Diverted Profits Tax

Ian Swales Excerpts

Wednesday 7th January 2015 Westminster Hall

[Ian Swales (Redcar) (LD)]

It is a pleasure to serve under your chairmanship, Mr Turner. I, too, congratulate the hon. Member for Amber Valley (Nigel Mills) on securing the debate. His initiative is excellent, given the enormity of what is proposed.

There is something of a crisis in corporation tax: globalisation, the European Union and the internet have all given many more opportunities to move tax or profits around. In the days since I was a global finance director in 1996, we have seen a lot more predatory activity by advisers and companies. They seem to be far more shameless about carrying out transactions without a commercial basis. With my training, I would have said that that was already a problem, even without any new legislation, but companies seem quite happy to do such transactions, to the extent that a year or so ago the chief executive of WPP could describe the amount of tax paid as “a question of judgment”, which tells us a lot about the amount of flexibility that he could see in the system.

Moreover, the chief executive of Google famously boasted about avoiding £2 billion in tax in a single year. He seemed to have no concept that that meant £2 billion in cuts to public services in the all countries in which his company operates, or the same amount more in tax that other companies and individuals in those countries would have to pay. The climate seems to be changing, although the Prime Minister’s business advisory group still includes that chief executive. I wonder whether he had any input into the new policy and what he thinks of it.

After the measure was announced, Newsweek commented on 26 December:

“The British government, after a search, says it knows how to tax profits Google earns in the United Kingdom. Its solution is simple and elegant, and it probably won’t change a damn thing.”

That view is perhaps overly cynical, but it backs up a point made by several Members: the expectation is that companies will take other measures rather than lie down and pay the tax. That is a huge issue.

The hon. Member for Amber Valley was right to mention the question of how on earth the tax will be calculated. City experts are already saying that the calculations will lead to a “legal quagmire”—that is one expression I have seen used. In other words, when HMRC comes up with an assessment the lawyers will probably start work. I wonder whether HMRC has budgeted sufficiently for the resources that it will need to make the tax stick. It could be involved in lengthy legal cases with expensive lawyers paid by large companies.

That leads us to the main question concerning this tax. When I was trained as an accountant, we were told that the one principle a tax system needs is certainty. In other words, it should be clear what a company is doing and what the tax on that will be; the company can then pay that tax. Certainty is one of the functions of a good tax system, but with the diverted profits tax we are straying into an area of high uncertainty about how the tax will be assessed and paid. The hon. Gentleman made an excellent point about our ability to collect the money: by definition, it could be all over the place and not in the UK. That leads us to the question of the confidence the Minister has in our ability to collect the money—I am interested to hear her comments on that.

[David Mowat]

The hon. Gentleman has made an interesting point about certainty and also about the difficulties that globalisation and the internet have caused for gathering corporation tax. Is there a case for the international community to give up on corporation tax and instead have higher taxes on sales and, if necessary, dividends, so that the tax is still raised in the end but we do not have a continual process of chasing money across international boundaries, which, for the reasons he has given, is time consuming and perhaps counter-productive?

[Ian Swales]

I take the hon. Gentleman’s point on board. I know that some commentators believe the right way to go is to scrap the incredibly complex system that we have. Although that might be where we end up, I would like to see country-by-country reporting introduced first, so that we know what activity companies are carrying out in each country, and where they are trading and are declaring their profits will be transparent to the world at large. That would help tax authorities; also, the problems companies would then have with reputation management would cause quite a shift. I would like to see that country-by-country reporting first, but perhaps we will end up in the position that he has suggested.

The estimate is that the tax will raise £1 billion over five years. That is a very small amount given the scale of the issue. One commentator has suggested that Google alone could be assessed as owing around half that figure. The Financial Times has found that in 2012 seven US technology companies paid only £54 million in tax on UK sales of $15 billion. I am aware that corporation tax is levied not on sales but on profits, but the companies we are talking about typically make 20% profit or more on sales, so we could quickly come up with a large number there. Will the Minister tell us how the assessment of the amount the tax will collect was made? What assumptions sit behind it? The figure seems small given all the relevant issues, which we are well aware of.

The hon. Member for Amber Valley rightly mentioned EU law. I will not repeat what he said but there is clearly the potential to challenge the tax through the EU. When one talks to global finance directors, there is no doubt that financing structures and interest payments are the tax avoidance measure of choice—they are how the largest diversion of profits occurs. Will the Minister explain why offshore finance centres and excessive foreign interest payments have been specifically excluded from the diverted profits tax? I welcome the moves that have been made, but a large area has not been addressed by the tax.

I will mention a few other aspects of profit diversion. The Minister may tell us that they are included, but my guess is that most are not. There are well documented loopholes used by banks for tax arbitrage between countries, particularly between the UK and the US, because different instruments are taxed differently in the two countries and by shuffling money backwards and forwards it is possible to create beneficial tax arrangements. Will the legislation address those loopholes? Does the legislation deal with hybrid entities, for which there are similar opportunities because of the different taxation of legal structures between different countries? They are another method that the financial services sector in particular uses to shift profits.

Some of the issues connected to Luxembourg have been mentioned already, but will the Minister address the issue of the wholesale tax avoidance and profit diversion that, for example, sees Vodafone holding five times as much capital in Luxembourg as the GDP of Luxembourg, although it does no trading there? That kind of thing enrages the public, and it is high time it was addressed. When will she get the EU to deal with the preposterous activity going on in Luxembourg behind its so-called headline corporation tax rate of 29%?

The Channel Islands have already been mentioned. The particular point I want to raise is that the majority of contracts for UK private finance initiatives are now financed from those islands. That makes a mockery of the Green Book assumptions about PFI tax recovery; it is assumed that a very high figure—I think it is 6%—will come back to the Treasury in tax receipts, but that assumption completely ignores the fact that PFI deals are routinely moved to the Channel Islands, including those for 50% of the schools in my constituency, which are apparently owned in Jersey.

Those are just a few of the arrangements that may or not be covered by the diverted profit tax legislation. I suspect most are not, but they illustrate the fact that there is a lot more yet to do.

Diverted profit arrangements do not simply cost tax or allow profit diversion; they incentivise offshore acquisition and ownership of UK businesses. These days, highly profitable UK businesses have to create some offshore financing or else somebody else will do it for them, as predatory takeover activity in the UK is often predicated on offshore finance structures designed to move taxable profits out of the country. A good example would be Betfair. Last year, a company was looking to take it over in an aggressive takeover. I wondered what the company was going to add in terms of betting technology or new IT, but the clue was the name: “So-and-so Partners, London and Luxembourg”. The factor the takeover was going to add was the shifting of Betfair’s profits away from the hands of the Treasury. In the end, that takeover did not go through, but the diversion of profits affects business ownership and competition in the UK.

I mentioned the amount that the tax is expected to raise. I think the figure is low because of what are traditionally called behavioural effects—in other words, what companies may do as a result of the tax—and so I am interested to hear more from the Minister on what the Treasury thinks will happen, as opposed to the idea that companies will simply sit there and pay the tax. What kind of measures does the Treasury consider companies might take?

How will the success of the tax ultimately be measured? As the hon. Member for Amber Valley rightly said, it could well be that the real success of the legislation will appear not in diverted profit tax receipts but as higher corporation tax receipts. Does the Treasury have any way of judging how the measures have played out?

I welcome what is happening and hope that the Government will do more. I have mentioned country by country reporting, and that has begun to happen in the financial services sector. It is driven partly by other countries’ legislation. I hope it will expand through the work of the OECD and pressure from our Government, and in the operation of companies around the world will become more transparent. We should push for that.

John Cridland, the head of the CBI, said about a year ago that he was confused and did not know what the Government wanted on tax. I do not think that it is confusing at all. We want companies to account for their UK activities in the UK and pay tax on the profits that they earn in the UK. It could not be any simpler. I addressed the CBI tax forum two or three months ago and made that point. I said bluntly that if its companies were doing otherwise, we would steadily be coming after them.

The Government have a record of at least moving in the right direction. I was a member of the Public Accounts Committee for more than four years and took part in scrutiny of large companies and tax advisors; judging by the culture and attitudes out there, we still have a long way to go. I vividly remember asking a tax advisor how many of the schemes that he had advised individuals and companies to adopt in the previous few years had been made illegal; he cheerfully said it was all of them. It is good news that HMRC keeps pinning those things down, but the fact is that there is an industry out there constantly looking for new ways to avoid the taxes that we try to levy. I hope that the Treasury will make its proposals work, and will continue to recognise that there is still much more to do.

--- Later in debate ---

[Shabana Mahmood]

I am grateful to the hon. Gentleman for giving me the opportunity to highlight Labour policy in this debate. A few months ago, we published a paper on corporate taxation that included a section on the Crown dependencies and overseas territories. We have made the commitment that, if we win the general election, we will require the Crown dependencies and overseas territories to publish a public register of beneficial ownership. That is the key demand of all in the wider tax justice and fairness community, and it would shine a light on the true owners of businesses based in the Crown dependencies and overseas territories. The Government have spoken a great deal about doing something similar, but I think it is fair to say, without being party political, that progress has stalled. We have gone further by saying that we will ensure that that process happens. I have already taken the conversation forward with Ministers and other officials from the Crown dependencies and overseas territories.

[Ian Swales]

The hon. Lady makes an interesting point. Recently, I met officials from Jersey and Guernsey, and although transparency might be part of the issue, a lot of the arrangements that shift profit out of the UK are totally transparent. The issue is not transparency, but the arrangements themselves and, for example, the allowance of huge interest payments. I know that the debate is not about Labour party policy, but since we have strayed into that area, would her party do anything about such arrangements? A lot of them occurred under the Labour Government’s watch.

[Shabana Mahmood]

Of course we will look at particular arrangements, but transparency is the starting point. The Prime Minister famously said that

“sunlight is the best disinfectant”.

There has already been some opposition to our proposals, which suggests that there is real gain to be made from a much more transparent system for the Crown dependencies and overseas territories. That will be our start point, but we will continue to look at the other issues mentioned by the hon. Gentleman.

While we are on the subject, I would be interested to hear from the Minister about the Government’s approach to tax transparency policy with regard to the diverted profits tax. She will know that, in its paper on corporate taxation published a few months ago, the Labour party committed to going a little further on the broader issue of tax transparency and country-by-country reporting of business profits than the Government have done so far. We will support multilateral action, because we think that that is the right start point, but if multilateral agreement is not reached, we are prepared to take unilateral action on public tax transparency.

The Government have fully rejected that approach, saying that it will create too large a burden on business and that, were the UK to take unilateral action on tax transparency and country-by-country reporting, it would negatively affect the UK’s tax competitiveness. The Minister is well aware that both those arguments apply equally to unilateral action on the diverted profits tax. Will she explain why the Government have used those arguments to block potential unilateral action on country-by-country reporting in the form of a public register, but are dismissive of the same concerns when they are raised by others regarding unilateral action on the diverted profits tax?

It is important to understand why the Government think that those arguments do not apply, because although we may disagree with the criticisms made by business, in particular in relation to the diverted profits tax, it is important to understand the values and philosophical thinking behind the Government’s approach, because that will give us an indication of where policy is likely to go. I would appreciate the Minister’s detailed comments on that.

