Finance Bill (Third sitting)

Debate between James Wild and James Murray

Committee stage
Thursday 30th January 2025 Public Bill Committees

[James Murray]

The clause implements changes announced at the autumn Budget 2024, concerning tobacco duty rates. The duty charged on all tobacco products will rise in line with the tobacco duty escalator, with an additional increase being made for hand-rolling tobacco to reduce the gap with cigarettes. Smoking rates in the UK are falling but they are still too high; around 12% of adults are now smokers. Smoking remains the biggest cause of preventable illness and premature death in the UK, killing around 80,000 people a year and up to two thirds of all long-term users.

We have plans to reduce smoking rates further to achieve our ambition of a smoke-free UK. To realise that ambition, we announced our intention to phase out the sale of tobacco products for future generations, as part of the Tobacco and Vapes Bill, along with powers to extend smoke-free legislation to some outdoor areas.

At the autumn Budget, the Chancellor announced that the Government will increase tobacco duty in line with the escalator. Clause 65 therefore specifies that the duty charged on all tobacco products will rise by 2% above RPI inflation. In addition, duty on hand-rolling tobacco increases by 12% above RPI inflation. These new tobacco duty rates will be treated as taking effect from 6 pm on the day that they were announced, 30 October last year.

Recognising the potential interactions between tobacco duty rates and the illicit market, HMRC and Border Force launched their refreshed illicit tobacco strategy in January 2024. The strategy is supported by £100 million of new funding, which will be used to scale up ongoing work and support new activities set out in the strategy, including enhanced detection and intelligence capabilities.

New clause 5 would require the Chancellor to review the impact of increased tobacco rates on the illicit tobacco market within six months of the Bill being passed. The Government respectfully will not accept this new clause, as the potential impact on illicit markets is already one of several factors the Government take into account when a decision on tobacco rates is made. I also note that the approach used in the costings at the Budget, certified by the Office for Budget Responsibility, accounts for behavioural responses to changing excise rates, including the impact of illicit markets. HMRC also publishes tobacco tax gaps annually, which allow for an analysis for the long-term trends in illicit trade.

Although the Government are rejecting new clause 5, I assure Committee members that the Government will continue to monitor illicit trade and to support the efforts of our enforcement agencies to counter it. HMRC and Border Force have had strategies in place to reduce the illicit trade in tobacco for over 20 years, which have helped to reduce the tobacco tax gap from 21.7% in 2005-06 to 14.5% in 2022-23. That happened during a prolonged period in which tobacco duties were consistently increased, as the attitude of all Administrations, including I believe the last one, has been that the threat of illicit tobacco needs to be addressed by reducing its availability, rather than allowing it to dictate our public health and tax policies.

On that matter, I hope that all Committee members, and I assure them that that will continue to be this Government’s approach. The clause will continue the tried and tested policy of using high duty rates on tobacco products to make tobacco less affordable. It will help to continue the reduction in smoking prevalence, supporting our ambition for a smoke-free UK, and will reduce the burden placed by smoking on our public services. I comment the clause to the Committee and urge it to reject new clause 5.

[James Wild]

As we have heard from the Minister, clause 65 increases excise duty on all tobacco products and the minimum excise tax on cigarettes by the duty escalator RPI plus 2%. In addition, the excise duty rate for hand-rolling tobacco increases by an additional 10%. This is a one-off increase in addition to the restated policy of increasing rates in line with RPI plus two percentage points. We are broadly supportive of these measures but I have some questions around purchaser behaviour and its impact on the illicit market and enforcement. In addition to speaking to clause 65, I will also speak to new clause 5, which stands in my name.

Tobacco receipts are expected to be £8.7 billion this year, down by 2.7% on last year. They are forecast to decline by 0.5% a year on average over the rest of the forecast period to £8.5 billion, as declining tobacco consumption offsets increasing duty rates. The tax information and impact note explains that over the four years from 2019 to 2023, the tobacco escalator coincided with a reduction in smoking prevalence from 14.1% to 11.9% of people aged over 18. That is clearly welcome. The Government are bringing forward the Tobacco and Vapes Bill, which the Minister referred to and which includes lots of measures to make vapes less attractive to children and harder to get hold of. There is a lot to be said about that Bill, but fortunately, that is the job of another Committee.

