James Murray
Main Page: James Murray (Labour (Co-op) - Ealing North)Department Debates - View all James Murray's debates with the HM Treasury
Finance (No.2) Bill (First sitting)
James Murray Excerpts(3 years, 8 months ago)
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The Exchequer Secretary to the Treasury (Kemi Badenoch)
It is a pleasure to serve under your chairmanship, Sir Gary. The clause makes changes to ensure that decommissioning expenditure incurred by oil and gas companies in anticipation of the approval of an abandonment programme, a condition imposed by the Secretary of State or an agreement made with the Secretary of State qualifies for decommissioning tax relief.
Companies operating oilfields in the UK and the UK continental shelf have always been required to decommission the wells and infrastructure at the end of a field’s life. The tax relief for decommissioning expenditure is an important part of the UK’s overall oil and gas fiscal regime, which is balanced to maximise economic recovery of the nation’s national resources while ensuring that the nation receives a fair return for those natural resources. The changes made by the clause will clarify that appropriate expenditure on decommissioning incurred in anticipation of the approval of an abandonment programme, a condition imposed by the Secretary of State or an agreement made with the Secretary of State qualifies for decommissioning tax relief.
The clause does not have any Exchequer costs and does not alter the original policy intent of decommissioning tax relief. It will provide certainty for the UK oil and gas sector, which supports approximately 260,000 jobs, around 40% of which are in Scotland, and which has paid approximately £350 billion in production taxes to date. The clause will provide certainty that all appropriate decommissioning expenditure qualifies for decommissioning tax relief.
James Murray (Ealing North) (Lab/Co-op)
It is a pleasure to be back in Parliament physically and to lead on a Public Bill Committee for the first time under your chairmanship, Sir Gary.
James Murray
You will not be saying that by the end, Sir Gary.
We recognise that this clause makes a largely technical amendment to the Capital Allowances Act 2001, meaning that certain types of expenditure incurred by oil and gas companies on decommissioning plant and machinery before the formal approval of an abandonment programme will qualify for decommissioning expenditure relief. We will not oppose the clause. However, I want to ask the Minister about subsection (9), which introduces a clawback mechanism. It seems to apply when the anticipated abandonment programme has not been approved and the anticipated condition has not been imposed by the Secretary of State, or an anticipated approval has not been given by the Secretary of State within a specified period—namely, five years from the last day of the accounting period during which the expenditure was incurred.
In such cases, there is an obligation on the beneficiary of the relief to notify Her Majesty’s Revenue and Customs of the situation and to set out how any relevant returns are to be amended. Clearly, as with all tax reliefs, there is a risk that some companies might seek to exploit or use them inappropriately. I would therefore welcome the Exchequer Secretary setting out whether she thinks there is any potential risk of the relief being misused. If so, what actions will HMRC take to reduce the risk? What proactive investigations will HMRC make to verify that those taking advantage of the relief are doing so legitimately, and what penalties or other enforcement action will be taken if instances are uncovered where that is not the case?
Kemi Badenoch
I thank the hon. Gentleman for his questions. He raises an interesting point. We have been discussing industry’s concerns for some time over the lack of clarity on decommissioning expenses incurred prior to the approval of an abandonment programme. Industry already supports the measure. We consulted it on the draft legislation, and the clause takes account of comments received, particularly on the clawback mechanism that the hon. Gentleman refers to. We have now excluded the ongoing maintenance costs of assets waiting to be decommissioned from the clawback.
On clawbacks specifically, where expenditure is claimed on decommissioning in anticipation of an approval, the legislation allows five years for that approval to be in place before the clawback is triggered. We listened to industry’s comments during our consultation, and adjustments have been made to the clawback to exclude maintenance costs from the mechanism. The Department for Business, Energy and Industrial Strategy is responsible for overseeing decommissioning work on the UKCS. Where the anticipated approval condition or agreement is not approved by BEIS in the five-year period, it is appropriate for any relief to be clawed back. The legislation ensures that only legitimate decommissioning expenses qualify, and the clawback provides an important protection for the Exchequer.
Question put and agreed to.
Clause 16 accordingly ordered to stand part of the Bill.
Clause 17
Extensions of plant or machinery leases for reasons related to coronavirus
Question proposed, That the clause stand part of the Bill.
Jesse Norman
The clause makes provision for an easement for plant and machinery leases caught by anti-avoidance legislation when extended due to coronavirus. The easement has the effect of turning off the anti-avoidance legislation under specific circumstances. The reason for that is that HMRC has identified an issue where some plant or machinery leases could be adversely affected by the Government’s anti-avoidance legislation. This relates to specific circumstances where a lease is extended due to covid-19, and creates unexpected and unwelcome outcomes for many lessors and lessees. Therefore, at the Budget, the Government announced changes to ensure that the anti-avoidance mechanism is not unnecessarily triggered by legitimate commercial activity.
The measure will affect leases where a relevant change in consideration is implemented between 1 January 2020 and 30 June 2021. It is an easement, restoring eligibility to claim capital allowances to the position as originally intended immediately prior to the date of the change in consideration due under the lease. If not deemed appropriate, either party may choose not to apply this treatment, ensuring that no one will be left worse off by the change. The Government expect that the services, construction, manufacturing and agricultural sectors, in particular, will be positively affected by the changes.
The measure is important in assisting businesses that have been badly hit in their legitimate activity by the effects of the pandemic and in ensuring that they are not struck by unexpected tax charges. I therefore move that the clause stand part of the Bill.
James Murray
We recognise that the clause relates to the leasing of plant or machinery, and specifically to a situation where a lease of such machinery is extended due to coronavirus. Without this provision, such an extension could trigger anti-avoidance legislation, and we understand that the clause therefore amends relevant subsections relating to long and short leases in the Capital Allowances Act 2001, with the effect of switching of the anti-avoidance provision and returning the situation to what it would have been without coronavirus.
