Finance (No. 3) Bill (Ninth sitting)

Jonathan Reynolds Excerpts

Committee Debate: 9th sitting: House of Commons
Tuesday 11th December 2018 Public Bill Committees

Interest in respect of unlawful ACT

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

I beg to move amendment 151, in clause 84,page 62, line 5, at end insert—

“(11) The Chancellor of the Exchequer must review the effectiveness of the remedy introduced by this section, together with section 85, and lay a report of that review before the House of Commons within one year of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the effectiveness of the new statutory remedy one year after its adoption into law.

[The Chair]

With this it will be convenient to discuss amendment

Amendment 152, in clause 84, page 62, line 5, at end insert—

“(11) The Chancellor of the Exchequer must review the expected effect of the remedy introduced by this section, together with section 85 on corporation tax receipts and lay a report of that review before the House of Commons within one year of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the impact of the new statutory remedy on corporation tax receipts.

Clause stand part.

Clause 85 stand part.

[Jonathan Reynolds]

It is lovely to see you in the chair again today, Ms Dorries. I will speak to clause 84 and our amendments which, as you described, also cover clause 85, which is a supplementary clause.

Clause 84 relates to a somewhat historic issue—the payment of advance corporation tax known as ACT. ACT was payable when companies distributed dividends to shareholders before main corporation taxes were due. These payments could then be offset in profit and loss calculations potentially to reduce the overall tax bill. ACT was abolished under Gordon Brown’s tenure as Chancellor in 1999 to prevent its abuse mitigating revenues to the Exchequer, and to encourage reinvestment rather than excessive dividend payments.

However, there are some legacy cases relating to ACT claims. The clauses are the result of a legal judgment from the Supreme Court test case that impacts those claims—that of Prudential Assurance Company Limited and HMRC on 25 July 2018. This case gave rise to a number of judgments in relation to ACT. I will not read it in full—

[Peter Dowd]

Oh!

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[Jonathan Reynolds]

I know. Prudential put the case that it was entitled to compound rather than simple interest on the repayment, given that some of the tax that was levied, it claimed, was in breach of EU law. However, the Supreme Court disagreed with this analysis and subsequently found in favour of HMRC. The amounts at stake are very significant—they were listed as £4 billion to £5 billion according to media reports at the time. Therefore, the Supreme Court decision is clearly welcome when public finances are under such severe pressure.

The test case has helped to clarify outstanding issues relating to ACT. It is important that the Statute book reflects this decision and is fully up to date to remove any uncertainty for taxpayers with historic claims. It is an additional bonus that the Supreme Court decision has not created a further liability for HMRC in repaying compound interest.

However, we must be clear whether this change, while it relates to a legacy tax, will have any impact on current taxation matters. This is especially pertinent when it relates to corporation tax receipts.

Labour has tabled two amendments. We may not necessarily press them to a Division, but they will be useful to our discussions. Amendments 151 and 152 would, respectively, call on the Government to review the effectiveness of this new statutory remedy one year after its adoption into law and review its impact on corporation tax receipts. These reviews would play an important role in judging the overall impact of the judgment. As I have outlined, the liabilities at stake are very significant. It is essential that we have a clear understanding of whether the provision will give rise to any changes in revenue collection. I call on Members to look at the amendments and ensure we have the clarity and transparency needed to scrutinise the measure in full.

Is the Minister aware of any further issues that may relate to historic ACT claims that we should be aware of? Given that the numbers at stake are so large, we seek reassurance that no other potential liabilities could arise for HMRC in relation to legacy challenges.

[Mel Stride]

I thank the hon. Gentleman for his contribution. On his specific question of whether any other issues related to ACT might give rise to liability to HMRC, I am not immediately aware of any, but I will write to confirm whether that is the case.

The advance corporation tax or ACT system, which was repealed as long ago as 1999, has been found to be unlawful in certain circumstances. Clauses 84 and 85 provide a new legal remedy for claims against HMRC in limited circumstances. A number of cases involving ACT have been argued before the courts over a lengthy period. This litigation continues but it is now clear that some ACT was paid unlawfully.

Earlier this year, the Supreme Court overruled an earlier decision of the House of Lords from 2007. That has created uncertainty as to what remedies might be available where unlawfully paid ACT was repaid or set against corporation tax before claims against HMRC were started. The law requires that in those cases there needs to be a remedy. The courts are able to consider that but, given the uncertainty, it is desirable for Parliament to consider what that should be in order to provide a fair and balanced outcome.

