(9 years, 7 months ago)
Westminster HallWestminster Hall is an alternative Chamber for MPs to hold debates, named after the adjoining Westminster Hall.
Each debate is chaired by an MP from the Panel of Chairs, rather than the Speaker or Deputy Speaker. A Government Minister will give the final speech, and no votes may be called on the debate topic.
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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.
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?
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.
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?
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.
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?
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.
(9 years, 8 months ago)
Commons ChamberTailored 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.
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?
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.
(10 years, 8 months ago)
Commons ChamberI rise to congratulate the Minister on the excellent introduction of an independent payments regulator. I am amazed that this absolute game changer has not received more press attention, because our banking system still, on today of all days, faces the threat of being undermined in the eyes of consumers by its appalling behaviour. Today, Lloyds bank has been fined £28 million for its appalling treatment of retail customers—that is the biggest fine for retail misconduct ever. I stress that the reason for that, as the investigations by the Treasury Committee and the Parliamentary Commission on Banking Standards showed, is a profound lack of competition in the UK banking sector. Even worse, we even have the last great remaining closed shop, because the Payments Council regulates the banks, yet the banks own the Payments Council, and the banks both clear through and own the payments infrastructure. So there is no incentive to innovate and no self-regulation, and there is a deliberate suppression of competition. What the Minister has done by introducing an independent payments regulator is open that can of worms. The regulator will be a real game changer for the competitive outlook in the UK in future, and I wish to explain why that is.
The proposal is for the payments regulator to look at access to the payments system. As we know, the big clearing banks access the payments system directly, but challenger banks such as Virgin Money, Metro Bank and Aldermore have to go through an agency clearer. If its systems break down, those banks cannot serve their customers. Not only that, but because these banks have to go through the clearer to access the payments system, they get charged up to 10 times or 20 times as much as the clearers have to pay for one payments transaction. It is an absolute closed shop and it is appalling.
The payments regulator’s first job will be to examine access to the payments infrastructure and to say to the big banks, “You have to give direct access to every player.” The big banks argue, “You can’t do that because we all mutually underwrite one another’s payments.” As with any other clearing system, however, it is perfectly possible to leave a deposit up front and then to be called for more margin should you be running out of money, so the reason given for not allowing other banks direct access to the payments system is a completely spurious one. That will be item No. 1, and dealing with it will, in itself, create a completely different playing field for all those who want to come into the banking sector.
The hon. Lady is making a powerful point. Does she agree that a parallel situation would be having the big six electricity companies owning the grid and not allowing any other supplier on to it?
Yes, my hon. Friend is absolutely right. There are huge parallels between the banking closed shop and the energy closed shop. That is something I have been picking up, and I was recently in the media with him addressing this very subject.
Giving direct access to the payments infrastructure to all banks will reduce the barriers to entry, so I want further to congratulate the Minister on accepting the Treasury Committee’s recommendation that the PRA should have a specific competition objective. That is key, because the barriers to entry do not just relate to access to the payments system; there are regulatory barriers to entry. In other words, “If you are small, you cannot become a bank. Until you become a bank, you cannot become big. Therefore, you cannot ever become a bank.” We have created an environment where there are massive barriers to entry, so the payments system changes will really start to unravel that closed shop.
Importantly, I wish to put in one plea for full bank account portability. I know that the Minister has absolutely agreed that one of the first jobs of the new payments regulator will be to undertake a full cost-benefit analysis of account number portability. That would mean that if I want to switch banks in future, instead of waiting for even seven days, having to change all my direct debits, standing orders and bank account details, and having to be issued with new credit cards and cheque books and so on, I would simply be able to have my bank account details re-pointed at a new bank and so everything would remain the same. It would be instantaneous account switching.
When we move our mobile phone account number now, we can take our phone number with us. In a world where we had full number portability, we would also be able to take our bank account details with us. That would be a radical game changer for competition. New entrants could come in and attract new business on the promise that if a consumer does not like them they can always move somewhere else tomorrow. Banks would lie awake at night wondering how to retain their customers through excellent customer services rather than what next they can fleece them with, which happens all too often now.
Competition is not the only issue. There are two other items I wish to mention. The first is about resolution. We have put in all this effort to try to ensure that, in future, a bank cannot fail. We have increased capital requirements and changed the regulatory structure, which is all to the good. None the less, we know that in future, as sure as eggs are eggs, a bank will fail. What bank number portability will do is to give an instant means of resolution to avoid ever seeing again queues of people down a street trying to get their money out of a bank that they are concerned about.
If we in the UK become the first country to introduce full bank account number portability, we will be leading the world. By creating a shared infrastructure for payments, we will create a massive business opportunity for UK plc. I congratulate my hon. Friend, the Minister, but urge him to go even further and to support, when the time comes, the prospect of full account number portability.