Finance Bill (First sitting)

James Wild Excerpts

Committee stage
Tuesday 28th January 2025 Public Bill Committees

In conclusion, clause 19 and schedule 4 introduce the important undertaxed profits rule backstop to pillar two and make technical amendments to existing legislation. I therefore commend them, and Government amendments 1 to 14 and 21 to 37, to the Committee.

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

It is a great pleasure to serve on the Committee under your chairmanship, Mr Mundell. As we heard from the Minister, clause 19 and schedule 4 amend the parts and schedules of the Finance (No. 2) Act 2023 that implement the multinational top-up tax and domestic top-up tax. Part 2 of schedule 4 introduces the undertaxed profits rule into UK legislation, and part 3 makes amendments to the multinational top-up tax and domestic top-up tax. These taxes represent the UK’s adoption of the OECD pillar two global minimum tax rules, and we are supportive of the measures before us.

In October 2021, under an OECD inclusive framework, more than 130 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. Pillar one involves a partial reallocation of taxing rights over the profits of multinationals to the jurisdictions where consumers are located. The detailed rules that will deliver pillar one are still under development by the inclusive framework. As the Minister said, pillar two introduces a global effective tax rate, whereby multinational groups with revenue of more than €750 million are subject to a minimum effective rate of 15% on income arising in low-tax jurisdictions.

The multinational and domestic tax top-ups were introduced in the Finance Act 2023, as the first tranche of the UK’s implementation of the agreed pillar two framework. Measures in the Bill extend the top-up taxes to give effect to the undertaxed profits rule. That brings a share of top-up taxes that are not paid under another jurisdiction’s income inclusion rule or domestic top-up tax rule into charge in the UK. The undertaxed profits rule will be effective for accounting periods beginning on or after 31 December 2024.

Following discussions with the Chartered Institute of Taxation, I have a number of points to raise with the Minister. First, as the institute points out, there is an open point around the application of the transitional safe-harbour anti-arbitrage rules. The OECD’s anti-arbitrage rules for the transitional safe harbours are drafted very broadly, and may therefore go further than originally anticipated. Will the Minister clarify HMRC’s view of the scope of those rules?

There are also questions about taxpayers’ ability to qualify for the transitional safe harbours. A transitional safe harbour is a temporary measure that reduces the compliance burden for multinationals and tax authorities. There has been some uncertainty as to whether a single error in a country-by-country report could disqualify all jurisdictions from applying the transitional safe harbours. HMRC has recently indicated that it would be open to permitting re-filings of country-by-country reports where errors are spotted. Can the Minister provide further clarity on HMRC’s proposed approach?

The UK’s legislation will need to be updated regularly to stay in line with the OECD’s evolving guidance. What steps is the Minister taking to ensure that clear guidance is provided in a timely manner? The new top-up taxes and undertaxed profits rule are complicated. Schedule 4 runs to over 40 pages and includes an eight-step method to determine the proportion of an untaxed amount to be allocated to the UK. It is important that the Government minimise the cost of implementation and compliance. How will the Minister ensure that it is kept to a minimum?

While I welcome the work the UK is doing at a global level, there are still significant issues. I was interested, as I am sure the Minister was, to see that one of the first actions of President Trump, just hours after he took office, was to issue a presidential memorandum stating:

“This memorandum recaptures our nation’s sovereignty and economic competitiveness by clarifying that the global tax deal has no force or effect in the United States.”

It states in clear and unambiguous terms:

“The Secretary of the Treasury and the Permanent Representative of the United States to the OECD shall notify the OECD that any commitments made by the prior administration on behalf of the United States with respect to the global tax deal have no force or effect within the United States absent an act by the Congress adopting the relevant provisions of the global tax deal.”

The OBR estimates that pillar two is expected to generate £2.8 billion by the end of this Parliament. What impact could the US position have on the future operation of pillar two and the UK’s ability to levy top-up taxes on multinationals as planned? The same memorandum issued by President Trump notes that

“a list of options for protective measures”

will be drawn up within 60 days. What action are the Government taking to engage with the US Treasury and to prepare for such actions? Has the Chancellor raised this with her opposite number?

The Minister referred to the more than 30 Government amendments that have been tabled to schedule 4, which correct errors in the calculation of the multinational top-up tax payable under the UTPR provisions that would have resulted in an excessive liability; secure that eligible payroll costs and eligible asset amounts are allocated from flow-through entities in a manner that is consistent with pillar two model rules; and ensure that multinational top-up tax and domestic top-up tax apply properly in cases involving joint ventures. They are all perfectly sensible, but the number of amendments tabled underlines the complexity of the issue.