Increasing the price of tobacco clearly comes with the risk of boosting the illicit market. The tax information and impact note suggests that some consumers might engage in cross-border shopping and purchase from the illicit tobacco market. HMRC will monitor and respond to any potential shift. Indeed, the OBR has suggested that the duty rate is beyond the peak of the Laffer curve—the revenue-maximising rate of tax. Can the Minister confirm what measures will form HMRC’s response to any shift in illegal consumption?

There are also questions around the figures. Although HMRC estimates that 10% of cigarettes and 35% of hand-rolling tobacco consumption is from illegal and other non-UK duty paid sources, evidence submitted by the industry believes that is a significant understatement. Its data shows that the consumption of tobacco from non-UK duty paid sources currently accounts for 30% of cigarettes and 54% of hand-rolling tobacco consumption. Has the Minister discussed with HMRC the difference between those figures and the basis on which they have been put together?

The Tobacco Manufacturers’ Association said that the illegal market is not in decline but that, contrary to HMRC’s claims, it is expanding. As well as providing more accurate figures on the scale of the illegal market, it would be useful to know whether the Government have calculated the potential consequences for retailers and law enforcement of an expanding illegal market.

[James Wild]

The hon. Member has probably seen the same evidence produced by the industry as I have; I do not think that we should dismiss it out of hand. Representatives from the industry do, for example, go around football terraces, pick up the empty packets, see where they came from, and do sampling or take other measures. Of course the industry’s evidence should be challenged and tested, but my point is about whether HMRC has worked with the sector to see if its figures are wrong. If they are, and HMRC’s are perfectly right, we can follow the HMRC figures. I am raising a legitimate concern about the accuracy of the data to make sure that we are all operating from the same page because, as the OBR has pointed out, we may already have reached the peak point where the tax will be doing harm.

The Minister referred to the success of enforcement over the last couple of decades. In March last year, the previous Government set out a new strategy to tackle illicit tobacco. With evidence of a substantial illegal market—and whichever set of figures we take, it is substantial—what steps are the Government taking? Are they taking the previous Government’s strategy forward or will they introduce their own strategy?

The industry has specifically proposed that the Government provide trading standards with full access to the powers granted to HMRC under the Tobacco Products (Traceability and Security Features) (Amendment) Regulations 2023. At present, the legislation allows trading standards to refer cases to HMRC, which will then consider imposing on-the-spot penalties of up to £10,000 on those selling tobacco.

The industry proposed that it would be far more effective for trading standards to apply the penalty at the point of enforcement rather than having to refer the case to HMRC. It also suggested allowing trading standards to keep the receipts from any such penalties to reinvest in its enforcement action—we are all familiar with the pressures that trading standards is facing. Will the Minister say whether the Government have considered those proposals and, if they have not, will he?

I have tabled new clause 5 to ensure there is better understanding of the risk around the illicit market. The Minister respectfully dismissed the need for it, but it would require the Chancellor to, within six months of this Act being passed, publish an assessment of the impact of the changes introduced by clause 65 of the Bill on the illicit tobacco market. As we have heard, increasing tobacco duty could alter the behaviour of consumers, and we could see greater illicit market share.

Evidence from the industry—which may be contested—shows that non-UK duty paid sources are significant. There is clearly a risk that a further increase to tobacco duty could boost the illicit market, and HMRC needs to act to protect lawful revenues for the taxpayer. We would therefore welcome the Chancellor publishing an assessment of the impact of the changes. As I set out, we will not oppose clause 65, but I look forward to the Minister’s response to my points, particularly on the illicit market.

[James Murray]

I welcome the Opposition’s support for these measures. I will write to the hon. Gentleman in response to some of the queries he raised about specific figures. I will address the points that he made about the illicit tobacco market, because that is obviously something we all want to consider in some depth in connection with anything that we do around the tobacco duty.

As I mentioned in my earlier remarks, HMRC and Border Force launched their refreshed illicit tobacco strategy in January 2024. That is being implemented under this Government. It is supported by £100 million of new funding, which will be used to scale up the ongoing work and support the new activities outlined in the strategy, including enhanced detection and intelligence capabilities.