We understand that the need for the clause was raised by the Finance and Leasing Association, which represents 40% of relevant lessors in the UK, and that after consideration the Treasury agreed that the change for which the clause provides was needed. It will cover only covid-19-related lease extensions where anti-avoidance legislation is triggered from 1 January 2020 to 30 June 2021, as the Minister said.
Alison Thewliss
Amendment 2 has the opposite aim, I suppose, to Government amendment 16. We proposed to update the Income Tax Act 2007 so that the extended loss carry-back rules in the Bill, in relation to furnished holiday lettings businesses, would have effect, whereas the Government clearly intend that the measure will no longer apply to those businesses.
In tabling our amendment we assumed that the Government had drafted their measure incorrectly and had accidentally excluded the people in question, but clearly we were wrong. They have not excluded them as much as they had hoped to, and are coming back to double down on that exclusion by means of amendment 16. Our technical amendment would help the sector, and we are keen for the Government to take it on board.
The Low Incomes Tax Reform Group has also raised the wider implications of clause 18 and the potential for unintended consequences and pitfalls resulting from the interaction between any tax refund and universal credit. Has the Minister given that any consideration? The group feels that there has been a significant increase in claims for universal credit during the pandemic—it is clearly evidenced—including from self-employed individuals and limited company directors who may never have needed to claim such support before the pandemic.
Under the universal credit legislation, self-employed income for a universal credit monthly assessment period is calculated by taking actual receipts in the assessment period and deducting any amounts allowed as expenses, tax, national insurance and any relievable pension contributions in that period. The group points out that receipts specifically include any refund or repayment of income tax, VAT or national insurance contributions related to a trade, profession or vocation, so any tax refund made as a result of the provision may therefore fall to be treated as income for universal credit purposes in the assessment period in which it is received, which in most cases will lead to a reduction of universal credit of 63p for every £1 of refund. In addition, further to that, if the refund is large enough, it might trigger the surplus earnings rules, meaning that any excess income in one assessment period can be carried forward and treated as income in the next assessment period, up to a maximum of six months.
It would be helpful if the Minister said whether the Government are aware of the issue and what plans they have to raise new universal credit claimants’ awareness of it, so that they can understand that if they receive the refund while they are in receipt of universal credit, they will need to report it as income for universal credit purposes. They will have to understand the implications fully.
This is an unintended issue arising from the pandemic. People who have never claimed universal credit before, who may have recourse to the provisions that the Government are making, will not understand how the two things interact. They might not have access to appropriate financial advice, and I would not want the Treasury or HMRC to be doing something on one hand that the Department for Work and Pensions did not understand on the other. What discussions has the Minister had with DWP Ministers, and what information does he intend to give out to people? As the Low Incomes Tax Reform Group points out, there could be implications that have not been considered.
James Murray
We note that clause 18 and schedule 2 provide a temporary extension to the carry-back trading losses provisions from one year to three years, for losses of up to £2 million for a 12-month period, both for companies and for unincorporated businesses. Those extensions to trade loss carry-back rules for both corporation and income tax have been introduced in response to covid-19 to help businesses that have suffered economic harm as a result of the restrictions placed on them.
We understand that the intention is to provide cash-flow benefit to affected businesses by providing additional relief for trading losses. As we have heard, the Chartered Institute of Taxation has said that it welcomes this measure for giving a cash injection to businesses with a track record of making profits and paying tax, but which have suffered during the pandemic. The Chartered Institute of Taxation points out that, in many cases, this measure will represent a cash-flow, rather than an absolute, cost to Government. The cost will reverse as the business, having used up its losses by carrying them back, makes profits and pays taxes sooner in the future.
Although we recognise the broad support for the measure from the Chartered Institute of Taxation and the wider importance of helping businesses with cash flow when they have suffered as a result of covid restrictions, we have tabled new clause 10, which relates to tax avoidance and evasion. We do not doubt that most businesses benefiting from the measure will do so legitimately. Given the importance of making sure public money is spent effectively and as intended, however, we believe the Government should identify any risk and take action to mitigate those risks as necessary.
Furthermore, we would also like to raise the issue identified by the Chartered Institute of Taxation’s Low Incomes Tax Reform Group—namely, the potential interaction of any tax refund with universal credit, as set out by the hon. Member for Glasgow Central. I would therefore like to reiterate her call to the Minister to ask whether he is aware of this issue. If so, what plans do the Government have to raise awareness of this issue with universal credit claimants to make sure they understand that, if the refund is received when they are in receipt of universal credit, they will need report this income for UC purposes?
Jesse Norman
I am grateful to the hon. Members for Glasgow Central and for Ealing North for their questions; let me speak to the points they have raised.
The hon. Member for Glasgow Central suggested—in fact, she averred—that she had tabled her amendment based on what I fear is a misunderstanding of the legislation, without her being aware that this was actually an incorrect feature of the legislation that the Government were seeking to correct. I apologise if she has been misled. It is certainly not part of any intention of the Government to change what is a long-standing arrangement for the taxation of furnished holiday lettings, and there was no intention to extend the relief to businesses that do not currently qualify for loss carry-back relief. I apologise if the legislation has inadvertently misled her, and I hope on that basis that she will not press her amendment.
On the interaction with universal credit, the key point I would make is that this is a change designed to provide businesses with flexibility. Universal credit is a cash flow-based benefit, and rightly so, because it intends to track people’s cash flow as it rises and falls in receipt of the benefit. Of course, my officials consider all these matters in the round. If there are further technical points that the hon. Members for Glasgow Central and for Ealing North would like to put forward, based on the specific feedback of the Low Incomes Tax Reform Group, we would be happy to listen to them and respond accordingly.
Question put and agreed to.
Clause 18 accordingly ordered to stand part of the Bill.