As I mentioned, this is a two-pillar system. The corporate tax road map confirmed the Government’s support for the international agreement on a multilateral solution under pillar one and the intention to repeal the UK’s digital sales tax when that solution is in place. The digital sales tax raised £380 million in 2021-22, £567 million in 2022-23 and £678 million in 2023-24. I would welcome an update from the Minister on pillar one and the future of the digital sales tax.

The Opposition will not be opposing the clause, but I look forward to the Minister’s response to the specific points I have raised, including those on developments under the new Trump Administration and on implementation.

[James Murray]

I thank the shadow Minister for his support for the provisions before us and our general approach.

First, it is the case that we are amending the Bill in Committee, but that is because, as his colleagues may remember from their time in government, these are complex rules and it is important that pillar two rules work as intended. This is a complex international agreement and it represents one of the most significant reforms of international taxation for a century. It is to a degree inevitable that revisions would be needed as countries and businesses introduce pillar two and set it in progress. It is complex, but we should not forget that pillar two applies only to large multinational businesses, and the reason it is being introduced is to stop those businesses shifting their profits to low-tax jurisdictions and not paying their fair share here in the UK. The rules need to respond to that, and we need to make sure that they work for all sectors and all types of businesses.

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[James Wild]

As we heard from the Minister, clause 20 repeals the ORIP rules, which are about ensuring that profits derived from UK consumers are taxed fairly and consistently, regardless of where the underlying intangible property is held. The previous Government announced in the 2023 autumn statement that they would abolish ORIP, so we support the clause.

The ORIP rules were a short-term, unilateral measure introduced in the Finance Act 2019 to disincentivise large multinational enterprises from holding intangible property—assets such as patents, trademarks and copyrights—in low-tax jurisdictions if it was used to generate income in the UK. Such multinationals could thereby gain an unfair competitive advantage over others that hold intangible property in the UK, as well as eroding the UK tax base. However, the legislation is no longer required, because the OECD/G20 inclusive framework pillar two global minimum tax rules will comprehensively discourage the multinational tax planning arrangements that ORIP sought to counter.

As the Minister said, the repeal will happen alongside the introduction of the pillar two undertaxed profits rule from 31 December 2024. Has he assessed how successful the ORIP rules have been since their introduction? HMRC’s tax information and impact notes state that this measure will have a negligible impact on around 30 large multinational groups and a negative impact on the Exchequer, peaking at £40 million in 2026-27. Can the Minister clarify why the repeal of the ORIP rules is having a negative impact on revenues to the Exchequer? I note that the Chartered Institute of Taxation has welcomed the measure and specifically said that

“any reduction in the legislative code to minimise overlap and unnecessary measures is welcome.”

We say amen to that.

As I have set out, we will not oppose the clause, but I look forward to the Minister’s response to my specific points about ORIP.

[James Murray]

I thank the shadow Minister for his support for the clause. I think his question was about the impact of repealing ORIP. A fundamental point here is that pillar two, which we debated previously, will now tax the profits that were the target of ORIP. Pillar two is expected to raise more than £15 billion over the next six years, so ORIP is simply no longer needed. The Government believe that simplifying and rationalising the UK’s rules for taxing cross-border activities is important, and as such it is right that we use this opportunity to repeal ORIP.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Application of PAYE in relation to internationally mobile employees etc.

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[James Murray]

I will briefly address clause 21 before explaining what the amendment seeks to achieve.

The clause makes changes to simplify the process for operating pay-as-you-earn where an employee is eligible for overseas workday relief. It relates to some of the reforms we are making around non-UK domiciled individuals, which we will return to later in Committee, because those clauses are in a different part of the Bill. More broadly, the context of this measure is that the Government are removing the outdated concept of domicile status from the tax system, and replacing it with a new, internationally competitive, residence-based regime from 6 April 2025.

Currently, where an employer makes an application to treat only a portion of the income that they pay to an employee as PAYE income, they are required to wait for HMRC to approve an application, which can result in delays. The changes made by clause 21 will mean that from 6 April 2025, an employer will be able to operate PAYE only on income relating to work done in the UK once they have received an acknowledgment from HMRC of their completed application, rather than having to wait for HMRC to approve it. That approach will simplify the operation of overseas workday relief for employers, while still allowing HMRC to direct employers to amend the proportion of income on which PAYE is operated, should it be necessary to do so.

Amendments 15 to 19 are needed in order to ensure that the legislation regarding the correct operation of PAYE works as intended. The Government are committed to making the tax system fairer so that everyone who is a long-term resident in the UK pays their taxes here. The new regime ensures this, while also being more attractive than the current approach, as individuals will be able to bring income and gains into the UK without attracting an additional tax charge. That will encourage them to spend and invest those funds in the UK.