The hon. Gentleman also asked about the impact of increasing tobacco duty on the demand for illicit products, and whether increasing duty rates might push some smokers towards illicit products. It will be helpful if I set out the context for this discussion. Under the assumptions that were used in the tobacco costings for the autumn Budget, which were of course certified by the OBR, the overall level of increase decided on by the Government raises revenue while continuing to reduce tobacco consumption.

The approach used in costings, certified by the OBR, takes into account a number of potential behavioural responses to changing excise duty rates, such as quitting or reducing smoking, substituting with vapes, and moving from UK duty paid consumption to the non-UK duty paid market, including the impact on illicit products. However, the threat from illicit tobacco needs to be addressed by reducing its availability, rather than allowing it to dictate our tax and public health policies.

Finally, the hon. Gentleman asked whether HMRC had worked with the sector to authenticate its figures. HMRC has analysed how external figures are calculated, but World Health Organisation rules prohibit extensive engagement with the industry on such issues.

Question put and agreed to.

Clause 65 accordingly ordered to stand part of the Bill.

Clause 66

Rates of vehicle excise duty for light passenger or light goods vehicles etc

--- Later in debate ---

[James Murray]

Clause 66 makes changes to the uprating of standard vehicle excise duty rates for cars, vans and motorcycles, excluding first-year rates for cars, in line with the retail prices index, from 1 April. The clause will also change the VED first-year rates for new cars registered on or after 1 April, to strengthen incentives to purchase zero emission and electric cars.

As announced at the autumn Budget, the clause will freeze the zero emission rate at £10 until 2029-30, while increasing the rates for higher-emitting hybrid, petrol and diesel cars from 2025-26.

Vehicle excise duty—VED—is a tax on vehicle ownership, with rates depending on the vehicle type and the date of first registration. Vehicle excise duty first-year rates were introduced as part of the wider changes to the VED system implemented in 2017, and they vary according to emissions. Vehicle excise duty first-year rates are paid in the first year of a car’s life cycle, at the point of registration. From the second year, cars move to the standard rate of VED. From 1 April, new zero emission vehicles registered on or after that date will also be liable for the VED first-year rates.

Vehicle excise duty first-year rates have been routinely uprated by the RPI since their introduction in 2017, and as announced by the previous Government at the autumn statement in 2022, from April 2025, electric cars, vans and motorcycles will begin to pay VED in a similar way to petrol and diesel vehicles.

The clause will set the VED rates for 2025-26, increasing the standard rates for cars, vans and motorcycles in line with the RPI. As part of this uprating, the standard rate of VED for cars registered since 1 April 2017 will increase by only £5. The expensive car supplement will also be increased by £15, from £410 to £425. The rates for vans will increase by no more than £15, and motorcyclists will see an increase in rates of no more than £4.

From 1 April 2025, the VED first-year rate for zero emission cars will be frozen at £10 until 2029-30. For 2025-26, first-year rates for cars emitting 1 to 50 grams per km of carbon dioxide will go from £10 to £110, and cars emitting 51 to 75 grams per km of CO₂ will go from £30 to £130. Rates for cars emitting 76 grams per km or more of CO₂ will double.

New clause 6 would require the Chancellor to review the impact of the £40,000 expensive car supplement threshold and consider its effects on the proportion of new cars sold that are electric vehicles. As set out at the autumn Budget, the Government have already committed to considering increasing the £40,000 threshold for EVs at a future fiscal event. The Government recognise that new electric vehicles can still often be more expensive to purchase than their petrol or diesel counterparts, and we acknowledge the need to ensure that EVs are affordable as part of our transition to net zero. In the light of that commitment, a separate review is unnecessary so I urge the Committee to reject new clause 6.

The changes to the VED first-year rates outlined in clause 66 will increase the incentives to buy new zero emission cars at the point of purchase and support the uptake of new electric vehicles. Revenue from that change will also help to support public services and infrastructure in the UK. An increase in VED standard rates for cars, vans and motorcycles by the RPI in 2025-26 will ensure that VED receipts are maintained in real terms. I commend clause 66 to the Committee.