Other hon. Members expressed concerns about the potential for legal challenge. The Minister is aware that there is substantial scope for discretion in the application of the new rules. Although I was not a tax specialist, as a former lawyer, whenever I see the word “discretion” I know that for lawyers it basically means that there is lots of money to be made—a point also made by other hon. Members. What assessment have the Government made of the possibility of challenges within both EU law and the terms of the UK’s various double taxation treaties? My working assumption was that conversations have already been had, particularly in relation to the double taxation treaties. Nevertheless, it would be helpful if the Minister could update us and perhaps also give further details on HMRC resourcing, particularly for known areas of risk of legal challenge.

The Exchequer impact was also mentioned. Given that the draft legislation casts a broader net than was anticipated in the lead-up to the autumn statement, it is unclear why the revenue associated with the measure is quite so low, comparatively speaking. For example, we know that Google and Amazon alone generate somewhere in the region of £7.5 billion of UK revenue between them. A £360 million tax boost at a corporation tax rate of 20% would imply taxable profits of £1.8 billion, which an aggressive interpretation of the rules could attribute to those two companies alone. The projected yield therefore implies some combination of caution and, potentially, significant ongoing royalty deductions from UK corporation tax, behavioural change, and the anticipation of legal challenges. Again, it would be helpful if the Minister could explain exactly what the Government had in mind when modelling the Exchequer impact of the changes.

Avoidance is a continuing issue. Whenever new rules are introduced, one of the first things we must all look for is the potential for avoidance opportunities. One method for avoiding the rules might be the relocation of businesses where the business model does not require a physical footprint in the UK. Have the Government done any work in consideration of such issues? The new rules read much more like a TAAR—targeted anti-avoidance rule. In the past year, I have had a number of discussions in Committee with the Minister’s colleague, the Financial Secretary to the Treasury, the hon. Member for South West Hertfordshire (Mr Gauke), about the use of targeted anti-avoidance rules to support the tax avoidance measures that the Government have introduced, and I have wondered whether we might also end up discussing a TAAR for this particular TAAR. Again, it would be helpful if the Minister could explain where the Government are coming from on that.

Has the Treasury done any modelling to take account of copycat or so-called retaliatory legislation from other countries? Could the UK ultimately be a net loser? We have some intellectual property-heavy sectors in our country, particularly pharmaceuticals and media. If other countries introduce similar rules, that would affect the UK, potentially making us a net loser. I am sure that the Treasury has done some work on such issues; we should know more about them in order to illuminate the debate.

Finally, where does the Minister think the new measures leave the general anti-abuse rule—GAAR—for which the Government legislated earlier in this Parliament? Tax lawyers in particular have commented that we are seeing much more complicated new legislation, rather than better use of existing legislation, including the GAAR and, potentially, transfer pricing rules and other elements of the tax system that people feel are currently not necessarily enforced. The combination of those two measures could have dealt with many of the issues that have been raised. Instead, the Government have decided to introduce an entirely new tax. Where do they think that that leaves the wider legislative framework?

The Opposition’s general approach is supportive, and we will seek to be constructive as we debate these issues further ahead of the Finance Bill 2015.

[The Economic Secretary to the Treasury (Andrea Leadsom)]

It is a pleasure to serve under your chairmanship, Mr Turner, and I wish you a happy new year. I congratulate my hon. Friend the Member for Amber Valley (Nigel Mills) on securing this debate on such an important subject. As a number of colleagues have pointed out, the new measure is designed to ensure that Britain is a very competitive place—in fact, our ambition is to be the best place in the world to start up and run a business. If a company comes to this country, we will charge it low tax rates, but it will be expected to pay. That is what lies behind the measure: to ensure that companies pay that fair rate of tax.

The Government are working to create the most competitive tax system in the G20—a simple, competitive and fair tax system that will support economic growth and investment. However, we then expect companies operating in the UK to pay these fair and competitive taxes, so we are taking action both domestically and internationally. It is not one or the other—one does not rule out the other, as the hon. Member for Birmingham, Ladywood (Shabana Mahmood) suggested it may. We are trying to address concerns about some businesses paying little or no tax on profits made in the UK.

When this Government came to power, Britain had one of the least competitive business tax regimes in Europe. Since 2010, the Government have introduced a series of tax reforms to boost competiveness, such as the patent box, increasing the generosity of research and development reliefs, modernising the UK’s controlled foreign companies regime, and cutting corporation tax from 28% to 21%—next year, it will fall to 20%, the lowest rate in the G20.

The corporation tax reforms were a central plank of our economic strategy, and that strategy is working: growth, jobs and investment are all moving in the right direction. An increasing number of multinational businesses are locating activities in the UK, including companies such as Brit Insurance and Hitachi Rail Europe. The UK is one of the most competitive and attractive countries when it comes to deciding where to base a business.

It is clear that the tax reforms we have made since 2010 are supporting the economic recovery, and that our plan to cut corporation tax again to 20% will lead to more jobs and investment in the UK. Nine out of 10 UK businesses say the corporation tax rate cuts delivered since 2010 have been good for UK competitiveness.

However, as all colleagues have pointed out, there are real public concerns about unfairness in the system, whereby some companies, particularly large multinationals, are seen to be aggressively avoiding tax in the UK. It is vital that the public have confidence in the tax system, and that the tax rules treat both companies and individuals fairly and consistently, without leaving them scope to avoid their obligations. As we seek to return the public finances to balance and reduce the deficit, it is also important to make sure that we collect all the tax that is due. For those reasons, we are taking action, both domestically and internationally, to reform the tax rules and tackle corporation tax avoidance.

The hon. Member for Birmingham, Ladywood asked whether we are therefore giving up on the international tax framework, and of course, as she will know, that is not the case. The current international tax rules were first developed in the 1920s and desperately need reforming, so that they continue to support free trade and ensure a level playing field for businesses, but also to make sure that they address weaknesses such as companies playing different regimes off against each other to avoid paying tax on their profits anywhere at all.

The UK has taken a lead on the international stage to reform these rules and is committed to multilateral action through the G20 and the OECD to tackle the issue of base erosion and profit shifting—known as BEPS. At their summit in St Petersburg last year, the G20 leaders fully endorsed the ambitious and comprehensive BEPS action plan set out over 2014 and 2015. The individual action points are being taken forward by various OECD working parties.

The OECD BEPS project is reviewing the international tax rules to find out where they are not fit for purpose in today’s modern globalised economy. Over 40 countries are collaborating to take forward the action plan: a comprehensive two-year strategy to tackle international tax avoidance.

[Ian Swales]

We constantly hear about the G20 and the OECD, but the Netherlands, for example, is not even a member of the G20. Is the Minister concerned that all this work is going to be focused on certain countries, but that will, in itself, just lead to even more activity in countries that are not party to this process?

--- Later in debate ---

[Andrea Leadsom]

I am grateful to all hon. Members for the points they are making about other tax jurisdictions. What the UK can do is lead the international effort and focus on what we can do to ensure that the UK’s tax base is not eroded. Therefore, although these other points are extremely important, hon. Members will realise that I cannot influence directly the tax laws that Luxembourg undertakes for itself, other than through the contribution the Government make to the international effort to put pressure on different jurisdictions.

The Chancellor announced, in the autumn statement 2014, UK action on two of the internationally agreed 2014 outputs of the BEPS project. I know that the hon. Member for Redcar supports the UK’s introducing legislation to implement the G20-OECD agreed model for country-by-country reporting, which will require multinational companies to provide tax authorities with high-level information on profit, corporation tax paid and certain indicators of economic activity for risk assessment. Draft legislation for the Finance Bill 2015 was published on 10 December 2014, with a tax information and impact note and an explanatory note.

Furthermore, a consultation document on the UK plans for implementing the G20-OECD agreed rules for neutralising hybrid mismatch arrangements—another point raised by the hon. Gentleman—was published at the autumn statement. The new rules will tackle a tax avoidance technique used by multinationals to exploit differences between countries’ tax rules to avoid paying tax in either country, or to obtain more tax relief against profits than they are entitled to.

However, the Government have gone further still. The hon. Member for Birmingham, Ladywood asked whether that was instead of BEPS or because we feel that BEPS will not work, but no, not at all—this is in addition. The Government have gone further to tackle tax avoidance by multinational companies operating here in the UK and to strengthen our defences against the erosion of the UK tax base. That is entirely complementary to the BEPS process. Where companies in the UK are going to extraordinary lengths to avoid paying their fair share of tax, we will act to prevent that. That is why the Government have introduced the new diverted profits tax—to counter the use of aggressive tax planning by large multinationals to avoid paying tax in the UK on profits that have been generated from economic activity here in the UK.

The diverted profits tax will be applied using a rate of 25% from 1 April 2015. The measure is targeted at contrived arrangements used to shift profits away from the UK in a manner that ensures they go untaxed or largely untaxed. The measure is designed to counter the erosion of the UK tax base as a result of complex structures that circumvent the international tax rules on permanent establishment and transfer pricing.

For example, some multinationals have gone for aggressive tax planning that involves quite complicated arrangements, such as the so-called “double Irish”—a point raised by the hon. Member for Strangford (Jim Shannon) and my hon. Friend the Member for Amber Valley—using group companies in other countries as conduits to route expenditure to tax havens so that profits from UK activity goes untaxed.

Specifically, the diverted profits tax applies in two situations. The first is where a foreign company carries out activities in the UK in connection with the supply of goods or services to UK customers in such a way that it avoids creating a permanent establishment, and the main purpose of that arrangement is to avoid UK tax, or a tax mismatch is secured such that the total tax derived from UK activities is significantly reduced. The second situation is where a UK company, or a foreign company with a UK permanent establishment, creates a tax mismatch by using transactions or entities that lack economic substance.

If a multinational company is found to be using those contrived arrangements to avoid tax in the UK, HMRC will issue a notice that requires the diverted profits tax to be paid up front. The legislation provides for a review period of up to 12 months, within which the multinational company will have the opportunity, among other things, to demonstrate that it was not liable for the charge or to provide information to HMRC to show that the level of disallowance of intra-group expenditure in computing the charge is wrong on normal transfer pricing principles. The measure is designed to complement our transfer pricing arrangements.

[Ian Swales]

On the second case the Minister mentions, she can be interpreted as talking about artificial financing structures—for example, moving money to Luxembourg and then loaning it back to the UK—but the briefing note says that the legislation specifically excludes such arrangements. Can she confirm that?

[Andrea Leadsom]

I think I have been quite clear about the purpose of the legislation. I am not aware of the briefing note to which the hon. Gentleman refers. I will address the point again in responses to questions, so perhaps we can deal with it then.

After the 12-month review period, if the charge has not been withdrawn, the multinational company will have the right to appeal the charge at a tax tribunal on any appropriate grounds.

There are some specific exemptions from the tax. A number of hon. Members asked who was exempted. Those will include small and medium-sized enterprises, companies with limited UK sales and the situation where arrangements give rise only to loan relationships. I will come on to that in more detail at the end of my responses to questions. The draft legislation was published on 10 December and will come into effect from 1 April. Comments from industry are of course welcome as we finalise the rules to ensure that they are clear and targeted.

As I said, the UK is fully engaged in the work to reform the international tax framework through the OECD-G20 BEPS project. The introduction of the diverted profits tax is entirely consistent with those principles and complements the ongoing international efforts in the BEPS project, which is looking to align taxing rights with economic activity.

A number of hon. Members questioned the yield that is expected or forecast from the diverted profits tax. The Office for Budget Responsibility has certified the central estimate of tax yield to be £1.35 billion over the next five years to 2019-20. That will contribute to the £31 billion that HMRC has already secured from tackling tax avoidance and evasion by large businesses since April 2010.