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Amendments 151 and 152 seek a review within one year of the passing of the Bill of the effectiveness of the remedy and the effect of the remedy on corporation tax receipts. The remedy provided in clauses 84 and 85 is a limited one to address a specific area of uncertainty following a Supreme Court decision, and where there is ongoing litigation. The litigation has been under way for many years and may well be ongoing for a number of years yet. The remedy is not exclusive and the court may award a different remedy. It will be potentially unhelpful, and may not be possible, to seek to comment on the effectiveness of the statutory remedy when relevant litigation is still ongoing. We have already published a tax impact and information note, which sets out the expected impacts, including on the Exchequer. The new remedy is designed to remove uncertainty to the benefit of both HMRC and the claimant companies, and I therefore commend the clauses to the Committee.

[Jonathan Reynolds]

I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 84 ordered to stand part of the Bill.

Clause 85 ordered to stand part of the Bill.

Clause 86

Voluntary returns

[Jonathan Reynolds]

I beg to move amendment 153, in clause 86, page 64, line 45, at end insert—

‘(9) The Chancellor of the Exchequer must review the effectiveness of the changes made to the Taxes Management Act 1970 and the Finance Act 1998 by this section and lay a report of that review before the House of Commons within one year of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the effectiveness of the provision for voluntary tax returns.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 154, in clause 86, page 64, line 45, at end insert—

‘(9) The Chancellor of the Exchequer must review the revenue effects of the changes made to the Taxes Management Act 1970 and the Finance Act 1998 by this section and lay a report of that review before the House of Commons within six months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the effectiveness of the provision for voluntary tax returns.

Amendment 155, in clause 86, page 64, line 45, at end insert—

‘(9) The Chancellor of the Exchequer must review the resources that Her Majesty’s Revenue and Customs needs to implement the measures in this section relating to tax returns delivered otherwise than in pursuance of a requirement to do so and lay a report of that review before the House of Commons within two months of the passing of this Act.”

This amendment would require the Chancellor of the Exchequer to review the HMRC resourcing needed for the provision for voluntary tax returns.

Clause 86 stand part.

I call Anneliese Dodds to move amendment 153—[Interruption.] I am sorry: Jonathan Reynolds.

[Jonathan Reynolds]

Thank you, Chair. The most exciting clauses have been taken from me. I am very grateful to have been allowed to take this on voluntary returns. On occasion, individuals submit returns to HMRC before a statutory notice requiring the return has been delivered. That applies to many different types of individuals, including those carrying out an income tax self-assessment, and individuals on PAYE who believe they are due a return.

HMRC has historically accepted such returns, given that it would be a considerable drain on resources to reject them and ask taxpayers needlessly to resend them. However, following a ruling by the first-tier tribunal in April 2018, it has been decided that that policy is not supported by law. Therefore, to ensure that the practice can continue, we understand the clause will bring about the legislative change needed so that the position is supported in law. An HMRC appeal is under way because it is possible that this could invalidate historical returns if it is refused by a higher court.

We are talking about significant numbers of returns, as was revealed during the tribunal hearing by HMRC. The Government receive about 350,000 returns of this type each year. Those are in the main from PAYE taxpayers who do not need to complete the self-assessment return but who are seeking a repayment. In its statement accompanying the case, HMRC stated:

“This policy provides a mutually beneficial administrative arrangement for customers and HMRC. The alternative would be that HMRC would have to reject returns submitted voluntarily, issue a formal s8 notice and the customer would have to resubmit the return. This would add unnecessary administrative burdens to both customers and HMRC, causing unnecessary delay in HMRC processing returns, claims and repayments.”

As part of the ambition to put the customer at the heart of what HMRC does, it has introduced a simple assessment for 2016-17 onwards, to enable HMRC to send customers with straightforward tax affairs a simple assessment notice of their liability, without the need for them to resubmit a self-assessment return. It expects that this will significantly reduce the number of voluntary returns it receives each year, and PAYE customers who are not already in self-assessment will not need to complete a self-assessment tax return to get a refund. HMRC also has long-term plans to abolish annual tax returns as part of the Making Tax Digital strategy.

As we are near the end of the Committee, I do not think we need to go through the long history of issues relating to Making Tax Digital, but we have made these points many times before, both in this Committee and in previous Finance Bill Committees. For smaller businesses, Making Tax Digital will add a significant reporting burden by requiring them to switch from one report a year to four. Making Tax Digital will still be being implemented in April 2019, coinciding with our departure from the EU, and putting a significant compliance burden on businesses if there are also VAT changes.