[James Wild]

As we heard from the Minister, clause 66 provides for increasing certain rates of VED for light passenger and light goods vehicles in line with the RPI. There will also be changes to the first-year rates for zero emission vehicles and low emission vehicles. We broadly support the measures, but as well as discussing clause 66, I will consider new clause 6, which is in my name and that of my hon. Friend the Member for Grantham and Bourne.

According to the OBR, VED receipts are expected to raise £8.2 billion in 2024-25, up by £0.5 billion compared with 2023-24. It expects an increase through the forecast period to £11.2 billion, driven by an increasing number of cars, more cars paying the expensive car supplement and the extension of VED to electric vehicles from 2025. It was the last Government who decided that EVs would no longer be exempt from VED and moved to make the system fairer. I will raise some points about the implications of that, and particularly the expensive car supplement for electric vehicles. New zero emission cars, registered after 1 April, will be liable for that charge, which currently applies to cars with a list price exceeding £40,000. That threshold has not changed since 2017, despite inflation and changing technologies. The Society of Motor Manufacturers and Traders has called on the Government to look at that.

The current ECS threshold will add more than £2,000 to the cost of a zero emission vehicle in the first six years of ownership, and more than £3,000 including the standard rate VED that must also be paid. That will deter potential buyers from purchasing zero emission vehicles and will have an impact on residual values. According to figures quoted by the SMMT, the ECS is likely to capture more than half of the zero emission vehicle market from 2025.

The Minister referred to the Government saying that they may look at the threshold in future, and I will come on to that when I discuss new clause 6. Can he confirm how much the ECS currently raises and how much it is forecast to raise as a result of the changes? Given that the Government are committed to a 2030 ban on new petrol and diesel vehicle sales, what impact will the ECS have on the Government’s progress towards that goal?

For those reasons, we have tabled new clause 6, which would require the Chancellor, within six months of the Bill being passed, to publish an assessment of the impact of the £40,000 expensive car supplement threshold in clause 66. The assessment must consider the effects of the threshold on the proportion of new car sales that are electric vehicles.

As we have heard, the threshold has remained unchanged since 2017 and the Government are pushing ahead with the 2030 date. My right hon. Friend the Member for Richmond and Northallerton (Rishi Sunak) introduced some welcome common sense to the debate by moving the date for the ban on new petrol and diesel car sales back to 2035. That is the date that the major car manufacturing countries in Europe and the rest of the world have adopted, and one that we should have stuck to.

The Government’s policy is odd because it makes people less likely to move to EVs—because it makes it more expensive to do so. Perhaps the Treasury is not quite as signed up to the Energy Secretary’s dogmatic approach as he is; perhaps it secretly agrees with Opposition Members who certainly think that he is the most expensive Cabinet member in many ways. Although I recognise that the Minister said that the Government have committed to look at the threshold, the new clause would make that binding and make sure that it happened within a specific timeframe. We therefore want the new clause to be taken forward. As I have set out, we will not oppose the clause, but I will press new clause 6 to a Division.

Hybrid vehicles will start paying road tax at the standard rate, as well as paying the ECS where applicable. Those changes will hasten the departure from hybrids, as my hon. Friend the Member for Grantham and Bourne said earlier. I would be grateful if the Minister provided an assessment of the decision to disincentivise hybrids and if he could say how many jobs in the UK are based on producing hybrid vehicles.

[James Murray]

I thank the shadow Minister for indicating the Opposition’s support for the clause. I understand what the Opposition are doing by proposing new clause 6, and the points that they want to raise, and the Government have considered it. We consider our commitment, which was made at the autumn Budget in the public domain, to be a strong commitment from the Government: we will consider increasing the £40,000 threshold for EVs only at a future fiscal event.

We recognise that when electric vehicles are new, they can still often be more expensive to purchase than their petrol or diesel counterparts. There is a need to ensure that EVs are affordable as part of the transition. We also recognise that, as transport is currently the largest-emitting sector, decarbonising it is central to the wider delivery of the UK’s cross-economy climate targets.

As I said, it was announced at Budget ’24 that the Government will consider raising the threshold for zero emission cars only at a future fiscal event. The Government have no current plans to review the threshold for petrol, diesel and hybrid vehicles, but we keep all taxes under review as part of the Budget process.