Let me answer some specific questions. My hon. Friend the Member for Amber Valley asked whether this measure was in some way overriding UK tax treaties. I can reassure him that that is not the case. The scope of the UK’s tax treaties is limited under UK law to income tax, capital gains tax and corporation tax. The diverted profits tax is therefore not covered by those treaties, so, as a formal matter, there is no treaty override; and in fact the OECD, in the commentary on its model tax treaty, provides that states can deny the benefits of a tax treaty where arrangements have a main purpose of securing more favourable tax treatment in circumstances contrary to the object and purpose of that treaty.

My hon. Friend also asked whether the measure was compatible with EU law—he did so rather reluctantly, and I would be reluctant, too, on the matter of tax sovereignty. The diverted profits tax has been designed to comply fully with our obligations under EU law. It is aimed at structures that are clearly designed to erode the UK tax base. As such, it is an appropriate response to those who abuse EU law to divert profits from the UK. The safeguards built into the legislation provide taxpayers with a number of opportunities to demonstrate that they should not be subject to the diverted profits tax. Accordingly, we believe that this is a balanced and proportionate measure that tackles arrangements that are clearly designed for tax avoidance.

The hon. Members for Strangford, for South Antrim (Dr McCrea) and for Upper Bann (David Simpson) asked about the specific cut-off for the diverted profits tax. I can tell them that the rules do not apply to SMEs as defined by the EU. That includes companies with fewer than 250 employees, turnover of less than or equal to €50 million and a balance sheet size of €43 million. That is consistent with our transfer pricing legislation. There are also measures that restrict the diverted profits tax if there is not much UK business going on.

My hon. Friends the Members for Amber Valley and for Warrington South (David Mowat) asked about the Channel Islands and the Isle of Man. Of course, they will be aware that those territories are free to set their own rates. We in the UK will go through international forums in terms of influencing international tax jurisdictions, but the UK has a very clear and transparent tax policy-making process, as evidenced by this parliamentary debate. Tax is a national, sovereign matter, so individual tax jurisdictions are free to set their own tax policy. The diverted profits tax is designed to ensure that the UK’s tax base is not eroded by that.

My hon. Friend the Member for Amber Valley asked whether the assessment and collection processes will really work and whether they are fair. For example, if HMRC gets a notice from a big company saying that it might be within the scope, how can it issue an initial charge notice in 30 days? Where would the information come from and so on? I can tell him that the notification of potential liability to diverted profits tax must be made within three months of the end of the company’s accounting period. The Government are still consulting on the detail of the notification requirement and would welcome comments on the drafting. However, it is likely that not all notifications will result in the issue of a preliminary notice. The preliminary notice does not create a charge, but merely warns that a charging notice may be issued and sets out estimated figures that would be included. Following the issue of the preliminary notice, the company would have 30 days to correct any factual inaccuracies in it. That would include any errors in figures on which an assumption in the notice is based.

My hon. Friend the Member for Amber Valley and the hon. Member for Strangford asked whether the provisions were drawn too broadly, such that they might catch not only the abusive structures targeted but a whole load of other, unintended taxpayers. The Government are of course open to suggestions on how the drafting of the legislation could be clarified without undermining its effectiveness. However, the calculation of the charge follows well established transfer pricing principles. Those principles are widely understood and routinely applied by businesses in pricing intra-group transactions. The only difference is that where the contrived features set out in the legislation are present, the diverted profits tax will have to be paid earlier than in a normal transfer pricing dispute.

[Ian Swales]

I thank the Minister for giving way again; she is being very generous. She talked about the notification process and so on. Is she happy with our knowledge of legal entities and the fact that many of them will be outside the UK? Will HMRC be able to cope with that process?

[Andrea Leadsom]

The hon. Gentleman will be aware that this Government have significantly increased the resources available to HMRC for this purpose, so yes, we are confident we will be able to manage this process.

There were a number of other questions, which I fear I will not have time to deal with now, about interest payments being excluded. There is a limited exemption for certain arrangements that involve only loans, and separate work is going on to look at how to ensure fairness in the measures. That matter is not being excluded, but is being looked at separately.

Hon. Members raised the question of the wholesale diversion of profits to Luxembourg. The legislation targets profit diversion only where the profit has a clear link to the UK, as I think I made clear. It would not be appropriate for the legislation to go further than that and to bring into scope profits that originate from other territories. However, the Government are strongly supportive, as I said, of the BEPS process, which aims to prevent and address this international problem.

In conclusion, I reiterate that the whole purpose of the diverted profits tax is to create in the UK the most competitive environment in which to base and run a business, including low corporation taxes, but it is a requirement of this Government that companies wishing to do business in the UK should pay those taxes and should not seek to avoid paying them.

Stamp Duty Land Tax Bill

Ian Swales Excerpts

Wednesday 10th December 2014 Commons Chamber

[Mr Gauke]

This is likely to have an impact, with more transactions for properties on which the stamp duty bill has fallen—some 98% or so—and slightly fewer transactions when a larger stamp duty bill will apply. Although there will be an element of behavioural change as a consequence of the measure, property transaction numbers and house prices will be affected by a whole range of factors, so it can be difficult to ascribe any particular changes to one particular reason. However, it is likely that there will be more transactions, and that has certain advantages, such as for labour market mobility, and if it means that people are living in the homes that they want to live in as opposed to feeling trapped in their property to a certain extent. I think that the measure will have a beneficial impact on the housing market.

Each new SDLT rate is now payable only on the portion of the property value that falls within each band. That is in contrast to the old system, under which tax was due at one rate for the entire property value. Moving from a slab to a slice arrangement is right in terms of fairness and economic efficiency. The new arrangement will cut SDLT for 98% of people who pay the tax, and no one who is buying a home worth up to £937,500 will pay more.

This Government believe in aspiration. The aspiration to own our own house is one of the elements of human nature. It is something that, for generations, has been totemic for people in this country. This is a Government who will help people to achieve that ambition, and do so in a fair and equitable way.

The previous stamp duty system was flawed. It had been criticised by hon. Members on both sides of the House, industry and think-tanks. It was

“one of the worst designed and most damaging of all taxes”,

according to the director of the Institute for Fiscal Studies, and “unfair” according to the Building Societies Association. According to the Royal Institution of Chartered Surveyors, it did not

“work as it stands and creates large distortions”.

The problem with the previous system was simple. The slab approach created an enormous hike in taxes at certain thresholds. If someone paid £250,000 for a house, they would pay £2,500 in stamp duty. If they paid £250,001, however, they would pay £7,500—three times as much. In reality, of course, nobody did; they would have been crazy to. What happened was that there were dead zones—in this case a little above £250,000—in which almost no transactions actually took place.

To return to the intervention made by my hon. Friend the Member for Reading West (Alok Sharma), this change is likely to result in a substantial increase in the number of transactions in those dead zones because of the ending of the bunching effect, which should help us to have a more efficient market. Let me again give an example that I cited in last week’s debate: in 2013-14, there were over 30 times as many sales between £245,000 and £250,000 as there were between £250,000 and £255,000. Given that the average UK house price is around £275,000, this was a big distortion affecting a significant number of properties.

What also happened was that people owning properties a little under the threshold were reluctant to improve them for fear that that would be money thrown away if they came to put the property on the market. Also, people wishing to move up the property ladder as their families grew, but who found themselves on the wrong side of the step upwards, had to find a significant—and arbitrarily imposed—lump sum precisely at a time when there are hundreds of other one-off expenses to worry about. We have got rid of the inefficient and distortive old system, and replaced it with a fairer new system that cuts SDLT for 98% of people who pay it.

Under the new structure, no buyer purchasing a property will pay anything at all up to the first £125,000. Buyers will be charged 2% for the portion from £125,000 to £250,000, and 3% for the portion from £250,000 to £925,000. Those individuals buying a house worth more than £925,000 will be charged 10% for the portion of the price between £925,000 and £1.5 million, and buyers will pay 12% tax for any portion of the price above the £1.5 million threshold.

I stress that the tax will be paid once, and once only, at the point when the purchaser has the cash to do so. Once it has been paid, that is it, because we do not believe in introducing a system that would require homes to be revalued every year, or in imposing a large liability on people who may be asset-rich but cash-poor.

[Ian Swales (Redcar) (LD)]

I welcome the rate profile that my hon. Friend has put into the Bill. Does he agree that the measure is another example of this Government increasing taxes for the wealthy and making those with the broadest shoulders bear the biggest burden?

[Mr Gauke]

It is an example of that. In yesterday’s Treasury questions, in the context of the reduction of the 50p rate of tax to 45p, I pointed out that the proportion of income tax paid by the top 1% has been higher—and is projected to be higher—in the years since that cut than it was when the 50p rate was in place. There is a similar point to be made here. For properties, we estimate that the top 1% will be paying just under 40% of all stamp duty yields, whereas in 2010, under the old system, the top 1% were paying only 19% of all yields. Stamp duty has become more progressive as a consequence of our changes.

--- Later in debate ---

[Ian Swales (Redcar) (LD)]

I will not detain the House for long but I want to register the Liberal Democrats’ support for these proposals. They are important measures that relate to the liquidity of the housing market. The point at which people pay a lot of money is generally a good point at which to raise taxes, but if they are levied in a way that causes the market to be less liquid, that is a bad thing.

I said in my speech last week that slab systems in general need to be looked at, on both the tax and benefits side, because by definition they produce cliff edges and cause sub-optimal behaviour at the boundaries. For that very reason I will join the chorus of people who have said that it is also time to look at the commercial SDLT arrangements. I think that all slab systems should be reviewed, because we can be sure on the income side that tax is avoided near those boundaries, and on the benefits side people are encouraged or discouraged in their behaviour because of the cliff edges.

I understand the need to introduce these measures quickly, and therefore why the Minister might not want to review all such systems with this kind of speed, but I urge him to initiate reviews to see what other changes might be needed on the commercial side and in any other slab systems. I think that the system proposed is very good. It is progressive. I take the point made by the hon. Member for St Albans (Mrs Main) and ask the Minister what inflation arrangements he is considering for the boundaries of the new system. The fact that the budget document shows an increasing take from stamp duty rather suggests the fiscal drag that the hon. Lady fears. I would appreciate it if the Minister responded to that point.

As I said in an intervention, this reform joins the long list of measures that the Government have introduced to increase taxes on those who can best afford it, such as the large increase in capital gains tax and in tax on pension contributions and, indeed, the fact that the top rate of income tax is now 5% higher than it was for the entire period of the previous Government, except for their very last day in office. I welcome the progressive nature of those changes. Very wealthy home buyers will be paying a lot more to the Treasury, which I welcome. The Minister talked about the percentage effects in various parts of the country. I can report that, to the best of my knowledge, the figure for those benefiting in Redcar is 100%, so I thank him for that. I believe that this change is an important matter of fairness, and my party will support it.

--- Later in debate ---

[Priti Patel]

The reform cuts stamp duty for 98% of people who pay it. That is the point I was making.

The reform reduces the tax bill for first-time buyers. As my hon. Friend the Financial Secretary highlighted, this is about aspiration. Everything about the debate we have had is about supporting home owners, first-time buyers and the principle of aspiration.

In a moment I will move on to the points that have been raised by my hon. Friend the Member for St Albans (Mrs Main). The Labour party made a number of points about how many people have benefited from some of the advice that Her Majesty’s Revenue and Customs provided last week on the transitional support. The Government do not have the current figures on how many home buyers have benefited from the transitional reviews. As with most cases where stamp duty is paid, we get the information only after a transaction has been fully completed. However, we expect that as many as 35,000 transactions will benefit from the transitional rules, which is a substantial number.