Schedule 2
Temporary extension of periods to which trade losses may be carried back
Amendment made: 16, in schedule 2, page 101, line 34, leave out sub-paragraph (5).—(Jesse Norman.)
This amendment clarifies that relief under Part 1 of Schedule 2 to the Bill is not available to a furnished holiday lettings business that is treated as a trade under section 127 of the Income Tax Act 2007.
Schedule 2, as amended, agreed to.
Clause 19
R&D tax credits for SMEs
Question proposed, That the clause stand part of the Bill.
Jesse Norman
Clause 19 and schedules 3 and 4 make changes to deter abuse in the payable credit element of the research and development tax relief for small or medium-sized enterprises, or SMEs. R&D tax reliefs, including the SME scheme, support businesses to invest and are a core part of the Government’s support for innovation. In 2017-18 alone, there were over 54,000 claims to the SME scheme, providing relief of £2.7 billion, which supported over £10 billion of R&D investment.
The SME scheme has two parts. First, the relief functions as a corporation tax additional deduction, reducing the profits on which a company pays corporation tax by 130% of qualifying expenditures, on top of the standard 100% deduction. Secondly, if a company is loss making, or if the deduction creates a loss, they may be entitled under the law as it stands to surrender losses in exchange for a payable credit up to 14.5% of 230% of qualifying expenditures.
However, the Government have been concerned about abuse in the payable credit element of the scheme. In particular, some loss-making companies that do little R&D themselves pay another person, such as a company based abroad, for a lot of R&D simply to have access to the payable credit element of the relief. They are thus benefiting themselves, but the benefit of the R&D is not accruing to the UK economy. To prevent abuse of the SME scheme, Budget 2018 announced a cap on the amount of payable credit that a company will be able to receive.
The change will limit the amount of payable credit available to some companies, and it will be set at £20,000 plus three times the company’s pay-as-you-earn and national insurance liability. The liability acts as a proxy for actual R&D activity happening in the UK to ensure that claimants have an actual employment footprint here in order to benefit from the payable credit.
The measure has been carefully designed to ensure that non-abusive companies are unaffected, and it achieves that through three important features. First, the threshold of £20,000 means that the smallest claims will be uncapped. Secondly, this is based on the total liability for all employees, not just the liability for employees working on R&D. Where companies subcontract R&D to connected persons, or use agency workers supplied by connected persons, they will be able to include costs attributable to that as well. Thirdly, companies that can show they are creating or preparing to create intellectual property, or are managing intellectual property that they have created, and where less than 15% of the R&D expenditure is with other connected companies, may be exempt from the cap.
Compared with the draft legislation published last year, the definition of intellectual property has been expanded, based on comments made, so that it will include both know-how and trade secrets in order to cover cases in which a company does not wish to or cannot seek a patent. We have worked closely with the industries involved on this design. The changes will take effect for accounting periods beginning on or after 1 April 2021. Up to 25,000 companies will be affected by the measure, although not all will see their payable credit reduced. The measure is expected to yield £455 million across the scorecard period.
The measure is an important step to protect the integrity of the SME scheme. The Government have extensively consulted in order to ensure that legitimate businesses are not caught, and the new rules will ensure that the reliefs remain sustainable, enabling them to continue to support innovation into the future.
James Murray
Clause 19 and schedules 3 and 4 introduce a new restriction, or cap, on the payable element of the R&D tax credit for SMEs. Tax reliefs that seek to incentivise firms to invest in R&D form an important part of the Government’s approach to innovation. However, as the Government admit, the SME tax credit has become a target for fraud and abuse. We welcome any Government efforts to counter fraudulent attempts to claim the SME R&D tax credit. Will the Minister set out figures explaining the extent of the fraud and abuse, including how much it has, or is estimated to have, cost the Exchequer in each of the financial years 2018-19 through 2020-21?
We note that this change has been a few years in the making. It was first announced at the 2018 Budget, the Government consulted on its detailed design in 2019, and there was a further consultation in spring and summer 2020. The opinion of the Chartered Institute of Taxation is that the outcomes of these two consultations have fed into the design of this measure in a way that it welcomes, as it considers that these changes will minimise the impact and deterrence effect on businesses undertaking genuine R&D.
The process of consultation continues, and at the March Budget, the Government announced a new review of R&D tax relief, supported by a consultation with stakeholders. Without, of course, pre-judging the outcome of that review or consultation, we would like to ask the Minister to set out any early thoughts he has about where this process may lead, both in relation to R&D tax credit and tax relief generally, and specifically as they apply to SMEs. We would welcome the Minister setting out his response to this point, as well as—as I mentioned—the figures or estimates he has on the impact on the Exchequer of fraud involving, and abuse of, the SME tax credit in each of the three past financial years.
Jesse Norman
I am grateful to the hon. Member for his questions. Of course, it is in the nature of avoidance that it is not possible to estimate: it is avoidance or potential avoidance, so it is not possible to give accurate figures as to the exact levels of avoidance that has taken place. However, it is noticeable that this measure has an estimated positive revenue effect of over £400 million, which is an interesting fact in and of itself, and quite an interesting potential indicator of the importance of the measure.
On the wider issue of progress in this area, the hon. Member will be aware that we have a review underway. It would not be appropriate for me to pre-judge the scope of this, or indeed the outcome of a review that has only relatively recently been initiated, but I assure him that it will be thorough and effective.
Question put and agreed to.
Clause 19 accordingly ordered to stand part of the Bill.
Schedules 3 and 4 agreed to.
Clause 20
Extension of social investment tax relief for further two years
James Murray
I beg to move amendment 23, in clause 20, page 13, line 20, leave out “6 April 2023” and insert “6 April 2026”.