[James Wild]

As we have heard from the Minister, clause 21 amends the process by which employers can operate PAYE on a proportion of payments of employment income made to an employee during the tax year. It is a welcome change. We will be supporting the clause and the simplification that it introduces.

By way of background, the clause amends section 690 of the Income Tax (Earnings and Pensions) Act 2003. Section 690 provides a mechanism for an individual or employer to seek a decision from HMRC regarding the tax treatment of certain earnings. The resulting determination under section 690 is an agreement between HMRC and a UK employer on the estimated percentage of duties that an internationally mobile employee expects to carry out in a tax year. Once that determination is provided, the employer can operate PAYE on only that percentage of the employee’s salary.

Unfortunately, that is easier said than done. According to the Institute of Chartered Accountants in England and Wales, historically HMRC has missed its four-month target to agree employers’ applications, and in some cases it has taken up to a year to obtain HMRC’s approval. This is just one example of the difficulty that taxpayers have in engaging with HMRC. I welcome the comments that the Minister made at Treasury questions last week about the work that he is doing—he chairs the board of HMRC, I believe—to ensure that HMRC delivers a better service for customers. We all wish him well on that.

Perhaps this is an opportune time to remind the 3.4 million people who have to submit self-assessment tax returns to do so before the 31 January deadline. Colleagues may wish to ensure that they have submitted theirs.

In the absence of an agreement, PAYE must be operated on the whole salary, meaning that the employee would be overtaxed and must claim relief after the year end. That is not a satisfactory outcome for anyone. These changes will allow employers to immediately operate PAYE on only the proportion of earnings that they believe relates to UK duties, rather than having to wait for HMRC to approve the application. This new process is a welcome step forward in dealing with an issue that HMRC has had in meeting its legal obligations under the current tax system.

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[James Wild]

As we heard from the Minister, clause 22 makes amendments to parts 4 and 5 of the Taxation (International and Other Provisions) Act 2010 concerning the meaning of indirect participation in relation to advance pricing agreements. Once again, we welcome these changes. An APA is a procedural agreement between one or more taxpayers or one or more tax authorities on the future application of transfer pricing policies. Advance pricing agreements can help to provide certainty and avoid transfer pricing disputes.

HMRC recently became aware that there is a technical gap in the circumstances in which an advance pricing agreement may be entered into. Clause 22 aims to rectify that gap and provide clarity on what constitutes indirect participation in the context of APAs. The clause amends both the transfer pricing and APA legislation to ensure the validity of advance pricing agreements in cases where the parties to the provision are connected only by virtue of acting together in relation to the financing arrangements.

The clause will ensure the validity of advance pricing agreements with businesses in such circumstances and is intended to ensure that HMRC can provide businesses with tax certainty in relation to the application of transfer pricing legislation. We have spoken a lot during this Committee about the importance of certainty for business, so that is a welcome step.

By providing clarification on what indirect participation means, the Government are confirming the scope of advance pricing agreements, which should improve certainty and dispute resolution. The Chartered Institute of Taxation notes that

“this measure will be helpful for taxpayers that have applied to or want to apply to HMRC for APAs in relation to financing arrangements (such as Advance Thin Capitalisation Agreements) in circumstances where the UK’s transfer pricing rules are only in scope due to persons acting together in relation to those financing arrangements.”

The clause will likely improve the process both for businesses and HMRC. It is, however, a little hard to understand the real-world impact from the tax information and impact notes. Now that indirect participation has been defined and the scope of advance pricing agreements effectively broadened, will there be any extra enforcement cost? I would be grateful if the Minister could confirm how many businesses the change is likely to impact. It would also be useful to know whether the Government have calculated the economic benefits of advance pricing agreements and, subsequently, how the change will impact the Exchequer. As I have set out, we welcome this technical change, but I would welcome the Minister’s comments on the issues I have raised.

[James Murray]

I thank the hon. Gentleman for his support for the clause. We are on a roll of him supporting clause after clause—may this continue throughout the rest of the Bill.

The hon. Gentleman rightly recognises that this is a simplification measure on which all Members can agree. As it is a simplification measure, it is non-scoring, so it does not have an Exchequer impact—it simply provides certainty on how the rules as intended will apply. It does not change how the rules apply or make a policy change to the Government’s approach; it makes sure that there is total certainty and clarity about how they will apply. Only a limited number of taxpayers will be affected, and we expect them to welcome the change because of this certainty.

I welcome the Opposition’s support for this clause, because I think we can all agree on giving as much certainty to taxpayers and businesses as possible.

Question put and agreed to.

Clause 22 accordingly ordered to stand part of the Bill.

Clause 23

Expenditure on zero-emission cars

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