My hon. Friend the Member for St Albans and the hon. Member for Redcar (Ian Swales) mentioned stamp duty on commercial properties. They will not be surprised to hear that the Government rightly keep all taxes under review. We have taken swift action on the residential front, as my hon. Friend the Financial Secretary has highlighted, and that was debated in the House last week. That swift action has obviously removed the distortions that acted as a break on aspiration and made it harder for first-time home owners.

The market for commercial property is different and, as I said, we will keep all taxes under review. My hon. Friend the Member for Rossendale and Darwen (Jake Berry) asked about mixed-use buildings. Those are subject to the commercial rules, not the residential rules, as my hon. Friend the Financial Secretary highlighted. The Government keep all taxes under review and will give consideration to mixed-use buildings ahead of future events as part of our normal review process.

My hon. Friend the Member for St Albans touched on Government forecasts. Forecasts of house prices and stamp duty land tax revenues have been verified by the Office for Budget Responsibility. My hon. Friend has been an assiduous campaigner on these issues and had a debate on the subject in the House not long ago. She referred to flipping between commercial and residential rates for avoidance purposes. We are clear that the reform is not an opportunity for avoidance.

[Ian Swales]

Can the Minister clarify the situation where buy-to-let residential property might be owned within a corporate envelope? Is that treated as a commercial business or does it still fall within the residential arrangements?

Oral Answers to Questions

Ian Swales Excerpts

Tuesday 9th December 2014 Commons Chamber

[Mr Gauke]

As it happens, the distributional analysis shows that our policies have narrowed the gap. The point is that we have made changes to our tax system to ensure a greater contribution from the wealthiest in terms of stamp duty land tax and capital gains tax. We have reduced some of the reliefs and exemptions that meant some high earners did not pay taxes. I am afraid that the idea that a 50p rate was effective in achieving such objectives—including raising revenue—is simply wrong.

[Ian Swales (Redcar) (LD)]

Further to the Minister’s answer on the diverted profits tax, will he confirm whether it will cover businesses that run substantial operations in the UK, but that invoice from Ireland or Luxembourg to avoid tax?

[Mr Gauke]

We are confident that the measure will be effective in targeting multinationals that use aggressive tax planning and contrived structures to avoid UK tax. The diverted profits tax will be charged at 25% and will raise more than £1 billion over the scorecard period.

Financial Conduct Authority Redress Scheme

Ian Swales Excerpts

Thursday 4th December 2014 Commons Chamber

[Ian Swales (Redcar) (LD)]

I rise to join the chorus of thanks to the hon. Member for Aberconwy (Guto Bebb); we all owe him a great debt for his relentless spearheading of our efforts in this long saga. Only a handful of constituents have come forward to tell me that they have been affected by this problem, but I have a very strong feeling that they are only the tip of the iceberg. I think that there are a lot of business people out there who are frightened of their banks and of what might happen to their business reputation if they come forward, or who are so unsophisticated that they do not even know that they have a problem. I think that there are many affected businesses that we do not hear from.

Having said that, I have certainly seen the problem. I welcome what has been done so far with the direct redress scheme, but I still think that it has taken too long. During this period we have seen business collapses and even suicides, although not in my constituency. There are still huge issues remaining. Many Members have spoken of the problems with the consequential loss scheme, and I wish to add my voice to that.

I want to talk in greater detail about the banks’ behaviour and what they have done to my constituents. I will talk about one constituent, Mr Stephen Lilley, who operates a single retail shop in a seaside village. I am sure that he would not regard it as an insult if I described him as unsophisticated as far as these products are concerned. Indeed, such is their complexity that I regard myself as unsophisticated, despite being a qualified accountant.

[Tessa Munt]

It has always struck me that it would be completely logical to require bank staff and independent financial advisers to be qualified to a certain level in order to flog these things. Surely “unsophisticated” means anybody who does not have an equal qualification when buying one of these things.

[Ian Swales]

My hon. Friend makes an interesting point. I think that even small businesses, such as those mentioned by my hon. Friend the Member for Brecon and Radnorshire (Roger Williams), probably should have had independent financial advice to deal with their own banks, which is a completely unacceptable situation.

I think that Mr Lilley’s case has wider implications, although I could equally have used those of other constituents, such as Roy Myers, Martin Johnson and Peter Broom. Mr Lilley took out a loan for his business. He was asked to put up as security his house, his son’s house, the commercial property, a share portfolio and the goodwill of the business, which he did. It was a swap product with the additional liability of a credit line, which was not declared at the time. I think that we all know how complex these products are. It was a derivative product that was priced in US dollars and then converted back to pounds. Mr Lilley had unknowingly fully indemnified the bank for these facilities, including the credit line, which they were not aware of. They have, through a pro bono arrangement, had some very expert advice on their situation. I should say that Mr Lilley made it clear to his bank from the start that he wanted a simple, declining balance loan, but that was never offered to him. He was very keen to repay the loan and not to take out a long-term arrangement, but that is what he did.

Mr Lilley has now been offered an alternative product—a cap—by the independent reviewer. The expert whom Mr Lilley is using believes that it is a regulated product, but the independent reviewer is not regulated to deal with the product, so right from the start there is a question of legality about his being offered that alternative product. At a meeting with HSBC on 24 October, the independent reviewer admitted that he was paid by HSBC, which brings the independence into question. Until that date, Mr Lilley did not know that there was an additional credit line in place, although it is some years since the original arrangement. The failure to disclose that puts a real question mark over whether it was contrary to section 1 of the Fraud Act 2006. It has been impossible to ascertain when the credit line was put in place or by whom. Moreover, the relationship manager was, in effect, selling a regulated mortgage because domestic properties were involved, and they were not qualified or regulated to do so. There is a whole issue about the legality of what the banks were doing. Mr Lilley and his family turned out to be guarantors of the extra credit line, which was secured against their homes, and under an “all moneys” charge they would have full liability. They have consistently asked for information about this, but the bank has still failed to provide it.

On 21 August 2013, an adjudication was agreed, part of the terms of which were that the swap was cancelled. Today, well over a year later, the swap is still in place. This is a small business person running a single shop—a mom and pop business, as the Americans like to call it. He has had to lodge two homes, business premises and a share portfolio worth far more than the loan that he took out. Because of the way that the bank has structured these products, it will not release any of the collateral. Mr Lilley would like to get some of his share portfolio back to help finance the problems he has as a result of the loan, but the bank will not release it. That is because it is itself using the assets that have been lodged for wider purposes. There is an underlying scandal going on.

Mr Lilley’s loan agreement says:

“In the event of HSBC’s insolvency or default or that of any brokers involved with your transaction positions may be liquidated or closed without your consent. In certain circumstances you may not get back the actual assets which you lodged as collateral and you may have to accept any available payments in cash.”

That means: “Your home may be at risk if the bank does not keep up the repayments. Even if the loan is up to date, if the bank or any brokers become insolvent, the bank may call in your assets.” That is a very onerous condition. The bank can do this because in 2007 the FCA changed the client asset rules, which contain two important clauses. CASS 3.1.5 says:

“the firm is given a right to use the asset, and the firm treats the asset as if legal title and associated rights to that asset had been transferred to the firm subject only to an obligation to return equivalent assets to the client upon satisfaction of the client’s obligation to the firm.”

In CASS 3.1.7, the position becomes even clearer:

“the asset ceases to belong to the client and in effect becomes the firm’s asset and is no longer in need of the full range of client asset protection. The firm may exercise its right to treat the assets as its own by, for example, clearly so identifying the asset in its own books and records.”

That starts to explain why the banks are so reluctant to offer shorter-term products, or different products, as part of the redress scheme: it is because they are using these assets in their own balance sheets. Between 2007 and 2008, when the regulations changed, RBS added £700 billion of assets to its balance sheet—equivalent to about half the UK economy. I suspect that an awful lot of houses and businesses are on RBS’s balance sheet and people do not even realise it. As a major shareholder of RBS, the Treasury needs to examine this, particularly as the Bank of England is saying that it is more likely to let banks fail in future. Many people could find themselves losing businesses and assets they did not even know were part of a bank’s balance sheet.

The operation of the compensation scheme, the behaviour of the banks, and, importantly, as the hon. Member for Wyre Forest (Mark Garnier) said, the behaviour of the FCA and question marks over its independence, mean that the scandal is continuing. It really is time for the Government to conduct a truly independent inquiry.

--- Later in debate ---

[Cathy Jamieson]

My hon. Friend makes a good point and I was going to say something about the circumstances that he and my hon. Friend the Member for Dumfries and Galloway (Mr Brown) mentioned and that element of compulsion. Clearly, many people felt that they had no option but to take those products or else they would not get the loan. As I am sure everyone understands, there are circumstances in which people rely on banks, and they trusted them and believed they were getting good advice.

[Ian Swales]

To emphasise that point, a constituent of mine was presented with an agreement to sign at the point when they thought they were signing a straightforward loan agreement. They literally did not have time to think, let alone make a choice.

[Cathy Jamieson]

Indeed, the hon. Gentleman makes a useful point and similar circumstances have been brought to my attention of people who thought at the point of signature that all they were signing was a refinancing agreement, and they had not understood the full consequences. We must drill down on those issues to ensure that people get the justice they deserve.

In some instances, product sellers painted only a partial picture of the product and the nature of the protection offered—I see the Minister is listening intently and I am sure she will agree. That resulted in customers purchasing products that were not appropriate to their circumstances, with the result that they lost money or spent money unnecessarily.

In the review, the FCA draws a distinction between sophisticated and unsophisticated customers. Under the terms of the agreement with the banks, only the cases of customers deemed to be unsophisticated were subject to the review. The FCA defines unsophisticated customers as those less likely to have had the expertise or resources to seek advice before purchasing an interest rate hedging product. People might suggest that that is a common-sense distinction, and one that correctly focuses on customers who were less likely fully to comprehend the nature and consequences of the product they were being sold, but the question of how the distinction was arrived at is an entirely different one. It will be interesting to hear the Minister’s view on that, and on the question of whether people ought to have the opportunity to appeal if they were put into the sophisticated category.

--- Later in debate ---

[Andrea Leadsom]

Tailored business swaps were provided by largely Yorkshire and Clydesdale bank, which has voluntarily agreed to look at redress in a similar way to that in which the interest rate swap redress scheme works.

I want to move on because there is another debate to follow. Let me address some of the questions raised by my hon. Friend the Member for Aberconwy. He asked why some banks are not splitting the original loss and the consequential losses, and he pointed out that the amount of redress paid is inconsistent between banks. He mentioned the fact that a particular whistleblower says that banks have pressurised independent reviewers to serve the banks’ interests rather than those of the SME, and argued that the FCA is not showing the bank-by-bank redress numbers. He asked whether we should set up an appeals process for reviewers to look at each other’s banks’ reviews, and spoke about the lack of payment of consequential losses beyond the 8% that is normally provided. He addressed the issue of HMRC’s tax treatment of redress and of whether embedded swaps should be included. I want to run through those issues very quickly.

I can assure my hon. Friend and all Members that the FCA has been determined throughout the process to get to the bottom of this. Occasionally, Members might think that the FCA is not interested or not keen to resolve the matter, but that could not be further from the case. In particular, the FCA carefully considers any variance in redress offers to make sure that standards are applied consistently. It selects individual cases for review based on feedback from customers, campaign groups and MPs to ensure these have been dealt with fairly. Independent reviewers report regularly to the FCA, both on the judgments they are making and on how the banks are performing, and independent reviewers regularly meet each other to ensure a consistent approach to assessing claims.