James Murray
Clause 20 and our amendment 23 relate to the social investment tax relief, which was introduced in 2014 to encourage investment in qualifying social enterprises and trading charities. It offers investors a range of tax reliefs, including income tax relief and CGT holdover relief, on gains reinvested in qualifying enterprises. This relief originally contained sunset provisions that would have terminated it on 26 April 2019. The sunset was extended in 2017 to 6 April 2021, and now clause 20 is extending the operation of the scheme further, to investments made in enterprises on or before 5 April 2023.
We support the decision to extend the life of this relief, which has been called for by the social investment sector, stakeholders such as the Co-operative party, and the shadow Chief Secretary to the Treasury, my hon. Friend the Member for Houghton and Sunderland South (Bridget Phillipson), during consideration of the Finance Bill 2020. However, we remain concerned that the Government need to be doing more to increase its take-up, which we note has been lower than expected. HMRC’s last statistics, released in May 2020, set out that since 2014—when the relief was launched— 110 social enterprises have raised funds of £11.2 billion through it. Indeed, the results of the Government’s 2019 call for evidence on the relief say:
“Around three-quarters of respondents reported difficulty in using SITR. Reasons given varied and included a lack of capital supply (even with the offer of tax relief) for the levels of demand; a lack of or unclear guidance; complex eligibility restrictions; and limited resources within social enterprises to manage SITR processes and investments.”
Concerns about low take-up are shared by the Chartered Institute of Taxation, which recognises that although some obstacles to using the social investment tax relief to invest in social enterprises have been removed, the effect is yet to bed in, and significant other barriers to take-up remain. I would therefore be grateful if the Minister set out what the Government are doing to improve take-up of the social investment tax relief, and whether they would consider consulting more widely on how investment in social enterprises can be facilitated. Alongside concerns that the relief is overly complex for the smaller organisations it is designed to support, analysis by the Chartered Institute of Taxation also raises concern that this relief is less well suited to investments made by way of loans, even though, anecdotally, loans to social enterprises are more common than equity investment. To understand the situation in relation to loans better, I would be grateful if the Minister informed us what proportion of the £11.2 million raised through the social investment tax relief since 2014 have been in the form of loans.
More widely, the Chartered Institute raised concerns that a two-year period to address the current barriers is unlikely to be sufficient and might put off some long-term investors. We therefore tabled amendment 23 to encourage the Government to consider and set out their view on amending the Bill to include a longer extension to the relief. I would be grateful for the Minister’s views on how long the relief should be extended.
Jesse Norman
I thank the hon. Gentleman for his questions, to which I shall respond when I have described how the clause works.
Clause 20 extends the operation of social investment tax relief for two years, until 5 April 2023. This will continue the availability of income tax relief and capital gains tax reliefs for investors who make investments in qualifying social enterprises. This measure ensures that the Government will continue to support social enterprises in the UK that are seeking patient capital for growth.
SITR encourages investment in social enterprises by offering income tax and capital gains tax reliefs to individual investors who subscribe for new shares, or make a new debt investment, in qualifying enterprises. Between 2014 and 2018-19, 110 social enterprises used SITR to raise £11.2 million in investment—a much lower engagement than originally anticipated. In line with commitments made when SITR was expanded in 2016, the Government conducted a review of the scheme last year, including through a call for evidence. Following the review, the Government now propose to extend SITR’s sunset clause from April 2021 to April 2023.
James Murray
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 20 ordered to stand part of the Bill.
Clause 21
Workers’ services provided through intermediaries
Question proposed, That the clause stand part of the Bill.
Jesse Norman
The clause relates to workers’ services provided through intermediaries and makes technical changes to the off-payroll working legislation. The off-payroll working rules exist to ensure that a contractor who works like an employee, but through a personal service company, pays broadly the same amount of tax as those who are directly employed. The rules ensure fairness between individuals who work in similar ways but through different structures.
This is not a new tax. The changes legislated for last year improve compliance with existing rules by transferring the responsibility for determining whether the rules apply from the contractor’s personal service company to their client and have taken effect from April 2021 in the private and voluntary sectors. The changes were implemented in the public sector in 2017. Reform was legislated for in the Finance Act 2020 and came into effect on 6 April this year, as planned.
The main change we are making in this clause is to address an issue raised late last year by stakeholders. A small section of the legislation introduced in the Finance Act 2020 and intended to prevent people from avoiding the rules through the use of artificial structures applied more broadly than was intended. This had the effect that some workers who were not intended to be within the scope of the rules would be caught. This would have placed obligations under the off-payroll working rules on a wider range of clients and engagements than was intended from 6 April 2021. The Government announced on 12 November 2020 that they would make a technical change in this Finance Bill to ensure that the legislation reflected the policy intent.
HMRC has worked closely with stakeholders to find a solution that both prevents avoidance and ensures that the legislation does not apply beyond the scope of the policy intent. The main technical change that we are making in this clause will ensure that the rules do not apply when the worker has no interest in the intermediary company or, when they have a less than material interest in the intermediary, their fee is already taxed wholly as employment income.
The clause also proactively introduces a targeted anti-avoidance rule, or TAAR, to future-proof the rules and further minimise any risk of contractors being drawn into avoidance arrangements. This will ensure that unscrupulous parties cannot exploit these conditions in order to avoid the rules.
The Government are also making two minor related technical changes, which were requested by stakeholders, to make it easier for businesses to operate the rules and to ensure that parties who provide fraudulent information are held responsible. Currently, workers are asked to inform their client whether their intermediary meets the conditions that mean the rules need to be considered. If the worker does not provide this information, clients must assume that the intermediary is in scope. This change will make it easier for parties to share information by allowing the intermediary, as well as the worker, to confirm to the client whether the off-payroll working rules need to be considered.