In addition, according to HMRC’s own figures, a shocking 4 million calls to HMRC went unanswered in 2017. As my hon. Friend the Member for Bootle said in the previous Finance Bill Committee, if people call up to pay their taxes, they should be able to get through. Given that the deficit has not yet been eliminated, one would think that the Government would welcome people voluntarily ringing up to pay more tax. Therefore, this change to legislation seems sensible. It would avoid any further costs or administrative pressures on HMRC at an already challenging time for the organisation. I can only imagine the enormous burden it would present if the historical treatment of 350,000 returns was judged to be invalid.

We need more insight into how HMRC resources might be affected to ensure that this measure does not have any unintended consequences. Therefore, Labour has tabled three amendments to give us the information needed to assess this properly. Amendment 153 would require the Government to review the effectiveness of this provision for voluntary tax returns within one year. It seems that the process of submission for voluntary tax returns is working reasonably effectively at present. This review would allow us better to understand whether moving into a more formal framework has any potential negative impacts.

Amendment 154 would allow us to make the same assessment, but with regard to the effects on revenue. If the provision has any impact on tax collection, it is important that it is quickly identified and remedied.

Finally, amendment 155 would require the Government to review the HMRC resourcing needed for the provision of voluntary tax returns by publishing a document to that effect within one year. As I have outlined, HMRC has faced severe cuts at a time when demands are increasing across several fronts—particularly as the UK leaves the European Union. Therefore, it is critical that we understand whether there will be any further draws on HMRC resources over the course of the provision’s implementation. I urge hon. Members to support the amendments and Labour’s efforts to guarantee that we have an HMRC that functions effectively, both for taxpayers and for tax collection.

[Mel Stride]

Clause 86 makes changes to HMRC’s ability to treat tax returns sent involuntarily like any return on a statutory basis with retrospective and prospective effect. It is necessary because these returns have been accepted and treated in the same way as any other tax return received by HMRC for more than 20 years using its collection and management powers. However, a tax tribunal ruled earlier this year that this policy was not supported by the law.

HMRC receives about 600,000 voluntary tax returns each year. They are voluntary because they are made without any requirement or request from HMRC to do so. People in businesses send them in because they want either to pay tax or to make tax repayment claims. HMRC has always accepted those returns and treated them like any other return. This policy is helpful for taxpayers who send in returns because they are concerned that their affairs are not up to date. If HMRC did not accept voluntary returns when a taxpayer sent in a return, it would have to formally ask them for a return, and they would need to refile it.

Amendments 153 and 154 would require the Government to publish reports about the effectiveness and revenue effects of the clause. Such reports are unnecessary. The purpose of the clause is not to change existing practice but to give it legal certainty. Reporting on its impact is therefore unnecessary, as there will be no change in either practice or revenue. Amendment 155 would require the Government to lay a report into the resources that HMRC needs to implement the clause. The clause will have no impact on HMRC’s resources and will not change HMRC’s practice of accepting returns sent in on a voluntary basis. I therefore commend the clause to the Committee.

[Jonathan Reynolds]

I wish to press the amendment to a vote.

Question put, That the amendment be made.

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[Jonathan Reynolds]

As the Minister has said, the clause relates to two legislative changes that would alter the way that interest can be charged and paid on tax under section 178 of the Finance Act 1989, as well as setting interest rates for certain purposes, including retrospectively for diverted profits tax, and providing for interest to be charged under section 101 of the Finance Act 2009 on particular penalties for PAYE from 6 May 2014.

The charging of interest is an important source of revenue to the Exchequer. It is a fundamental principle that the same rules apply to all taxpayers and there may therefore be circumstances in which it is appropriate to charge interest on late payments in the same way that HMRC offers interest on tax refunds that exceed a period of one tax year. That charge is an important tool and deterrent for tax avoidance and late payments.

The diverted profits tax in particular, which was introduced in 2015 as the so-called Google tax, is at least a step in the direction of ensuring that large multinational companies pay their fair share. As the Committee has discussed in previous clauses, certain multinational companies, through dint of their presence in multiple jurisdictions and the armies of tax planners at their disposal, have used a variety of tactics to minimise their tax obligations. While we welcome DPT as step in the right direction, the public are clear that more action should be taken.

My hon. Friend the Member for Oxford East spoke in depth about DPT in an earlier sitting of the Committee. She explained that the diverted profits tax focuses on two forms of tax avoidance. The first is where a company with a UK-taxable presence uses arrangements lacking economic substance to artificially divert profits from the UK. The second is where a person carries out activities in the UK for a foreign company that are designed to avoid creating a permanent establishment through which they would be taxable. The Minister promised to lay before the House a report on the impact on revenue made by the mechanics of the application of DPT. When that information is made available, the Opposition will carefully consider it to assess the efficiency of the diverted profits tax. It must be considered in the round, in the light of the incoming digital services tax, which will struggle to be effective if it is not carefully planned around the unique structure of digital companies across multiple jurisdictions.