My hon. Friend referred to the agreement between the FCA and the participating banks. As I understand it, this agreement sets out the principles of how the review should have been undertaken. I understand, too, that the FCA is prohibited from releasing these agreements by confidentiality restrictions. I can assure Members, however, that I will write to the FCA and ask for clarification, bearing in mind Members’ desire to have that made public if possible.

[Ian Swales]

The Minister has talked about the independence of reviewers. Even the FCA’s notes state that it has had to require banks to change independent reviewers when there has been a potential conflict of interest. It is clear that reviewers are not always as independent as they should be. What is the Minister doing about that?

[Andrea Leadsom]

The FCA has considered whether reviewers are independent, and the instance cited by the hon. Gentleman probably demonstrates that it is actively taking part in that process. As I have said, however, if Members want to raise particular cases with me, I will look into them.

My hon. Friend the Member for Aberconwy referred to the allegation by a former independent reviewer from KPMG that the banks had applied undue pressure for a change in a redress determination. That is a very serious claim, and I know that the FCA has taken it very seriously. The regulator has given a reassurance that it has maintained close oversight of the relationship between banks and their independent reviewers throughout the review, and that it does not believe that that allegation is supported by the facts.

A number of Members raised the issue of embedded swaps. It is important to define that term. I understand it to refer to fixed-rate loans with an economic, or mark-to-market, break cost. As is standard practice with fixed-rate loans, a break cost is incurred by a borrower who pays off a loan early. The tradition in the United Kingdom has been that the terms and conditions of contracts between businesses, such as loans, are not generally prescribed by the Government, and we normally expect businesses to take positive action. First, they can complain to their banks if they are unhappy with their fixed-rate loans, and many customers have already taken that route. The FCA monitors banks’ complaint-handling processes, and takes action if it sees a problem. Secondly, smaller businesses can have recourse to the Financial Ombudsman Service.

What is vital—and the Treasury has ensured that this will happen in future—is that when a business enters into a fixed-term loan, the terms of the contract and, in particular, the way in which break costs are calculated are absolutely clear. We have secured a voluntary agreement, through the British Bankers Association, that banks will provide the same level of disclosure of features within fixed-rate loans— such as break costs—as applies to interest rate hedging products. Most important, the banks will ensure that break costs are fully explained, and that worked examples are provided.

A number of Members also voiced concerns about the number of businesses that have been assessed as sophisticated and therefore fall outside the scheme. The Government have made it clear that when a business lacks the necessary skills and knowledge fully to understand the risks posed by these products, it should receive appropriate redress. So far, about a third of businesses have been deemed to be sophisticated and to fall outside the scheme. There has been criticism of that: many have suggested that all businesses should be covered. The Government believe that there needs to be a defined cut off-point at which more sophisticated businesses take responsibility for understanding the products they are purchasing. Failure to introduce that cut-off point would weaken the incentives for businesses to act sensibly when purchasing financial instruments, and could open the floodgates to any businesses that had lost out as a result of a financial transaction.

However, the FCA has amended the way in which the sophistication test criterion can be applied, and information about that is available. Time does not permit me to give every detail of where we started and where we are now, but the aim has been to ensure that all businesses that are unsophisticated can fall within the scheme. There may well have been some incorrect reassessments, but there have been very few subsequent complaints.

Stamp Duty Land Tax

Ian Swales Excerpts

Thursday 4th December 2014 Commons Chamber

[Ian Swales (Redcar) (LD)]

It is a pleasure to follow the hon. Member for Rochester and Strood (Mark Reckless), who made some good wider economic points. The key point about this reform is that the Government are making a very large cash input, in effect, to make the housing market more liquid and help people move house when they want or need to.

The Government and the Treasury should look at every system where there are huge slab effects, whether on the tax or the benefits side. Slab systems, by their nature, produce cliff edges; and cliff edges, by their nature, produce strange behaviour. We see that in the current benefits system, where interactions between benefits can produce behaviour that was never intended. In this case, those boundaries have led to elaborate avoidance. Overpricing of carpets and curtains is commonly used to reduce the apparent house price to below a threshold. Smoothing out the profile of stamp duty charging reduces the necessity to engage in such above-board avoidance, or nefarious avoidance, which I am sure has gone on as well, owing to the large sums of money involved.

I very much welcome the changes. I should declare an interest, in that my daughter, who lives in Basingstoke, is likely to benefit from them very soon. The reform could have been carried out in a cash-neutral way, but would have been difficult to implement because of the losers involved, so I welcome the injection of money that has enabled it to be framed in such a way that 98% of people will see no change or a saving.

This progressive reform is another example of how the Government are making the people with the broadest shoulders bear the biggest burden. Houses sold at over £937,000 will incur an increase in stamp duty, and a £5 million house will incur a stamp duty increase from £350,000 to half a million pounds—so an extra £160,000 on a large house.

[Mark Reckless]

May I put on the record a correction in relation to figures that were mentioned earlier in the debate? Purchasers of houses between £937,000 and £1 million lose out. Then there is another quite significant area from £1 million up to, I think, between £1.15 million and £1.2 million that will benefit from the reform.

[Ian Swales]

I thank the hon. Gentleman for that clarification. It is not something that I have examined closely, given the nature of my constituency, which I shall mention.

The reform is yet another example of increasing tax on millionaires, which has happened on so many fronts under this Government, including capital gains and pensions contributions. Also, with the exception of the very last day of the previous Government, income tax is 5% higher than it was in their 13 years. I welcome that; it is important that we make those who are most able to do so pay more, and this is yet another measure by which we are doing that.

There are some oddities. People will gain all the way up the chain, but for those buying at exactly £250,000 and exactly £500,000 there is no gain.

The effect in my constituency of Redcar is pretty good. I do not think that there is a property worth £937,000 in the entire constituency, so every one of my constituents will benefit from the change. I have to welcome it from that point of view. I simply ask the Minister for clarification on the point that we always have to raise on Treasury measures: whether there is any possibility of avoidance. Will these arrangements be applied clearly to overseas buyers? Will they be applied to corporate buyers when the house is being moved through a share transfer—and is that loophole being, or has it been, closed? Will they be applied where the house is being bought to let, either by individual landlords or a corporate structure?

With those few questions on avoidance, I fully support these measures. Making the housing market more liquid will lead to a stronger economy, and the way in which the reform is being implemented leads to a fairer society.

Autumn Statement

Ian Swales Excerpts

Wednesday 3rd December 2014 Commons Chamber

[Mr Osborne]

I do not want to go into too much of the detail that will be on the table in the important cross-party talks, but clearly one challenge that the Northern Ireland Executive face is that they have not implemented some of the welfare reforms, which has led to a hole in their budget. There are not currently credible proposals on the table from all the parties—I use the term “all” in the collective sense. There is not yet collective agreement on how to address the challenges that the lack of welfare reform has created. That is why I phrased my statement as I did. We have the cross-party talks and we have an important couple of weeks ahead, as Members from Northern Ireland know. Let us hope that we make real progress in those talks.

[Ian Swales (Redcar) (LD)]

I warmly welcome the new £28 million national formulation centre, which I believe is heading for Sedgefield in the north-east. That was one of the key asks of the chemistry growth partnership and is listed in the green book. Will the Chancellor continue to support the chemical industry, which is the UK’s biggest manufacturing exporter and is helping to make the north-east one of the fastest growing regions of the UK?

[Mr Osborne]

My hon. Friend is right that the new catapults that we have set out—the formulation centre and the investment in the high-value manufacturing catapult—will help the north of England, particularly around the area that he represents. Support for the chemical industry is important. The changes to energy taxation in the Budget will help the chemical industry. There might be an opportunity to look at specific things that we could do to help the chemical industry further, rather than all energy-intensive industries. I am happy to have that discussion with him and other Members who represent constituencies with chemical manufacturers.

Taxation of Pensions Bill

Ian Swales Excerpts

Wednesday 3rd December 2014 Commons Chamber

[Ian Swales (Redcar) (LD)]

The hon. Lady has obviously done a lot of research on this. As I understand it, once a flexible draw-down is started, the tax relief is then limited beyond that, so cascading £40,000 of tax relief year after year is not possible. That is my reading of the Bill.

[Cathy Jamieson]

I thank the hon. Gentleman for that intervention, as those are exactly the kind of detailed points that I hope the Minister will respond to when he gives his views on the provisions. These are exactly the sort of questions to ask: is that the type of tax avoidance that we have described and the AAT has suggested would be an issue? Is it possible? Is it an intended consequence of the Bill? During the Public Bill Committee he explicitly told us that allowing individuals to avoid income tax and national insurance contributions is “not the intention” of the reforms, and I had no doubt that he was genuine on that. However, people are still coming to us and repeatedly outlining concerns about the scale of tax avoidance that could be facilitated by the Bill. Therefore, it is important that we continue to pursue the matter, even at this late stage, and be given assurances on it.

Towers Watson has said that Ministers seem “sanguine” on this matter. I am sure that the Minister is not sanguine in any shape or form about the potential for tax avoidance, that he would want to close any loopholes and that he would want to send a clear message that it was not his intention that the Bill be used for any attempt at tax avoidance. That is particularly the case because, as has been repeated again today, tax revenues and the take into the Exchequer are falling, because of some of the Government’s other economic policies, particularly on wages and the impact on income tax and national insurance. It is not as though the Exchequer is going to be able to afford to lose hundreds of millions of pounds of tax income.

Interestingly, the written evidence from Towers Watson cited the Minister’s assurance that

“the government will be closely monitoring behaviour under the new system”,

and will take action “if loss accelerates” Towers Watson’s evidence suggests that it is very likely that action will be required. Complementing the AAT estimates of how much tax could be lost if individuals use salary sacrifice before they have accessed their pensions flexibly, Towers Watson provides an estimate of how much tax could be lost after a pension has been accessed flexibly and the money purchase annual allowance imposed. Towers Watson’s projection returns us to the point made by the hon. Member for Redcar (Ian Swales) and shows why we have pursued this matter vigorously. Towers Watson states that

“if £10,000 of salary is given up in exchange for an employer pension contribution, the employer could pay £1,380 less National Insurance while the employee would pay between £200 and £1,200 less”.

Although the annual allowance does not altogether remove the scope for tax avoidance, it does have a limiting effect, which of course we welcome. The crucial point made by Towers Watson, however, is that this is not a potential tax avoidance opportunity that has been “dreamt up by accountants”, but one that could be “created by legislation” before us today.

Taxpayers and employers need to know whether the Government will regard the diversion of salary through pensions as legitimate. Some people have suggested that the Government drafted the legislation oblivious to the loophole they were creating and that when they realised the consequences, they came up with the money purchase annual allowance rules as a partial stop-gap. I am inclined to be slightly more generous, because I am sure that the Government were very conscientious in drafting the Bill and gave consideration to all its component parts. I am sure that the Minister will reassure us on that point in his response. I know that he is concerned about the potential for tax avoidance, because he has repeatedly told us that he will “closely monitor behaviour” under the new system and that he will work with the industry to ensure that the system remains “fair and proportionate”.

[Ian Swales]

I am following the hon. Lady’s argument closely. Is she suggesting that this Bill creates new avenues for employer contributions to pension schemes? As I understand it, what she describes is available in the current system.

[Cathy Jamieson]

I thank the hon. Gentleman for his intervention. I hope the Minister will provide a clear steer to people about what would be acceptable both to employers and employees. I would also be interested to learn what he plans to do if the system turns out not to be fair and proportionate, and what form the monitoring will take. That is why we have proposed new clause 1. We did debate the matter in Committee, but we are still concerned that we have not heard exactly how the monitoring will take place and what the Minister intends to do.