The second change amends the provisions related to fraudulent information. This will allow HMRC to take action against any UK-based party in the labour supply chain that provides fraudulent information, for example by claiming that an intermediary is out of the scope of the rules when they are not. Currently, the liability would rest with the worker if they, or someone connected to them, provided fraudulent information. This change ensures that the liability rests with any UK-based party in the labour supply chain that provided the fraudulent information. This protects others in the supply chain from being liable for underpaid tax and national insurance contributions when they have acted on this fraudulent information in good faith.
The clause ensures that the off-payroll working reform works as intended from 6 April, and it introduces minor, but helpful, technical changes that were recommended by stakeholders. These changes had effect from 6 April, when the off-payroll working reform took effect.
James Murray
As we have heard, clause 21 introduces a series of changes that relate to workers’ services provided through intermediaries, the provisions of which we support.
First, the clause makes amendments to the off-payroll working legislation in chapter 10 part 2 of the Income Tax (Earnings and Pensions) Act 2003, to address the unintended widening of the conditions that determine when a company is an intermediary and is subject to chapter 10. The off-payroll working rules were amended by the Finance Act 2020, including an amendment that sought to prevent potential avoidance of the rules by workers diluting their shares in these intermediaries, so they did not have a material interest. However, this amendment widened the determining conditions applicable to companies beyond policy intent. The clause limits the scope of these conditions by removing those engagements that would be unintentionally caused by the rules, restoring the original policy intent.
The clause further introduces a targeted anti-avoidance rule that seeks to prevent avoidance arrangements trying to circumvent the conditions for a company or partnership to use intermediaries for the purposes of chapter 10. As the Minister will know, we support measures that seek to address avoidance.
The clause introduces two further technical amendments. The first makes it easier for parties in a contractual chain to share information relating to the off-payroll working rules. The second places the loss liability for the tax on the party in the labour supply chain that provided the fraudulent information. It is right that those in a supply chain should be held responsible for providing fraudulent information.
As the Minister will know, other hon. Members raised concerns relating to clause 21 in Committee of the whole House earlier this week. My hon. Friend the Member for Brentford and Isleworth (Ruth Cadbury), who is co-chair of the all-party parliamentary loan charge group, asked whether the Government would consider amending the clause
“to allow only compliant umbrella companies to exist.”—[Official Report, 20 April 2021; Vol. 692, c. 912.]
In the interest of all views on this debate being fully considered, will the Minister set out his assessment of the impact that change would have?
Jesse Norman
I thank the hon. Gentleman for his question and for his support for this important legislation. Although not related to this clause, I thank him for the support the Labour party has given on the issue of the loan charge. These are important ways to curb forms of abuse of the rules that may mean people do not pay appropriate levels of tax, so I am grateful for that support.
On the last point that the hon. Gentleman raised, I am afraid that it was an unfortunate and slightly misinformed debate in Committee of the whole House, in part because there was a suggestion that somehow clause 21 benefited only umbrella companies and should be struck out, and that the effect of striking it out would somehow mean that workers would receive agency rights by working through agencies’ payrolls. In fact, that is not correct. Clause 21 has no bearing on workers receiving rights, and it also ensures that the rules apply correctly to agencies, and indeed to a wider group, such as employees on secondment. The effect of the amendment proposed in Committee of the whole House would have been to gut the legislation, which is why the Government opposed it.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Clause 22
Payments on termination of employment
Alison Thewliss
This technical amendment would ensure that, in new subsection 402D(6A) of the Income Tax (Earnings and Pensions) Act 2003, which is to be inserted by clause 22(7), the method of calculating post-employment notice pay for certain employees paid by equal monthly instalments whose post-employment notice period is not a whole number of months continues to be an alternative method that can be used if it benefits the employee, rather than being compulsory.
In common with the Institute of Chartered Accountants in England and Wales, we feel that the provisions do not match the intended policy. The institute has recommended that clause 22(7)(c), which inserts new subsection 402D(6A) into the Income Tax (Earnings and Pensions) Act 2003—I will be sending my notes to the Hansard people, given all the figures and facts—needs to make it clear that the method set out for calculating post-employment notice pay is an alternative that can be used, rather than something that must be used. That would make the legislation on termination payments align with the policy intent stated in the Bill’s explanatory notes, the “Notes on the Finance Bill resolutions 2021”, and HMRC’s existing guidance.
Clause 22 amends the income treatment of termination payments. As explained in paragraph 11 of the explanatory notes, clause 22(7)(c) provides for the new subsection to be inserted into the Income Tax (Earnings and Pensions) Act 2003. The clause will apply to individuals who have their employment terminated and receive a termination payment on or after 6 April 2021. We understand that the Institute of Chartered Accountants in England and Wales has identified some technical difficulties with the proposals. It believes that the intention of legislating this point is to put into law the ability to choose to adopt the alternative method, which is in line with HMRC’s policy of enacting extra statutory concessions and other easements following the Wilkinson case. If enacted, however, the Finance Bill will make it compulsory, so we recommend our amendment, and we ask the Government to give greater consideration to it. It is a very technical and detailed amendment, as I have said already, but I urge the Minister, if he cannot accept it today, to bring it back at a later stage.
James Murray
As we know, clause 22 focuses on post-employment notice pay, which is the part of a termination payment that is treated as being a payment in respect of the employee’s notice period, and that is subject to income tax and to employees’ and employers’ national insurance contributions. The clause amends the income tax treatment of termination payments in two ways. First, it provides a new calculation for the post-employment notice pay for employees who are paid by equal monthly instalments and whose post-employment notice period is not a whole number of months. That will help avoid excessive tax charges, and we support it.
Secondly, the clause aligns the tax treatment of post-employment notice pay for individuals who are non-resident in the year of termination of their UK employment with the treatment for all UK residents. Currently, post-employment notice pay is not chargeable to UK tax if an employee is non-resident for the tax year in which their employment terminates. This measure will ensure that non-residents are charged tax and national insurance contributions on post-employment notice pay to the extent that they have worked in the UK during their notice period. The change affects only individuals who physically performed the duties of their employment in the UK. That non-residents should make tax contributions on post-employment notice pay for the time that they worked in the UK during their notice period is a fair change, so we support the measure.