In relation to PAYE penalties where interest may be chargeable, I ask the Minister to provide further clarity around the changes. While I reiterated previously that there must be a fair and equal application of the rules, interest and penalty charging can cause serious hardship for individuals, especially when applied retrospectively for unintentional and unwitting errors committed by the taxpayer. Can the Minister elaborate on what consultation has taken place with low-income groups on the provision, to give us a sense of whether an impact assessment has been carried out? To which sections do the retrospective aspects of the legislation apply?

In the current situation with the 2019 loan charge, which stretches back over many years having been applied retrospectively, there is ample evidence that it causes serious hardship for individuals who, in some cases, say that they have been induced into such a scheme by a third-party, without full knowledge of its application. We must therefore exercise the utmost caution when applying any retrospective rules that cover individuals. I was pleased to read, however, that the legislation allows for interest charging on promoters of tax avoidance, in line with section 101 of the 2009 Act. We must ensure that we are pursuing promoters with the full force of the law, to tackle the root causes of avoidance and evasion.

The Opposition have therefore tabled a number of new clauses to the Bill. New clause 17 would require the Chancellor to review the viability of equalising HMRC’s late payment interest rate with the repayment interest rate. The new clause attempts to address a clear imbalance and perceived unfairness in the current interest rates set by HMRC. As it stands, if a taxpayer owes HMRC tax and is late in paying it, a charge of 3.25% interest is added. That is in stark contrast to HMRC’s own repayment rate, which, when paying things back, stands at just 0.5%. That double standard is exacerbated by the Government’s recent raising of late payment interest rates for all taxpayers by 0.25%.

The ACCA accountancy body has described that imbalance over late payments as “simply unfair,” and called for a level playing field to ensure that HMRC sets the same late payment rate as it charges. That is certainly something that the Opposition believe that the Government should review because it is ultimately a question of fairness. There should not be one rule for taxpayers and another for HMRC, as that simply breeds dissatisfaction with the tax system and those who enforce it.

Labour Members are committed to a tax system with justice and fairness at its heart, and we recognise the Government’s clear failings on the handling of HMRC’s powers, which were recently recorded extensively by the Lords Economic Affairs Committee. I hope that all sides of the House will consider supporting this review.

The Opposition’s new clause 16 would require the Chancellor to review the interest rate on late payment of penalties for the promoters of tax avoidance schemes. New clause 15 would require the Chancellor to consider raising the interest rate on late payment of penalties to 6.1%. The introduction of penalties for the promoters of tax avoidance schemes is relatively new. However, it is rather depressing to think that the promoters of tax avoidance schemes, who are then issued penalties, will pay less interest on late payments than the interest currently applied to student loans. Surely it says something about the Government’s priorities that they would allow a lesser interest rate on the late payment of penalties by those who advertise and encourage people to use tax avoidance schemes than the 6.1% interest rate that is charged to students in the UK.

New clause 15 would instead force the Chancellor to review the interest charged on late payments of penalties by the promoters of tax avoidance schemes and consider raising them to 6.1%. This would act as a deterrent when it comes to the late payment of penalties and it would also force the Government to consider the absurdly high interest rates that student loans are currently subject to. I call on Members to support the Opposition’s amendments on these issues today, to ensure that HMRC can operate fairly and effectively. I would also be grateful to hear some clarity and reassurance from the Minister about the retrospective elements of this legislation.

[Mel Stride]

There is no need for consultation on this measure because, as the hon. Gentleman will know, it was just putting beyond doubt what has been established practice over a very long period. He raised the issue of retrospection. The measure is retrospective, inasmuch as it is putting beyond doubt the fact that these rates were appropriate in the past. We are just bringing the long-standing practice out of any sense of uncertainty.

The hon. Gentleman suggested that the loan charge was retrospective. It is not, because the arrangements entered into under the loan charge scenario were always defective. They never worked at the time when they were entered into, and therefore the tax was due in the past. It is being collected in the present.

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[Jonathan Reynolds]

I rise to make my final speech to the Committee on clause 88. [Hon. Members: “Shame!”] I know; it is a shame. The fun must end, but there will always be another Finance Bill.

The clause is enticingly named “Regulatory capital securities and hybrid capital instruments”. As the Minister just told us, it will introduce new tax rules for loan relationships that are hybrid capital instruments. According to the Bill’s explanatory notes, it will also revoke regulations dealing with the taxation of regulatory capital. The clause and schedule refer to the issuance of instruments by companies and financial institutions that contain debt and equity-like features, which, in investment terms, are more commonly known as convertible bonds.