Essentially, new clause 1 asks the Government to commit to doing something that the Minister has already said that they would do—to monitor and review the reforms to ensure that they are not used for the purpose of tax avoidance. We simply want that commitment in the Bill, to ensure that there are reports back to the House.

When we first debated the issue, concerns were raised about the time scale in which we were asking for the review. We had not, at that stage, fully anticipated how long it would be before patterns were established and problems had manifested themselves, which is why the new clause includes a two-year-time frame.

--- Later in debate ---

This appears to stem from a concern that the Government’s changes will have an adverse impact on the housing market. With greater choice and flexibility at the point of retirement, people will be allowed to make a decision about their finances that is right for them. This Government are committed to making the aspiration of home ownership a reality for as many people as possible. That is why they have introduced policies such as Help to Buy and further measures announced in the Budget to support the supply of housing. As part of the new regulatory framework for financial services, the Government have introduced the Financial Policy Committee to ensure that risks stemming from the housing market are identified and early mitigating action taken, if required.

[Ian Swales]

Does the Minister recognise that the point at which many people draw their pensions, particularly the lump sum element, is the very point at which they might wish to help their children get into the housing market, and that we should not do anything to prevent that?

[Mr Gauke]

My hon. Friend makes an important and relevant point. We are putting power in the hands of individuals to decide what they do with their retirement pension pot. We are also ensuring—I shall touch on this in a moment—that guidance is available. It may well be that after careful consideration, people conclude that they do want to assist a family member to get into the housing market. That is a choice for them, and I do not think that we here should necessarily condemn such a choice: it might be precisely the right thing for people to do for them and their family.

As part of the new regulatory framework for financial services, we have introduced the Financial Policy Committee, as I was saying, and we have given the FPC strong powers to tackle any threat to financial stability, including a broad power of recommendation, which it used in June 2014 to address risks stemming from mortgage lending and sectoral capital requirements that apply to residential mortgage lending. The Government have consulted on granting the FPC powers of direction over macro-prudential tools for the housing market and aim to legislate for these new powers next year. In line with the new regulatory framework, the FPC is best placed to monitor the housing market and take action, if required.

Let me pick some other points raised in the debate, most of which it would be fair to say were familiar. I was asked whether people would understand the tax consequences involved. The guidance will help consumers to understand the tax implications of their choice of pension, and in addition, the Financial Conduct Authority has published near final rules that will require providers to supply their customers with a description of the possible tax implications when they apply to access their pension funds.

On extortionate draw-down charges, the FCA’s retirement income market study will be published shortly. In June, the FCA expanded the scope of this study to include consideration of products in the new flexible landscape and to identify any competition risks and potential consumer detriment. The guidance guarantee will be relevant here.

It was suggested that people might be charged too much tax without realising it. As with all PAYE income, the tax position will be reconciled at the end of the tax year. All the income received by an individual that was taxed under PAYE will be brought together, and the correct tax will then be calculated. If there was an overpayment, the extra amount will be repaid, and if there was an underpayment, HMRC will contact the individual. People will not be subject to self-assessment solely because they have flexibly accessed their pensions, nor will they have to claim a refund in order to receive it.

I have already touched on the matter of how the new flexibilities will affect entitlements to benefits, but let me say now that the Government want to ensure that the choice that people make between taking their pensions as income—that is, purchasing an annuity and keeping more of their pension as capital—and drawing it down periodically, for example through a drawdown product, will not have a significant impact on how they are assessed for social care support and how their means are assessed for social security purposes. New regulations and statutory guidance on the Care Act 2014, which were published on 23 October, include details about the charging rules for care and support.

Today we announced a change in the rules for people above pension credit qualifying age who claim means-tested benefits. The notional income amount applied to pension pots that have not been used to purchase an annuity will be reduced from 150% to 100% of the income of an equivalent annuity—or the actual income taken, if that is higher—in line with the rules for care and support.

Let me now deal with an issue that was raised by the hon. Members for Kilmarnock and Loudoun and for Chesterfield (Toby Perkins). I shall not try to anticipate the response that my hon. Friend the Economic Secretary to the Treasury will make to the Adjournment debate that the hon. Gentleman will initiate later, but I can say that these matters are not being rushed. We have consulted extensively on the implementation of the policy, and there is widespread support for the changes. We are working closely with industry to ensure that it is ready for April 2015, and have been doing so since the announcement was made. We are making good progress in delivering the changes that are needed through both our Bills.

--- Later in debate ---

[Mr Gauke]

Amendments 1 to 8 are all of a minor and technical nature, amending various definitions and removing unnecessary sections. I would be happy to explain those in more detail if hon. Members are interested, but if they are not, I will move on to amendments 9 to 39.

As hon. Members will recall, we had a very useful debate in Committee about the new information requirements for individuals that are set out in part 6 of schedule 1 to the Bill. I said at the time that the Government were keen to work with industry and consumer groups to ensure that the requirements are proportionate, and that we would consider the issue further. We have therefore continued to have constructive discussions with the pensions industry about the impacts of the Bill. As a result of this ongoing consultation, we have tabled a number of amendments that we believe are a proportionate response to the concerns raised. These changes will make the reporting requirements that individuals need to meet easier to comply with, while still ensuring that they have access to the right information to help them pay the right amount of tax. Government amendments 9 to 39 therefore make a number of changes to the information requirements in the Bill to provide that individuals have to tell schemes that they have flexibly accessed their pension savings only if they are an active member of that scheme, and to increase the time they have to comply from 31 days to 91 days.

It might be helpful if I start by setting out why these information requirements are required. As we have discussed many times during the course of this Bill’s passage through the House, when an individual accesses their pension flexibly, their annual allowance for tax-relieved defined contribution pension contributions will reduce from £40,000 to £10,000. That will protect the Exchequer and ensure that the new system cannot be exploited to achieve unintended tax advantages by individuals’ diverting their salary into their pension and withdrawing it immediately with tax relief. It is therefore important that individuals understand the tax consequences of saving into a pension after accessing their savings flexibly. For that reason, the Bill placed a new requirement on individuals to tell all their pension providers once they had flexibly accessed a pension. This was intended to ensure that individuals do not use the new system to gain a tax advantage that is not intended. However, the Government have always been clear that they are keen to ensure these requirements are proportionate. Having considered the issue carefully, we are amending the Bill to provide that people need to tell only the schemes to which they are contributing or that they contribute to in the future. They will also have an extended period of 91 days in which to do so. These changes will make the new system easier for individuals and schemes to comply with, while also ensuring that the new annual allowance is implemented effectively. Again, I would be happy to explain these amendments in more detail if hon. Members are interested.

[Ian Swales]

I am certainly not asking the Minister to explain all this in a lot more detail and detain the House in doing so. One specific point raised in Committee was that people contributing to a workplace defined benefit scheme will not know how much of their annual allowance is being used in that scheme at the time when they are able to make contributions to a defined contribution scheme. Has he considered the possibility that such people could be treated—I think the Bill tends to do this—as though they are deliberately trying to avoid tax, whereas they may just have a lack of knowledge at the time they do this?

[Mr Gauke]

My hon. Friend makes an important point. There will be particular issues with defined benefit schemes. It may be that individuals do not know when contributions are paid by their employer. Where the scheme provides defined benefits only, the information requirement does not apply, and individuals will never need to notify it. If the scheme also provides money purchase benefits—for example, if it has a separate AVC section—the requirement can only apply where contributions are made to the AVC section. Defined benefit schemes are excluded as they will not have to send pension saving statements to the individual based on the £10,000 money purchase annual allowance. I hope that helps my hon. Friend.

--- Later in debate ---

[Ian Swales]

I will not detain the House for long, but, as the Liberal Democrat representative here, I feel that it is important to say something. The Bill supports the pensions revolution being driven by the Minister for Pensions, my right hon. Friend the Member for Thornbury and Yate (Steve Webb), who has done a terrific job. We are well aware, of course, that the main pension aspects of the regulations are in the Department for Work and Pensions Bill, not in this Treasury Bill.

Like the shadow Minister, I enjoyed serving on the Bill Committee. In this place we are often very adversarial, but I think that proceedings on the Bill have been conducted in absolutely the right spirit. When it comes to pensions, it is extremely important to have cross-party support for the arrangements agreed, because pensions, by definition, involve long-term decisions. Were we to keep trying to change the pensions system every year or two, we would not be giving people certainty on what to do about their future. It has been a real pleasure to serve on a Bill on which, although we have sparred over various details, there has been strong agreement on the need to pass it. It has the full support of the Liberal Democrats.

Question put and agreed to.

Bill accordingly read the Third time and passed.

Income Tax

Ian Swales Excerpts

Wednesday 5th November 2014 Commons Chamber

[Rushanara Ali]

If I get through my speech without the hon. Gentleman interrupting and heckling, I might consider giving way to him.

Time and again, it is those most in need who are suffering on this Government’s watch. Shockingly, 2.6 million children across the UK face poverty, which is 600,000 more than in 2010. The recent report by the End Child Poverty coalition found that half the children in my constituency are growing up in poverty, a figure that has risen since 2010. Of those, two in three are in working households. One in five people across the country face low pay. Against that backdrop, it says everything about this Government that they chose to focus their efforts on reducing tax rates for the highest earners. Surely we should think about putting in place a more just and fairer tax system, but also one that gives opportunity to young people who are out of work.

Those working people across the country who are struggling at the moment will no doubt wonder why this is happening. In this House, the Chancellor said in 2011 that he was

“not going to balance the budget on the backs of the poor”.

At the same Budget, he went on to say that it would not be right to remove the 50p tax rate, asking those on much lower incomes to make sacrifices. The Government should be clear: the working people in constituencies such as mine and beyond do not feel as if they have stopped making sacrifices. We must keep remembering that. They have not stopped making sacrifices. Those people face low wages and they continue, day in, day out, to experience hypocrisy from this Government, who refuse to tackle poverty—both in-work poverty and child poverty—and when child poverty continues to rise, year in, year out. It is a disgrace and it needs to be taken seriously.

The hypocrisy continues. Only last month, the Chancellor remarked at the Conservative party conference:

“there remains a large budget deficit and our national debt is dangerously high.”

What was his answer? It was a two-year freeze of tax credits and benefits, yet two thirds of those who will be affected are in work. Such a measure, hitting the least well-off, is deemed necessary, but the pressure on the top earners is off. How is that acceptable? How is that fair? How is that justified?

[Ian Swales (Redcar) (LD)]

Will the hon. Lady give way?

[Rushanara Ali]

If I am going to give way, it will be to the hon. Member for Taunton Deane—unless he starts heckling again.

According to calculations by the Office for Budget Responsibility, the Treasury lost around £200 million from top earners due to them deferring income, as my hon. Friend the Member for Nottingham East (Chris Leslie) said in his opening speech. The Chancellor will also struggle to resist calls to cut the top tax rate even further, as he and the Prime Minister have refused to rule that out. Perhaps the Minister will clarify whether the rate will be reduced further, or perhaps she will be able to rule that out.

Our approach on the Labour Benches is about a broad-based recovery, where everybody makes a contribution and where those who are most able to can make a bigger contribution. If we are serious about getting people back into work and giving young people an opportunity, this tax cut should be reversed. We need fairness embedded in the tax system, starting with top earners. That is why I support today’s motion.

I am happy to take an intervention from the hon. Member for Taunton Deane now, but I hope he will show some manners.