Kemi Badenoch
Clause 23 makes changes to reduce the van benefit charge—the VBC—to zero for employees who are provided with a company van that produces zero carbon emissions. The van benefit charge applies where an employee is provided with a company van by their employer that they use privately, other than for ordinary home-to-work commuting.
At Budget 2014, the Government announced that the van benefit charge for zero-emission vans would be a percentage of the flat-rate van benefit charge for conventionally fuelled vehicles until April 2020. Those changes were legislated for in the Finance Act 2015. At Budget 2015, the Government announced that the planned increases to the percentages for 2016-17 and 2017-18 would be deferred to 2018-19, and the percentages would increase by 20% for each subsequent tax year, rising to 100% in 2021-22. Those changes were legislated for in the Finance Act 2016.
The changes made by clause 23 will reduce the van benefit charge to zero from 6 April 2021 for all company vans that emit zero carbon emissions, giving those vehicles preferential tax treatment over conventionally fuelled vehicles. The Government announced the measure at Budget 2020 to incentivise the uptake of zero-emission vans and to help the UK to meet its legally binding climate change targets.
Transport is now the largest sector for domestic UK greenhouse gas emissions, and a significant proportion of that is accounted for by road transport. Moreover, vans tend to do more mileage and are more polluting than cars. By reducing the level of the tax charge that would otherwise be applicable, the change outlined in the clause will incentivise the uptake of zero-emission vans and support the Government’s environmental commitments.
James Murray
As we have heard, clause 23 seeks to amend the law in relation to the van benefit charge, a taxable benefit that arises when an employee is provided with a company van that is also used at times for personal journeys. We know that from 2021-22 the cash equivalent of the van benefit charge for zero-emission vans is nil. This applies only to those vans that cannot emit carbon dioxide under any circumstances when being driven.
The Government announced their intention to introduce the policy change in the 2020 spring Budget. As the measure seeks to incentivise the uptake of zero-emission vans, we support it standing part of the Bill.
Question put and agreed to.
Clause 23 accordingly ordered to stand part of the Bill.
Clause 27
Optional remuneration arrangements: statutory parental bereavement pay
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss new clause 2—Optional remuneration arrangements: statutory parental bereavement pay (review)—
“(1) The Secretary of State shall, before 1 April 2022, publish a report on the impact of section 27.
(2) The report in subsection (1) shall include consideration of the impact on—
(a) the take-up of statutory parental bereavement pay,
(b) revenues lost or gained due to tax avoidance, and
(c) productivity levels within the UK economy.”
This new clause would require the Secretary of State to publish a report about the impact of the measures in section 27, including take-up of statutory parental bereavement pay.
Alison Thewliss
We of course welcome all moves to support parents through the difficult time of bereavement. Our new clause would require the Secretary of State to publish reports on the uptake of statutory bereavement pay. It is important that we encourage people to take it up and that we let people know it is available to them. If the Government are not monitoring that, it is difficult to tell how effective the policy is.
Bereaved parents must be given the space and the time to grieve at a time of unimaginable tragedy. A lot will not know that they are entitled to this provision should the worst happen. We welcome the Government’s move to introduce a statutory requirement for people in the event of the death of a child, and we welcome the provisions more generally. Our aim is to increase the uptake of the payment and public knowledge of it.
In Scotland, we are certainly doing everything we can, within the constitutional and financial constraints placed on us, to support parents. We are increasing funeral support payments to reflect the cost of living. The 2020-21 Budget includes £1.3 million for funeral support payments in Scotland, increasing the standard rate from £700 to £1,000. The UK Government have not built the cost of inflation into their awards, but we will certainly be doing that for ours. It is important to take that cost into account when considering the whole package of support that can be delivered for bereaved parents.
Finally, my hon. Friend the Member for North Ayrshire and Arran (Patricia Gibson) has been pushing for an increase in bereavement leave for everybody in all circumstances, particularly given this last year, during which things have been so difficult for so many people across the country. Many employers still do not give the bereavement leave that they should when people are in such circumstances. I urge the Government to consider expanding bereavement leave to everybody in all circumstances. While it is incredibly important for parents, it is important that everybody has the time, space and financial backing to grieve. Sadly, many people do not have that vital support.
James Murray
As we have heard, statutory parental bereavement pay was introduced in April 2020. The measure in clause 27 has been proposed to ensure that a payment will not be treated as a variation in contract for certain long-term salary sacrifice arrangements, so that recipients of such payments are not disadvantaged. The clause will bring statutory parental bereavement pay into line with other benefits.
Without the change, if a parent takes such leave, the time they have taken off will factor into the calculation of a salary sacrifice arrangement. In effect, taking statutory parental bereavement pay would lessen their entitlement to salary sacrifice arrangements.
Exemptions for other benefits exist, but they were made before the introduction of statutory parental bereavement pay, so the latter is not included. Clause 27 will include it, bringing it into line with other benefits. That is sensible, and Labour supports the clause.
Jesse Norman
I am not sure there is a need to respond. I thank the hon. Member for Glasgow Central for her comments and the shadow Minister for the Opposition’s support.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Clause 29
Collective money purchase benefits
Question proposed, That the clause stand part of the Bill.
James Murray
Clause 29 relates to the tax treatment of collective defined contribution schemes as introduced by the Pension Schemes Act 2021. We support the introduction of CDC schemes, and schedule 5 sets out in detail how they will be treated for tax purposes.
As the House of Commons Library explains, in CDC schemes both the employer and the employee contribute to a collective fund from which retirement incomes are drawn. The funding risk is borne collectively by the individuals whose investments make up the fund. In a similar way to a defined contribution scheme, the employer carries no ongoing risk.