Convertible bonds are having something of a renaissance, as some investors argue that they are well suited to current market conditions, especially the potential rise in interest rates. Practically, a convertible bond pays a fixed coupon, like a debt, but gives the holder the right to exchange the instrument for equity on redemption. In uncertain times for the markets, the appeal is clear: the investor is exposed to a fixed income-type risk in terms of downside, while being able to participate in an equity-like upside. That risk profile has been especially popular in recent years. Subsequently, 2018 has been the year of the highest convertible bond issuance since 2007.

If issuance is on the rise, it is important that investors understand what they are buying and the precise risk profile of how the instruments will perform in different market conditions. It is also important that any tax mismatches are corrected, so the Exchequer is not missing out. That brings us to the substance of the clause.

Hybrid instruments present a taxation challenge, precisely because they change in nature throughout their duration. The distribution of profits would not attract the same tax treatment as interest payments. For financial institutions, that problem was solved by legislation that related to capital requirements—the Taxation of Regulatory Capital Securities Regulations 2013.

Given that the issuance of different hybrid securities was required by a more recent exercise in assessment of loss-absorbing liabilities by the Bank of England in June 2018, the change forms part of a comprehensive review across sectors to remove tax uncertainty. That is timely, given the rising popularity in other sectors of issuing convertible debt, which I referred to earlier. It is important that the Exchequer does not miss out on any revenue as a result of uncertainty. I understand that the Taxation of Regulatory Capital Securities Regulations will be revoked for that reason and replaced by a new taxation policy for hybrid capital instruments, which will be applied across all sectors.

My first question for the Minister is how confident he feels that HMRC and financial taxpayers will have time to comply with the new rules. What consultation has taken place, and what guidance will be made available to those for whom the regulations are changing? The Bank of England’s changes, which demand the issuance of new instruments, will take effect from January 2019. The timeline feels extremely tight from a compliance perspective, if the tax rules are changing only now to accommodate the modification.

We are discussing a comprehensive and detailed set of changes that will affect huge amounts of capital from financial institutions. The technical note published by HMRC on 29 October goes into some depth about the changes, but the Opposition believe that further insight must be given on what feedback and concerns were raised by those who will be affected by the measure. We therefore tabled amendment 156, which would require the Government to make a statement on what consultation there has been on schedule 19.

Amendment 158 goes further by obliging the Government to publish a review of the revenue effects of the measure. According to statistics from Scope Ratings, the European issuance of hybrid bonds from non-financial corporates alone reached more than €10 billion in the first four months of 2018. Together with issuance from financial institutions, we are talking about an enormous source of revenue. We need to understand whether the reforms have been effective.

In connection with that, I ask the Minister to clarify how the stamp duty rules will apply to the measure. The technical note explains that

“The hybrid capital instruments rules provide an exception from all stamp duties on the transfer of these instruments.”

However, it goes on to stipulate conditions under which it might apply. Objectively, it seems that where the instrument is converted to equity, it should be subject to stamp duty, like ordinary shares, but the technical note seems to apply a number of contingencies. I would be grateful if the Minister clarified that one way or the other. I call on hon. Members to support the amendments and ensure that we have transparency on a potentially crucial issue of revenue for the Exchequer.

[Mel Stride]

I thank the hon. Gentleman for his contribution. He raised the issue of whether those affected by the measures in the clause will have time to adjust and take on board the new regime. I can assure him that we are confident that is the case, albeit, for the reasons I gave in my opening remarks, we were not able to have a full consultation on these measures given the timing as between consideration of the Finance Bill and the decisions taken by the Bank of England.

Specifically on that point, the Bank held a public consultation on the MREL rules, but the outcome was not published until June 2018. The rules apply from 1 January 2019 and any changes to our tax laws are necessary before then. The Finance Bill timetable means it is not possible to put that out for public consultation on the clause. We consulted on those measures with a number of those who will be affected, so we did what we could in the time available.

As to the hon. Gentleman’s question regarding stamp duty exemptions, those will continue to be in force as under the current regime.

Question put and agreed to.

Clause 88 accordingly ordered to stand part of the Bill.

Schedule 19

Taxation of hybrid capital instruments

Amendment proposed: 156, page 315, line 15, schedule 19, at end insert —

“Part 4

Statement on consultation

“22 The Chancellor of the Exchequer must lay before the House of Commons a statement on the consultation undertaken on the provisions of this Schedule no later than two months after the passing of this Act.”—(Jonathan Reynolds.)

This amendment would require the Chancellor of the Exchequer to make a statement on the consultation undertaken on the measures introduced by Schedule 19.

Question put, That the amendment be made.