Question put and agreed to.

Clause 66 accordingly ordered to stand part of the Bill.

Clause 67

Rates of vehicle excise duty for rigid goods vehicles without trailers etc

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

[James Murray]

Clauses 67, 68 and 69 make changes to upgrade VED rates for heavy goods vehicles in line with the retail prices index from 1 April. They also make changes to the VED rates for rigid goods vehicles without trailers, rigid goods vehicles with trailers and vehicles with exceptional loads. Clause 71 uprates the heavy goods vehicle levy in line with the RPI from 1 April.

The registered keeper of a vehicle is responsible for paying VED. The rates depend on the vehicle’s revenue weight, axle configuration and Euro emission status. Furthermore, the HGV levy, which was introduced in August 2023 and frozen at the autumn statement in 2023, is payable for both UK and foreign HGVs using UK roads. Similarly to VED, the levy rates depend on the vehicle’s weight and Euro emissions status. Clauses 67, 68 and 69 will set the VED rates for heavy goods vehicles for ’25-26, increasing them in line with the RPI. For example, the annual VED liability of the most popular HGV—tax class TC01, VED band E1—will increase by £18, from £560 to £578. Hauliers will not see a real-terms increase in VED costs, as rates have increased to keep pace with inflation only.

The changes made by clause 71 will increase the annual rates for domestic and foreign HGVs using UK roads and the associated daily, weekly, monthly and six-monthly rates in line with the RPI. For example, the annual rate for the most common type of UK HGV will increase by £21, from £576 to £597. As part of that uprating, the £9 and £10 caps on the daily rates paid by foreign HGVs, which are a consequence of retained EU law and are now obsolete, will be removed.

Government new clause 1 corrects an omission in the Bill of an uplift to the general haulage rate announced at the autumn Budget. We are inserting a new clause to ensure that the legislation operates as intended by updating the currently recorded rate for the general haulage tax class—tax class 55—from £350 to £365 in line with the RPI.

New clause 7 seeks to require the Chancellor to make a statement about the impact of increasing VED on HGVs. The new clause is not necessary, as the Government have already published the tax information and impact note that sets out all the expected impacts of the measure. It makes clear that hauliers will not see a real-terms increase in their VED or HGV levy liabilities, as rates are being increased in line with the RPI to keep pace with inflation only. The measure is not expected to have any significant macroeconomic impacts.

Increasing both VED rates for HGVs and the HGV levy by the RPI for ’25-26 will ensure that VED receipts are maintained in real terms and that hauliers continue to make a fair contribution to the public finances in the wider context of a Budget in which hauliers have benefited from a further freeze in fuel duty, worth nearly £1,100 a year to the average HGV. I therefore commend clauses 67, 68, 69 and 71 as well as Government new clause 1 to the Committee, and I urge the Committee to reject new clause 7.

[James Wild]

As the Minister says, clauses 67, 68 and 69 provide for changes to certain rates of VED, and clause 71 increases the rates for the HGV road user levy. We will not oppose the provisions, but we have some concerns and points to make about the timing of the changes and the lack of support for impacted industries, such as the logistics sector. As well as discussing those clauses, I will consider new clause 7, which is in my name and that of my hon. Friend the Member for Grantham and Bourne.

Heavy goods vehicle VED is a complex picture, with more than 80 different rates. The characteristics of HGVs determine their rates, and the increases to HGV VED represent the first rise since 2014. Heavy goods vehicles may also be liable for the additional HGV road user levy, which was introduced in 2014 and is a charge for using the road network, ranging from £150 to £749 a year. The levy was suspended in August 2020, demonstrating the previous Government’s support for the haulage sector during the pandemic. A reformed levy was introduced in 2023 and was frozen at the autumn statement in 2023. The new levy divides qualifying HGVs into six levy bands rather than the previous 22, which is a welcome simplification.