The Opposition played a crucial role alongside trade unions to allow the Royal Mail to set up a CDC pension agreement with the Communication Workers Union in November 2018. We also warned, during the passage of the Pension Schemes Act, that we need CDC schemes to avoid the same pitfalls as defined benefit schemes as they relate to intergenerational fairness. CDC was first identified as a possible solution for Royal Mail workers being transferred to a less generous defined contribution scheme in 2017, which might not have provided sufficient income in retirement. The principle of a CDC scheme was agreed, and a specific Royal Mail CDC scheme was designed and modelled.
Work by Willis Towers Watson actuaries suggests that the CDC scheme will on average produce 70% more for an individual than a defined contribution scheme, and 40% more, currently, than a defined benefit scheme, according to the CWU. The scheme would replicate the old defined benefit scheme in design, producing a wage for retirement generated by a CDC and a guaranteed lump sum.
Although the CDC in different forms is used in other countries, such as Canada, Denmark and the Netherlands, no scheme of its type has previously existed in the UK. Legislation was therefore required. The first CDC scheme, in Royal Mail, is expected to be launched later this year, now that the Pension Schemes Act has been passed. Employers in the UK will now have an option to offer three, rather than two, types of scheme: defined contribution, defined benefit and collective defined contribution.
Given that the design of the CDC scheme is entirely new, we recognise that the clause will ensure that they may function in the same way as other schemes in relation to existing pensions tax treatment such as the annual allowance. Our new clause 9 simply asks that the Treasury lays before the House within 24 months of the commencement of the first collective money purchase pension scheme a review of the impact of clause 29 and schedule of 5, including on the distribution of benefits within collective money purchase schemes according to the age of members of the scheme.
CDC schemes are new. As the Minister has agreed, it is important that we ensure intergenerational fairness. I would therefore welcome his ongoing consideration as regards carrying out such a review.
Jesse Norman
I thank the hon. Gentleman for his comments. I anticipated them in my remarks. I would say that, as he has indicated, the issue was carefully discussed and reviewed—rightly so—in the passage of the Pension Schemes Act 2021. The importance of there being no difference in treatment between different cohorts and age groups of scheme lenders was made clear, and it was made clear that the regulations would cover that. That will be required by law, and it will fall not to HMRC or the Government, but to the independent Pensions Regulator to adjudicate on the effectiveness of the scheme.
Question put and agreed to.
Clause 29 accordingly ordered to stand part of the Bill.
Schedule 5
Pension schemes: collective money purchase benefits
Amendments made: 17, to schedule 5, page 116, line 25, after “36(7)(b)” insert “or 87(7)(b)”.
This amendment ensures that the new paragraph 2(9) of Schedule 28 to the Finance Act 2004 (inserted by paragraph 20 of Schedule 5 to the Bill), which deals with benefits payable by a collective money purchase scheme in the event of its being wound up, operates correctly in relation to a scheme governed by the law of Northern Ireland.
Amendment 18, to schedule 5, page 116, line 32, after “36(7)(b)” insert “or 87(7)(b)”.—(Jesse Norman.)
This amendment ensures that the new paragraph 2(10) of Schedule 28 to the Finance Act 2004 (inserted by paragraph 20 of Schedule 5 to the Bill), which deals with benefits payable by a collective money purchase scheme in the event of its being wound up, operates correctly in relation to a scheme governed by the law of Northern Ireland.
Schedule 5, as amended, agreed to.
Clause 34
Repeal of provisions relating to the Interest and Royalties Directive
Question proposed, That the clause stand part of the Bill.
Jesse Norman
This is a small technical clause and I will not spend long on it. The clause repeals legislation that gave effect to the EU interest and royalties directive in UK law. The change will mean that the taxation of EU companies will be aligned with the way in which the UK taxes companies in the rest of the world, meaning that the taxation of intra-group payments of interest and royalties will be governed solely by the reciprocal obligations in our double taxation agreements. The clause removes from our law an obligation that we are no longer bound to apply and ensures that all foreign companies are subject to the same rules regardless of where they are resident.
James Murray
We do not oppose the clause, which repeals legislation that gave effect to the EU interest and royalties directive in UK law, and which will ensure that companies resident in EU member states will cease to benefit from UK withholding tax exemption now that the UK no longer has an obligation to provide relief. As a result, EU companies will no longer receive more favourable treatment than companies based elsewhere in the world and the UK’s ability to withhold tax and cross-border payments of annual interest and royalties will be governed solely by the reciprocal obligations in double taxation arrangements. We understand what the clause sets out to do and do not oppose its standing part of the Bill.
Question put and agreed to.
Clause 34 accordingly ordered to stand part of the Bill.
Clause 35
Payments made to victims of modern slavery etc
Question proposed, That the clause stand part of the Bill.
Jesse Norman
This is an important clause. It exempts financial support payments made to potential victims of modern slavery and human trafficking from income tax. The UK has a legal obligation, under the Council of Europe convention on action against trafficking in human beings, to assist victims of modern slavery and human trafficking. Financial support payments have been made to victims of modern slavery and human trafficking since 1 April 2009, when the trafficking convention came into force in the UK.
When a potential victim of modern slavery and human trafficking is identified, they are considered under the national referral mechanism. This is a framework for identifying victims of modern slavery and human trafficking and it ensures that they receive appropriate financial support. In the absence of a specific exemption, the payments made by the UK Government and the devolved Administrations to potential victims while they are assessed under the national referral mechanism are charge- able to income tax. The changes made by clause 35 mean that payments made from 1 April 2009 to potential victims of modern slavery and human trafficking are exempt from income tax. It is important to note that HMRC has not made any income tax deductions from payments already made to potential victims.
These changes confirm the Government’s commitment to assist potential victims of modern slavery and human trafficking under the trafficking convention. The clause provides clarity that financial support payments made to potential victims are exempt from income tax. I commend the clause to the Committee.