Oral Answers to Questions

Ian Swales Excerpts

Tuesday 4th November 2014 Commons Chamber

[Priti Patel]

We are currently looking specifically at that.

[Ian Swales (Redcar) (LD)]

In the past four years the Tees valley has received five times as much investment from the regional growth fund as in the last four years of the Labour Government. That is going not just to large companies, but to smaller ones too, such as Wards and ElringKlinger in my constituency. Will the Minister ensure that regional growth funding continues to be a key element of rebalancing the economy?

[Priti Patel]

My hon. Friend is right that, by handing back power to local leaders, we are enabling them to back local jobs and to create prosperity and long-term economic growth. That is exactly what this Government are committed to doing.

Taxation of Pensions Bill

Ian Swales Excerpts

Wednesday 29th October 2014 Commons Chamber

[Crispin Blunt]

The hon. Gentleman tempts me down the path of discussing what is in the Pension Schemes Bill, which, although not the subject of today’s debate, is closely linked with the Taxation of Pensions Bill. I presume by his presence that he is on the Committee, as is the hon. Member for Middlesbrough South and East Cleveland (Tom Blenkinsop). I sincerely hope that the Committee will carefully examine this matter. It is subject to a current consultation by the FCA, to which I have submitted my evidence. This is an immensely important issue. To make the reforms in the Bill successful, we have to make a success of the guidance. We will not get it right first time. It will have to be capable of being improved in the light of experience, so that we do not end up with a mis-selling disaster or simply consumers not being informed enough to make appropriate choices.

We are giving people freedom, and with freedom comes responsibility. Sadly, that means that some people will make poor choices. The hon. Member for Edmonton (Mr Love) has spoken about people making poor choices, or taking a holiday; at least, that was the implication behind his remarks. I think taking a holiday is probably a thoroughly good choice, but he and I may differ. His Scottish Presbyterian background may be coming into play there. I will leave that as speculation.

[Ian Swales (Redcar) (LD)]

The hon. Gentleman raised a point that I had not thought about, which is the tax consequences during payment. Normal annuities are paid out against a pre-determined tax code, and people have their tax deducted at source when they receive their payments. I know this from personal experience. Under the flexible rules, he suggests that the tax will be payable only at the time of self-assessment, much later. Does he believe that providers of these products should be looking at tax deductions at source?

[Crispin Blunt]

I would concede that this is not an area on which I feel a total authority. Hon. Members who have served on the Pension Schemes Bill Committee and made themselves authorities in this area must also take seriously the advice of experts and industry to address precisely the kind of question that my hon. Friend raises. We cannot afford to leave consumers adrift while we make the transition from a highly regulated, paternalistic and rather depressingly inefficient market to one that provides much better returns and is much more competitive, but which needs better informed consumers to drive it.

--- Later in debate ---

[Ian Swales (Redcar) (LD)]

I should start by declaring an interest: I am well over 55 and have a pension pot that is subject to these provisions. I very much welcome the Bill because its measures are undoubtedly needed. I praise my right hon. Friend the Member for Thornbury and Yate (Steve Webb), who has been campaigning on these issues since 1999 and has done a terrific job in reforming pensions in his years as Pensions Minister.

The Bill is a revolution in terms of freedom. I am glad that defined-benefit schemes are excluded, because they were the source of much of the mis-selling that took place during the scandals that occurred, with people who had very secure local authority or teachers’ pensions, for example, being encouraged by unscrupulous advisers to cash them in and take out risky products. We have to try to avoid that.

People arrive at the time when they want to take their pension in many different circumstances. They may want to spend their money at different rates depending on their view of how they want to spend their retirement. They may have health issues that determine how they spend their money. They may make various different choices. Even though I was brought up as a Presbyterian by my Scottish parents, I have nothing against holidays, which are a perfectly good choice when one initially retires.

I know from talking to constituents that one of the main things people do these days is make a capital transfer to their children, particularly to buy a property. I can well understand why people whose income is okay might want to do so, and given that the new rules on inheritance are much less penal in cases of early death, funds that they have saved up will still be available to their family.

However—there are quite a few howevers about this Bill—annuities have a deservedly bad name in terms of value, mainly because low gilt rates mean that annuity providers can only offer low rates. Annuities do have a purpose. They are a pool, which is one of the things that I find constituents have difficulty in understanding. Perhaps even the hon. Member for Amber Valley (Nigel Mills) has difficulty in understanding that, given what he said; I know he does not, because he is an expert in this area. When people die soon after taking out an annuity, the insurance company does not get the money; the person who gets the money is someone who is lucky enough to live to be 100. That is what pooled annuities are all about.

By demonising annuities, we have caused people to forget that they do not know how long they are going to live. On average these days, somebody aged 65 will live until they are 83, but a lot live longer and quite a lot live less than that. The whole point about annuities is that they are a pool, and people bet against how long they are going to live. I think that the industry will come up with annuity-type products to meet the desire of many people for a secure income for as long as they live.

In financial services, it is always worth asking what is the worst that could happen, because it usually does happen. That is why we need to think about some of the unintended consequences, difficulties or gaps. Several speakers have mentioned the world of guidance. I was disturbed to hear the hon. Member for Reigate (Crispin Blunt), who is not in his place, say:

“We will not get it right first time.”

Let us remember that guidance in this area will be given only once for each individual. They cannot keep going back for more guidance: it happens once. If we do not get it right first time and the cohort of people in the first year do not get good advice, they will suffer for the rest of their lives. From our point of view, it might take a while to get the guidance right, but for the people getting the advice it must be right when they get it. The whole area of standards and regulation in relation to the Bill would bear more examination.

Advice needs to be impartial and transparent, and it should be based on straightforward products, but I worry about the level of knowledge of the people receiving advice. A few weeks ago, a constituent came to see me who had taken out a finance deal for some solar panels. It turned out that the combination of the savings on the solar panels and the finance deal meant that she had an overall penalty in her budget. The savings on the panels in no way paid for the cost of the finance, although she had been told that it would.

[Barbara Keeley]

The hon. Member for Amber Valley (Nigel Mills) spoke about someone who left work and needed their care costs to be covered at a certain point. In my view, that is another thing for which constituents do not plan. I have lost count of the number of my constituents who did not even know that they had to pay for social care and did not understand the thresholds. I am concerned that a lot of people will be tripped up if they draw down money and increase their savings, because they will suddenly find that they fall within the threshold at which they have to pay for social care. People commonly do not understand that, and it will not be covered by the guidance.

[Ian Swales]

That is a very good point. The guidance needs to be much more in the round on what may happen to people after retirement, but I suspect that that will not be mentioned in the guidance unless we can do something about it.

To go back to my example about the lady with the solar panels, I went through the documents with her, and they very clearly showed the numbers. There was no doubt: she had not been scammed. What she had signed up to was absolutely clear, and her signature was on all the documents. She said, “Oh, I just didn’t realise. I’ve an A-level in maths, so I should have realised.” What worries me is that we do not have to speak to many constituents before we realise that levels of knowledge about pensions are extremely low. As the hon. Member for Worsley and Eccles South (Barbara Keeley) has said, other consequential issues of getting older are sometimes even less clearly understood.

I am worried about the guidance, and I think that there will be concerns about whether it is appropriate and whether people have the financial awareness necessary to understand it. That goes back to the need to make people more financially literate from school onwards, but we will not solve that problem overnight. The industry is talking about having a second line of defence, and it needs to be listened to. It is a clear case of “They would say that, wouldn’t they?”—it is designed to get people to move towards the type of products that the industry is offering—but such a second line of defence might serve to protect people from themselves, as it were.

We need to watch out for scams. I listened carefully when the hon. Member for North Down (Lady Hermon) mentioned criminality in relation to people losing their pension savings. Pension release companies already impose extremely high charges for unlocking pension schemes and doing very little work. I am prepared to take an intervention from her if she so wishes, but I am a bit concerned about how to define criminality. People may make a bad decision, but that is not necessarily criminal. I agree with her, but I wonder what kind of products or service she means when she talks about criminalising those who end up losing their pension pots.

[Lady Hermon]

It is awfully nice of the hon. Gentleman and so kind of him to invite me to intervene. I absolutely do not want to criminalise people who draw down their pension. I am a huge fan of Radio 4, and I listen very carefully to its finance programmes. As has already been mentioned, we and many people—certainly constituents in my patch—are worried about unscrupulous so-called pension advisers who set themselves up so that people can go on to the internet, press a button and commit their life savings to them. I do not want to criminalise the person involved; I want to put into the Bill a deterrent against unscrupulous tax or pension advisers.

[Ian Swales]

I thank the hon. Lady for her clarification. I am sure that the Exchequer Secretary would be interested to hear more about how she defines “unscrupulous”. I agree with her, but there is more to do to be clear what that means or about conduct that the Financial Conduct Authority would regard as unscrupulous.

All this liberalisation of pensions, as the hon. Member for Amber Valley mentioned, makes pension savings more like other kinds of savings. We are also providing a big tax advantage. Removing restrictions on when pensions are taken and removing some of the tax charges and restrictions on death means that we are moving closer and closer to a simple tax-free savings market. Such a market is especially attractive for people who are very close to retirement. I have done some sums, and if one is about to take one’s pension pot, there is quite an incentive—because of the tax-free 25%—to throw in the maximum possible amount of money in the months before retirement. Somebody paying tax at the basic rate who puts a lot into their pension pot in March and starts their pension in April or May would make a 6% return on their money simply by putting it in and taking it back out again. A higher rate taxpayer would make a 16% return on their money simply by putting a lump sum into their pension pot immediately before they retire and then drawing it out again. There will therefore be clear consequences of the flexibility that we are creating. People will be more inclined to put their money in if they know that they will be able to get it out quickly. There are clear benefits to getting the tax-free amount very quickly.

We have heard about the possible later costs to the state in respect of care and so on. By definition, if people take more out of their pension pots earlier, more people will need state assistance later in life with health or care costs. I know that the Minister is aware of that issue, but I do not know whether the possible costs have been calculated or estimated.

I am more confident than most that the responsible part of the industry will come up with new products and innovations. As I said to somebody from Just Retirement last week, what people need is plain language. Even the word “annuity” is not plain language. People want a secure income in retirement. The vast majority of people who retire do not want to buy a sports car, but to have a certain income throughout their retirement. The more the industry wraps things up in mumbo-jumbo that people do not understand, the more suspicious people are of its motivations.

We are already seeing warning signs. For example, Fidelity is saying, “All this flexibility means complexity, which means higher costs, because we are not set up to run bank accounts.” I am concerned that the industry will see the changes as a new way to levy high charges. It will say that the very flexibility that the Government want to see is expensive to provide. I hope that we see the right level of competition in the market and that people come in who do not levy those high charges.

We have seen a huge fall in the number of annuities that have been taken out recently. Just Retirement has seen a 50% fall in demand for annuities. I suspect that that is partly due to uncertainty. People want to be clear what the new rules are before making a decision. Demand may pick up again, particularly if there are new products. However, there is no doubt that fewer people will take out annuity-type products.

[Cathy Jamieson]

I am listening carefully to what the hon. Gentleman is saying. Does he agree that there are concerns for people who have relatively small pots, because companies might feel that it is not in their financial interest to offer them products? How can we ensure that there is equality?

[Ian Swales]

The shadow Minister makes a good point. If we create a spectrum of products that is genuinely complex, the charges might be inappropriate even for those with medium-sized pots because of the flexibility that is offered. We need to hear more from the industry about that.