--- Later in debate ---

[James Murray]

The clause makes minor amendments to ensure the legislation for the application of vehicle excise duty to zero emission vehicles operates as intended. In the 2022 autumn statement, the former Government announced that from April 2025, zero emission cars, vans and motorcycles would begin to pay VED in line with their petrol and diesel counterparts. The clause will ensure that the legislation governing the application of VED to zero emission vehicles operates as intended by making minor technical amendments to the legislation. The changes will clarify the current VED exemption for electric vehicles, clarify the interpretation of data entries on the certificate of conformity and ensure that all zero emission vans registered between 1 January 2007 and 31 December 2008 pay VED, in line with their petrol or diesel counterparts, from 1 April 2025. The clause will ensure that the legislation for the application of VED to zero emission vehicles operates as intended.

[James Wild]

I will be very brief on this one. It is a perfectly sensible measure, and we will not be opposing it.

Question put and agreed to.

Clause 70 accordingly ordered to stand part of the Bill.

Clause 71 ordered to stand part of the Bill.

Clause 72

Rates of air passenger duty until 1 April 2026

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

[The Chair]

With this it will be convenient to discuss the following:

Clause 73 stand part.

New clause 8—Review of bands and rates of air passenger duty—

“(1) The Chancellor of the Exchequer must, within eighteen months of this Act being passed, publish an assessment of the impact of the changes to air passenger duty introduced by section 73 of this Act on—

(a) the public finances;

(b) carbon emissions; and

(c) household finances.

(2) The assessment under subsection (1)(c) must consider how households at a range of different income levels are affected by these changes.”

This new clause requires the Chancellor to publish an assessment of this Act’s changes to air passenger duty on the public finances, carbon emissions, and on the finances of households at a range of different income levels.

[James Murray]

Clause 72 sets the rates of air passenger duty for 2025-26, as announced in the 2024 spring Budget, and they will take effect on 1 April 2025. Clause 73 sets the rates of APD for 2026-27, as announced in the 2024 autumn Budget, and they will take effect a year later, on 1 April 2026.

APD rates have fallen in real terms, because they are set more than a year in advance using forecast RPI, and inflation has subsequently been much higher than originally forecast. The former Government announced that in 2025-26, rates would be uprated by forecast RPI and non-economy rates would be adjusted to account partially for previous high inflation. For 2026-27, the current Government are making a broad-based adjustment to all rates to compensate in part for previous high inflation and are raising the higher rate on larger private jets by an additional 50%. These changes aim to ensure that the aviation industry continues to make a fair contribution to the public finances. As is standard practice, the Government have given the industry more than 12 months’ notice.

Let me go into some detail. The changes made by clause 72 will raise all APD rates by forecast RPI, rounded to the nearest pound, for 2025-26. Non-economy rates will be further adjusted to correct partially for previous high inflation. For domestic and short-haul international economy passengers, these changes mean that rates will stay at their current level in 2025-26. Rates for other economy-class passengers will rise by £2. For non-economy international passengers, rates will rise by between £2, for short-haul commercial passengers, and £66, for those travelling ultra-long haul in larger private jets that incur the higher rate.

The changes made by clause 73 will raise all APD rates in 2026-27 to account partially for previous high inflation, and increase the higher rate on larger private jets by an extra 50% above the increases to other rates. For economy-class passengers, this means that those flying domestically will face an increase of £1. Rates for short-haul economy passengers will increase by £2, and those for long-haul economy passengers will increase by £12. The increases for non-economy passengers and those travelling in private jets will be greater. Whereas the short-haul international rate for economy passengers is increasing by £2, that for non-economy passengers is rising by £4 and that for private jet passengers by £58.

Taken together, the corrections to non-economy rates announced at the spring and autumn Budgets do not raise rates by more than RPI over the period since 2021-22, based on the latest figures. From 2027-28, rates will be rounded to the nearest penny, to ensure that they track forecast inflation more closely.

New clause 8 would require the Chancellor to publish an assessment of the impact of the APD changes on the public finances, carbon emissions and the finances of households at a range of income levels. At the autumn Budget, the Government published a TIIN that outlined the expected impacts of the APD changes, including the Exchequer, household and environmental impacts. New clause 8 is therefore unnecessary, and I urge the Committee to reject it.

These changes will help to maintain APD rates in real terms, following high inflation. I therefore commend clauses 72 and 73 to the Committee and urge it to reject new clause 8.