James Murray
We are pleased to support this important clause, which, as we have heard, introduces an income tax exemption for payments made to victims of modern slavery and human trafficking. As we also heard, the UK has an obligation under the Council of Europe convention on action against trafficking in human beings to assist victims of modern slavery and human trafficking in their physical, psychological and social recovery, including material assistance. The exemption from income tax will have effect from 1 April 2009, when financial support payments started. We welcome this measure, being wholly relieving and with retrospective effect, and are pleased to support its standing part of the Bill.
Alison Thewliss
I rise to support the clause; I think it is absolutely the right thing to do. May we have more information on how many people have received such payments since 2009? It would be useful to have a picture of how many people have benefited from this.
Jesse Norman
Clause 37 makes technical amendments to the corporate loss relief rules introduced in 2017. These ensure that the rules function as originally intended. They protect revenue by preventing companies from claiming excessive loss relief.
When a company makes a loss, it can carry forward that loss and use it to offset its taxable profits in future years. The Finance (No. 2) Act 2017 reformed the UK’s loss relief regime. There were two main effects of that reform. First, the amount of profit that can be relieved by carried-forward losses is restricted to 50%, subject to a £5 million deductions allowance. Secondly, losses arising after 1 April 2017 can be carried forward and relieved more flexibly as they can be set against different types of income and against profits of other members of the same group. The loss restriction ensures that companies cannot use carried-forward losses to reduce their tax bill to nothing when they are making substantial profits.
Legislation for the new loss relief rules needed to be sufficiently detailed to ensure that they were robust in relation to the complex arrangements of large companies operating across a diverse set of activities. The Government have since identified limited circumstances where the rules are not functioning as intended.
The clause ensures that groups can still have access to the £5 million allowance following a corporate acquisition or demerger. This will allow those groups access to the correct amount of loss relief to which they are entitled and as was originally intended. The clause also makes several minor technical amendments to the loss reform rules. It ensures: first, that anti-avoidance rules that apply following a “change of ownership” operate correctly; secondly, that the technical calculations that determine the amount of losses that can be set against profits apply as intended; and thirdly, that the rules governing how the £5 million allowance is allocated across corporate groups applies as originally intended and in a way that will reduce the administrative burdens on groups.
Due to the £5 million allowance, some 99% of companies are not financially affected by the carried-forward loss restriction. That will not change as a result of these amendments. Some companies will also benefit from the simpler rules for calculating their loss relief restriction and, in some cases, companies will benefit from a reduced administrative burden.
James Murray
We do not oppose clause 37, which amends the loss relief legislation and ensures that the relevant part of the Corporation Tax Act 2010 meets the policy objective of restricting relief for certain carried-forward losses. Schedule 8 allows certain groups to access an allowance to which they are entitled following acquisition or demerger. The schedule also makes further amendments to the transfer of trade provisions where there has been a change of ownership, group relief for calculation of loss restriction and allocation of the deductions allowance and group allocation statement submission requirements. As these amendments have been made to ensure that the legislation works as intended and to reduce administrative burdens, we do not oppose them.
Question put and agreed to.
Clause 37 accordingly ordered to stand part of the Bill.
Schedule 8 agreed to.
Clause 38
Corporate interest restriction: minor amendments
Question proposed, That the clause stand part of the Bill.
Jesse Norman
Clause 38 makes two changes to ensure that the corporate interest restriction rules work as intended. The Government introduced these rules in 2017 to counter base erosion and profit shifting by multinational groups. The rules restrict the ability of large businesses to reduce their UK taxable profits through excessive interest and other financing costs.
The first change applies from 1 July 2020 and clarifies the interaction between the rules governing the interest restriction, real estate investment trusts and the territorial scope of corporation tax. From 6 April 2020, the UK property rental business of non-resident companies within a UK real estate investment trust group comes within the charge to corporation tax rather than income tax. The proposed change ensures that such a non-resident company will still face the consequences of any interest disallowance, even if it decides to allocate its interest disallowance to a residual business rather than to its UK property rental business.
The second change applies from 1 April 2017 and deals with an administrative matter. As part of the application of the interest restriction rules, a group reporting company is required to file an interest restriction return. The proposed change ensures that no penalties will arise for the late filing of a return where there is a “reasonable excuse” for the failure. This exclusion is included within the corporation tax self-assessment regime and should apply in the same way to the interest restriction regime.
James Murray
We do not oppose clause 38, which makes technical amendments to the corporate interest restriction rules in part 10 of schedule 7A to the Taxation (International and Other Provisions) Act 2010 to ensure that the regime works as intended. We recognise that the amendments are minor, have come about as a result of engagement with the affected businesses and are necessary for the regime to work as intended.
Question put and agreed to.
Clause 38 accordingly ordered to stand part of the Bill.
Clause 39
Northern Ireland Housing Executive
Question proposed, That the clause stand part of the Bill.
Jesse Norman
This is a small but important measure. Clause 39 exempts the Northern Ireland Housing Executive from corporation tax, bringing it into line with state-funded housing providers and local authorities elsewhere in the UK. It will save the Northern Ireland Housing Executive millions of pounds in corporation tax payments. It is necessary to ensure that it is subject to the same tax treatment as other housing authorities elsewhere in the UK.
James Murray
The Whips will be relieved to hear that I have a very short contribution to make on this clause. The providers of state-funded housing in England, Wales and Scotland are exempt from corporation tax as they are considered to be local authorities for corporation tax purposes. However, the Northern Ireland Housing Executive was established in such a way that it did not meet the definition of local authority for corporation tax purposes. The clause introduces a new corporation tax exemption for the Executive and it brings the situation in Northern Ireland into line with the other nations of the UK. We support the clause standing part of the Bill.
Question put and agreed to.
Clause 39 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(David Rutley.)