Finally, on timing, I know from personal experience that when the date that one has defined as a potential pension date is approaching, the industry offers what it calls warm-up packages. I have had my first warm-up package for next year. The industry is not waiting until April next year. It has to get on with this right now. If there is any uncertainty in the minds of Ministers, they had better get moving pretty quickly, because the industry has to get all its systems, documentation, regulations and new products in place so that it can offer them to the cohort that is approaching retirement in just a few months’ time—from April onwards. The ABI is already concerned that it is getting towards the eleventh hour, when clarity on all this will be needed.

Despite all the reservations that I have expressed, I very much support the Bill and commend it to the House. I am sure that when it emerges in its finished form, it will be an excellent piece of work.

[Shabana Mahmood (Birmingham, Ladywood) (Lab)]

It is a pleasure to close this debate for the Opposition.

There have been only a few Back-Bench speeches, but they have all been insightful and valuable. The hon. Member for Reigate (Crispin Blunt) was spot on when he spoke about a deficit of consumer awareness and said that the FCA will have to be alert to the needs of all consumers across the spectrum.

My hon. Friend the Member for Middlesbrough South and East Cleveland (Tom Blenkinsop) sits on the Pension Schemes Public Bill Committee. He spoke at length about the evidence that was given by Mr Greenwood. I am not on that Committee, but I found the points he made about that evidence telling and concerning. I hope that the Exchequer Secretary will respond to those issues.

In particular, my hon. Friend highlighted the potential opportunities for tax avoidance. I am sure that Members across the House will want to interrogate the measures in this Bill and the Pension Schemes Bill in detail to ensure that revenues to the Exchequer are protected. I hope that the Exchequer Secretary will say more about the Government’s view of the number of employers—my hon. Friend gave the figure of 192 from the evidence that was given to the Pension Schemes Public Bill Committee—who are looking at mechanisms to exploit the changes to the pension taxation rules as a ruse to reduce employer’s national insurance contributions.

The hon. Member for Amber Valley (Nigel Mills) was right to say that we want to avoid the two extremes that he highlighted. He was also right to speak about the importance of getting the guidance to work properly. He raised an important point in asking what will be the default setting for people who have been auto-enrolled and have a pot of money, but who simply do not engage with the process. It is important to get into the nitty-gritty of what will happen in practice in such scenarios. Again, I hope that the Exchequer Secretary will respond to those issues.

The hon. Member for Redcar (Ian Swales) was right to begin his speech by reminding us of previous scandals and the lengths to which unscrupulous individuals have gone, and he concentrated our minds on ensuring that such issues do not arise again. He was right to say that we must get the guidance right first time because it only happens once for each person. That should concentrate the minds of all Members on ensuring that we get the guidance absolutely right.

The shadow Financial Secretary, my hon. Friend the Member for Kilmarnock and Loudoun (Cathy Jamieson), made it clear that we support the principle of increased flexibility for people in retirement and the reform of the pensions market so that people get a better deal. We are therefore not against the principle that people should be allowed to exercise choice. However, this is a big Bill that contains big changes that will affect tens of thousands of people, if not more, immediately. Just this week, research published by Ipsos MORI suggested that 200,000 people may choose to take their entire pension in one go next April, creating a potential tax windfall for the Treasury of £1.6 billion.

It is fair to say that some issues that are debated in this place appear to be removed from the outside world. This is not one of those occasions, as the figures show. We therefore have a bigger immediate responsibility on this occasion to get the Bill absolutely right. Although I reiterate our support for increased flexibility, I do so with a word of caution, because that flexibility will be exercised by people who have a deeply variable understanding of the marketplace in which they are operating.

The Ipsos MORI poll also showed that only a third of those planning to take out their pension pot were aware of the tax that they would pay should they take out their entire sum in one go. The 2012 Department for Work and Pensions attitude to pensions survey noted that half the respondents had no prior knowledge of annuities before being asked the questions in the survey. The Financial Services Consumer Panel also published a report, in December 2013, which said that the

“market does not work well for the majority of consumers.”

One of its key findings was that consumers were poorly placed to drive effective competition among providers and distributers of annuities. It said:

“There are many barriers inhibiting consumers’ full engagement when they decide to annuitise: low financial capability; fear of product complexity and of making an irreversible, high-cost mistake; general distrust of professional advisers, and inability to find appropriate advice at acceptable cost.”

The Bill will operate in that context, not in some fantasy world in which the majority of the electorate has an in-depth understanding of the pension marketplace. That is not to say that a greater understanding cannot be fostered, because, as we know, the same DWP survey shows an increase in the awareness of annuities between 2012 and the previous survey in 2009. However, in some cases we start from a very low base.

We also have a social responsibility to get this right. This policy needs to be fair. Successive Governments have invested in pension relief to support people in retirement. As the Government have said, it is an annual investment of £22.8 billion, and it is important that we ensure that the taxpayer gets good value for money for that. It is money that belongs to all taxpayers, even those for whom a private pension or a workplace pension are out of reach. We must ensure that the relief given generates the consequences intended, the main one of which is income in retirement, not income for other things.

[Ian Swales]

The shadow Minister raises a good point about the relief, but pensions are taxable when they are paid out, so it is important not to suggest that £22.8 billion is the net cost of the pension system. The money may be taxed at a different rate, but it will be taxed when it comes out.

[Shabana Mahmood]

I was simply making the point that the reliefs are there for a reason and we have to ensure that they work for the benefit of all taxpayers, but the hon. Gentleman is right.

There is also the hard-nosed political test of making sure it is not the Government who are picking up the pieces if this all goes wrong. I reiterate our support for increased flexibility, but we have to acknowledge that this particular system has built-in risks. Under the new arrangements, a pension pot of £100,000 could be used to secure an annuity of about £6,500 that, added to the state pension, would yield the recipient a little over the UK’s national pension income, according to HMRC’s 2013 figures. Of course, it could be drawn out in one lump sum to buy the proverbial Lamborghini—it would probably have to be a second-hand one because they cost closer to £250,000 than £100,000. But what would happen then? If the recipient in question has not made the necessary contributions to receive the single-tier pension, when it comes in, will their pension be topped up to the accepted minimum level? That is not yet clear. This potentially leaves us in a dubious ethical position as well as a financially precarious one.

Our responsibilities to get this right are clear. It will affect many people, and we have both a social and financial responsibility to make sure that the changes work properly. Given that those changes are so significant, I would have expected extensive consultation by the Government before the announcements were made, but unfortunately that was not the case. As my hon. Friend the Member for Kilmarnock and Loudoun said, despite beginning well, with work on the single-tier pension and auto-enrolment—policies based on evidence, consultation and consensus, which built on the work of the previous Government—these reforms have been rushed and somewhat erratic. The Government did not consult before making the announcements, either with consumers or with the industry. Nor have the Government allowed sufficient time for the changes to be executed.

Despite the enormity of the change and the change of emphasis from the importance of accumulation to the ease of access, we are left in a situation in which outside experts are lamenting the lack of time to get this right. Regarding the need for proper guidance for consumers, the ABI’s director general said:

“The guidance guarantee is a crucial part of the Government’s pension reform, and the industry fully supports the Government’s intention to provide free, impartial guidance to savers on their options as from next April. But time is not on our side. No one should under-estimate the work that needs to be done to make this a reality, which is why the Government have some urgent decisions to make.”

We have to ask why the Government are in such a hurry to push through reforms when some of the essential underpinning to make them work seems to be missing. I have to say I am glad that I will not be in the first tranche of retirees to experience these reforms, unlike the hon. Member for Redcar.

That brings us to the issue of good guidance, or lack thereof. We know that changes of this magnitude will bring a significant number of new products to the market. That is not in itself a bad thing, as some products will be better than others; that is the nature of the marketplace. It is also well recognised that on the whole there is a requirement to ensure that consumers are far better informed—I have already outlined the evidence provided by the Financial Services Consumer Panel. However, in addition to extensive consultation, we would expect the Government to have done significant work on the guidance mechanisms before making the announcement in the Budget, but unfortunately that was not the case. From the start, a significant level of confusion has surrounded what the Government meant when they said that reforms would be accompanied by “advice”. It later transpired that it was not “advice” that would be provided, but rather “guidance”. That is an important distinction, as we have heard, since guidance carries none of the same legal protections as advice, which is regulated and therefore considerably more expensive to provide.

When the Government have been pushed on the matter, I am afraid their language has been far from reassuring, to the extent that the measure looks like a mere add-on to the whole pension reform programme. In my opinion, that suggests a slightly cavalier attitude, which may prove to be short-sighted. The Financial Conduct Authority’s consultation, “Retirement reforms and the Guidance Guarantee”, stated that,

“to be effective the guidance will need to be tailored, providing consumers with sufficient personalised information, so that they can understand their options and make confident, informed decisions about their retirement choices.”

We appear to be getting something far less useful. In evidence to the Work and Pensions Committee in April, the Pensions Minister suggested that guidance will be more general in nature:

“The thing we are talking about is free to the customer. There is no charge for it. It is what we call ‘guidance’, rather than independent financial advice, so it is not formal, detailed or product-specific; you can go and buy that if you want to, but this is familiarising people with the options they have, and some of the concepts, even. Most people do not know what an annuity is.”

There is much that we do not know. We do not know the detail of what will be funded, the level of levy used to pay for it, what the guidance will be expected to cover, or what it is expected to achieve. Even at the end of the debate, we appear to have more questions than answers—questions that go to the heart of issues that will be central to ensuring that the programme works. We will be picking up on those issues of detail, fairness and guidance when the Bill reaches Committee.

--- Later in debate ---

[Priti Patel]

I thank my hon. Friend for acknowledging that work and for his thoughtful contribution. He has many pension providers in his constituency. Those insights have helped to inform the debate and shape the Bill.

The aim of guidance is to empower consumers to make informed and confident decisions on how to use their pension savings in retirement. Information alone is not enough to change consumer behaviour. The Government are committed to maximising awareness of the guidance service. Key to that will be the regulatory requirements on providers and schemes to signpost to guidance at key points when individuals are trying to access their pension pot. In its recent consultation on the changes surrounding new pension flexibilities, the FCA has been clear about requiring genuine signposting, including rules that ensure firms cannot circumvent consumers’ right to guidance. An essential part of the development of the guidance will be determining what engages consumers effectively. The Government are assessing engagement and take-up rates, and testing different engagement strategies informed by behavioural insight teams as part of piloting work beginning this autumn. Again, this is about getting it right. My hon. Friend the Member for Redcar (Ian Swales) made an important point about that. We are getting one bite of the cherry and we need to make sure we get it right.

[Ian Swales]

Can the Minister say a little more about the timing? She said that a consultation is under way; presumably its outcome will affect what the Government do. People who are due to take pensions in April will be considering their options from January and February onwards, so when will we be clearer about the nature of the guidance and the universality of provision, and when will people be told about that?

[Priti Patel]

Let me assure my hon. Friend that guidance will be available in good time. It is also imperative that we get the guidance right, so we are working assiduously to do exactly that.

The scope of the high-level content of the guidance was set out in the FCA consultation that it ran in anticipation of its standard-setting role. The Treasury and its delivery partners, the Pensions Advisory Service and Citizens Advice, are working up the operational details and the context of the guidance while adhering to the FCA standards.

I will come to some of the other points raised by colleagues, but I would like first to touch on the Ipsos MORI poll that has been referred to. The poll also found that 88% of people would not draw down their entire fund. People said that rather than just spend their funds on a range of things, they would use them for good financial planning. That is exactly what these reforms are all about: trusting people with their money.