[James Wild]

As we heard from the Minister, clause 72 sets the rates of air passenger duty for the year 2025-26—those rates were announced in the 2024 spring Budget, precisely to give the sector time to plan—and clause 73 sets the rates for 2026-27. The higher rates that apply to larger private jets will increase by an additional 50%, as the Minister said. We will not oppose these measures, but we want to raise some points and seek more detail about their impact.

APD was first introduced on 1 November 1994. Initially, it was charged at a rate of £5 on flights within the UK and to other countries in the European Economic Area, and £10 on flights elsewhere. Since then, it has been reformed by successive Governments. Currently, it is chargeable per passenger flying from UK airports to domestic and international destinations, and rates vary by destination and class of travel. According to the OBR, APD receipts are expected to be £4.2 billion in 2024-25, and then they are forecast to increase by 9% a year, on average, to £6.5 billion in 2029-30, driven by increasing passenger numbers and the higher duty rates. The changes mean that a family of four flying economy to Florida, for example, will be taxed £408—a 16% increase on the current rates.

I turn first to the changes in clause 73 that relate to the higher rate, which will increase by an additional 50% on business and private jets. There is some concern from the industry about the impact of the measure on economic growth—the Government’s driving, No. 1 mission, in which we support their efforts. In reality, most private jets are corporate aircraft that are used as capital assets. One industry commentator said:

“They allow businesses to increase productivity and the amount of time they have in the day, which means they can make more money, employ more people and pay more in taxes. ”

That is something I think we all support. Has the Minister calculated what impact the 50% increase will have on economic growth and developing our trade relationships? The Prime Minister rightly travels a lot around the world to make connections and promote trade in our economy. Can the Minister confirm whether the Royal Squadron is subject to the higher rates, or is it exempt?

There has also been some concern about the impact on our constituents—people going on holiday or to see family and friends. The changes may limit flight options. Airlines UK has said that the rise will make it harder for British carriers to put on new routes. Does the Minister think the increase will impact the ability to consider new routes? It will certainly increase ticket prices; I woke up this morning to hear the boss of Ryanair on the radio saying that the increases in APD will mean that a third of an average £45 fare will now be tax.

It is because of the impacts that the rate rises might have on consumers, industry and economic growth that we tabled new clause 8, which would require the Chancellor to publish an assessment of the impact of the changes introduced by clause 73 within 18 months of the Bill being passed. The assessment would have to consider the impact of the changes on the public finances, carbon emissions and household incomes. The industry has been clear in its warnings in this regard, and we need to take them seriously. The Minister said that the new clause is unnecessary and that a review has been covered anyway, but reviews should be an important part of the Treasury’s toolkit in understanding impact.

We will not oppose these measures, but we will continue to raise industry’s concerns, particularly on behalf of our constituents and people who want to go on holiday.

[James Murray]

It might be worth my saying at the outset that our support for the aviation industry more broadly is very clear. I am sure the hon. Gentleman was listening to the Chancellor’s growth speech yesterday, in which she announced that we will no longer shy away from decisions about airport expansion, which can be delivered to support economic growth while meeting our climate obligations. People in the aviation industry can have no doubt about this Government’s desire and willingness, and concrete actions, to work with them to drive economic growth in this country.

In relation specifically to APD, which is the subject of these clauses, I say to the hon. Gentleman that the adjustment to the APD rates for ’26-27 is proportionate, because the rates have fallen significantly behind inflation in recent years. These changes will help to compensate for that fact. The short-haul international rate on economy passengers will increase by £2 on 1 April 2026. That rate has not increased since 2012. Even after 1 April 2026, for a family of four—two adults, two children—flying economy class to Spain, the total APD increase will be only £4, since under-16s travelling in economy class are exempt from APD.

By contrast, the increases for non-economy passengers and those travelling in private jets will be higher, to ensure that they make a fair contribution to the public finances. One other bit of context is that, unlike other sectors, no VAT applies to plane tickets and there is no tax on jet fuel. It is only fair that aviation pays its fair share through APD.

Question put and agreed to.

Clause 72 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Christian Wakeford.)

Finance Bill (First sitting)

Debate between James Wild and James Murray

Committee stage
Tuesday 28th January 2025 Public Bill Committees

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.

--- Later in debate ---

[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.