse of the exemption can be shut down and must be shut down. Our proposals will explore removing the exemption where bonds are issued to connected persons, such as where a subsidiary issues a bond to a corporate parent or its private equity fund owners. To minimise disruption to private equity funds using the mechanism to simplify investor rebate claims under double taxation treaties, we would explore either offering an exemption for private equity partnerships where all, or the vast majority of, the ultimate beneficiaries would qualify for double taxation relief, or streamlining the withholding tax rebate process in consultation with the industry. So there is a mechanism to shut down the abuse of the exemption. It could and should have been taken up by the Government.

The estimates of the Exchequer impact of closing the loophole range from £1 billion to the Government’s estimate of about £200 million, with many more commentators saying that they would place it at about £500 million. In a letter to me dated 4 March 2014, the Minister said:

“Some newspapers quoted a figure of £500m for the tax at risk. This appears to be based on the unrealistic assumption that the interest paid out of the UK had not been restricted for tax purposes and that the beneficial recipient would not be entitled to gross payment. You will appreciate that I cannot discuss individual cases, but HMRC has confirmed to me that computational adjustments are frequently made. Consequently, the £500m sum is very wide of the mark. Any change here will not raise any significant yield.”

I was interested in that response, for which I was grateful and which I received after I had tabled a number of questions about the quoted eurobond exemption, because it displayed a concerning lack of clarity. The Minister says that the numbers quoted are “wide of the mark” but he does not say where the mark actually is. That is surprising, given that HRMC and the Minister have examined this in detail and have consulted on it, and given that they tell us that “computational adjustments” are regularly made for it. Despite that, still no figure has been given.

--- Later in debate ---

[Shabana Mahmood]

I would be happy to have a long conversation with the hon. Gentleman about all the different experts, but let me just say that our experts were drawn from across the business and legal worlds. They gave advice and assisted us in thinking through many of the issues related to the abuse of the quoted eurobonds exemption. I will not take this opportunity to put that advice on the record, because I have not sought the permission of those experts to make public some of the assistance and advice that they have given to us. However, our paper is thorough on the issue of how we would seek to close down abuse of the exemption. That tells the House that we have considered these issues deeply, and have thought through all of the problems that might arise from the different attempts to close down the exemption.

I was talking about yield, and how far a potential yield should dictate the Government’s policy in deciding whether to close down an abuse of the system. I referred to the business premises renovation allowance in clause 61. The Government have taken action to close down some of the abuse associated with that allowance, but the impact on the Exchequer was, we were told, negligible. So we see the Government proactively closing down a loophole in which the Exchequer impact is expected to be minimal, but where a loophole exists that is estimated to cost the Exchequer upwards of £200 million a year, they do nothing. How can they justify their decision not to take action to prevent the abusive use of the eurobonds exemption when there are hundreds of millions of pounds at stake?

The potential complexity of the change that would be required is no justification for the failure to act. It has not stopped this Government on other measures, including on the business premises renovation allowance. There seems to be no reason—not money, complexity or anything else—that could stop the Government from acting other than intense lobbying from the affected parties seeking to protect their own interests.

The Government have failed to act, but our new clause gives them the opportunity to do so. If they do not act, the next Labour Government will.

[Ian Swales]

rose—

[Shabana Mahmood]

I want to make some more progress.

Secondly, we want to push the Government to take action on disguised employment in the construction industry. Employers falsely declaring their workers to be self-employed is a long-standing and well-documented issue in the sector. Although there is of course some necessary and genuine self-employment in the sector, employers are currently able to declare someone to be self-employed when they exhibit all of the characteristics of an employee.

That results in three problems. The first is a cost to the Exchequer. The Treasury has estimated that that entailed a static cost of £350 million in 2009 and the House of Commons Library recently produced an estimate of about £500 million. The second problem is that those falsely classified as self-employed are denied their employment rights. That means that workers might work for the same company for several years, effectively as an employee, while not receiving any of the resulting employment rights, such as sick pay, holiday pay and maternity and paternity leave.

--- Later in debate ---

[Michael Connarty (Linlithgow and East Falkirk) (Lab)]

On the question of tax avoidance, if the Government do not design the tax system properly and people who should pay tax can avoid it if they do so legally, that might be correct legally, but it is not necessarily correct morally. Having said that, if the Government design the tax system in that way and someone takes advantage of it, particularly an entrepreneur, who might take the money they save in tax and reinvest it in further jobs and enterprises, that person can defend that on the basis that if the Government were really skilful they would not be able to avoid it. On the question of tax evasion, people should go to prison if they evade tax. It is very simple in my view.

I have written to the Minister on behalf of a constituent who is an entrepreneur. He is about to retire and will probably dispose of his company in the process, because he is not talking about another income stream coming from continuing contact with the company. He accuses the Government of bringing in retrospective legislation in this Finance Bill, because from clause 192—I have read this part of the Bill right the way through to chapter 3, which is on accelerated payments—it is quite clear that the Government intend these retrospective investigations to go back to 2004. It gives HMRC power to declare in the arrangements for follower notices the ability to claim the tax based on other cases that might be similar to the case it is investigating or discussing. If it does so, it can claim the payment from the individual based on that follower notice.

[Ian Swales]

On a quick point of clarification, the retrospective application that most people are concerned about is that which was applied in the Finance Act 2008, which was enacted by the previous Government.

[Michael Connarty]

I understand that the advice given to my constituent, who is a business person, came from one of the best financial advisers in Scotland. In fact, it was the financial adviser who wrote to Equitable Life long before anyone realised that it was defrauding people by enhancing assets falsely, and who was the first person called to give evidence to the Treasury Committee. They have advised my constituent that the problem is, in fact, in this Bill and the performance under its terms. It might be based on a previous ability to do so, but the concept of follower notices and accelerated payment notices are, in fact, in this Bill and did not exist before.

The question is whether the provision is retrospective, because I believe that the Minister is on record—I think that it might be in writing—as saying that he does not agree with retrospective tax powers. I also understand that the Treasury Committee confirmed in a recent report that this is indeed retrospective and the Government are yet to explain what is wholly exceptional about the performance they have put in this Bill—the follower notices and the accelerated payment notices—that will justify the use of retrospective claims for taxation.

It seems to me that when someone is doing their tax planning, particularly when coming to that later period in life—quite a few Members of this House are in that age group—they look at the law at the time, take tax advice from advisers, make arrangements and do their tax planning accordingly, and that is what they think will be their future income. Those people tend not to be receiving a pension paid by someone else; they are earning their pension by their own efforts and enterprises. If that advice is taken and their tax planning goes ahead, I want the Government to assure me that they will not then be told after this Bill is passed, “You made that arrangement in 2000, but we have decided that from 2004 that that tax planning, although legal then, is not legal, so we want you to pay a substantial amount of tax back that was not in the tax arrangements then.” I think that it is only just that the Government give people an assurance that they will not come seeking to turn what was a legal tax arrangement into an illegal one and cost them a substantial amount of money.