Draft Investment Allowance and Cluster Area Allowance (Relevant Income: Tariff Receipts) Regulations 2018
Jonathan Reynolds Excerpts(5 years, 3 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is a privilege to serve under your chairmanship this morning, Mr Davies. It is, indeed, always good to start the day with a Treasury statutory instrument; the Minister and I could go even further and say that it is a treat to consider one that is not related to Britain’s exit from the European Union, for a change.
As the Minister outlined, the draft regulations relate to a change originally announced in the 2016 Budget: allowing tariff receipts to be included as a relevant income for investment allowances in the oil and gas sector. My only technical question for him is whether that change will be retrospective and, if so, whether there is an estimate of the overall cost to the Exchequer in that regard. It is marked blank in the impact section of the tax information and impact note that the Government published on 23 July 2018. If the figure is zero, perhaps there is a question about why the change is needed at all.
Understandably, the Opposition are supportive of the economic contribution of the oil and gas sector and the jobs and tax revenue that it provides; as the Minister said, it is a major national asset. However, our constituents will be interested to know the Government’s rationale for offering a further tax break to the oil and gas sector at the time of transition to a low-carbon economy and when concerns about climate change are so acute. The Minister will be more than aware that the UN Intergovernmental Panel on Climate Change report published in October 2018 showed that we have just 12 years left to make unprecedented changes to prevent global warming from increasing above 1.5°.
The impact note published by the Government states:
“While the UKCS is a mature basin compared to other prospects, there is still an estimated 20 billion barrels of recoverable oil remaining.
In recent years, the government has taken significant steps to create the right environment for oil and gas producers to maximise economic recovery of the remaining hydrocarbons in the basin. Encouraging investment in key infrastructure is an important aspect of this objective as it can delay decommissioning and support further development in the UKCS.”
Is it really the Government’s intention that those 20 billion barrels would be recovered? If so, what environmental consequences would that entail? How, for instance, does it fit with the emissions reduction pledge 2020, to which the Government have publicly committed? To give the Committee some sort of guide, I point out that 20 billion barrels of oil, if combusted, would release more than 20 times the UK’s entire CO2 emissions in 2017, and that is before any emissions generated in extracting the oil were taken into account, so clearly that is quite a significant part of Government policy.
People want to know what tax incentives are being promised to the renewable energy sector to encourage further infrastructure development in cleaner technologies. Fiscal policy is intrinsic to driving the transition to a greener, low-carbon economy. This change appears to be a move in the other direction, and I think that people would benefit from hearing from the Minister some of the rationale that lies behind it.
Finance (No. 3) Bill
Jonathan Reynolds ExcerptsTuesday 8th January 2019
(5 years, 3 months ago)
Commons ChamberRead Full debate Finance Act 2019 View all Finance Act 2019 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 8 January 2019 - (8 Jan 2019)
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I beg to move, That the clause be read a Second time.
Mr Deputy Speaker (Sir Lindsay Hoyle)
With this it will be convenient to discuss the following:
New clause 7—Review of effect of carbon emissions tax on climate targets—
“The Chancellor of the Exchequer must review the expected effect of the carbon emissions tax on the United Kingdom’s ability to meet its internationally agreed climate targets and lay a report of that review before the House within six months of the passing of this Act.”
New clause 12—Review of expenditure implications of Part 3—
“(1) The Chancellor of the Exchequer must review the expenditure implications of commencing Part 3 of this Act and lay a report of that review before the House of Commons within six months of the passing of this Act.
(2) No regulations may be made by the Commissioners under section 78(1) unless the review under subsection (1) has been laid before the House of Commons.”
This new clause would require a review within 6 months of the expenditure implications of introducing a carbon emissions tax. It would prevent part 3 (carbon emissions tax) coming into effect until such a review had been laid before the House of Commons.
New clause 13—Report on consultation on certain provisions of this Act (No. 2)—
“(1) No later than two months after the passing of this Act, the Chancellor of the Exchequer must lay before the House of Commons a report on the consultation undertaken on the provisions in subsection (2).
(2) Those provisions are—
(a) sections 68 to 78,
(b) section 89, and
(c) section 90.
(3) A report under this section must specify in respect of each provision listed in subsection (2)—
(a) whether a version of the provision was published in draft,
(b) if so, whether changes were made as a result of consultation on the draft,
(c) if not, the reasons why the provision was not published in draft and any consultation which took place on the proposed provision in the absence of such a draft.”
This new clause would require a report on the consultation undertaken on certain provisions of the Bill – alongside New Clause 11, New Clause 14 and New Clause 15.
New clause 19—Review of powers in consequence of EU withdrawal (No. 2)—
“(1) The Chancellor of the Exchequer must, no later than a week after the passing of this Act and before exercising the power in section 89(1), lay before the House of Commons a review of the following matters—
(a) the fiscal and economic effects of the exercise of the powers in section 89(1) and of the outcome of negotiations for the United Kingdom’s withdrawal from the European Union giving rise to their exercise;
(b) a comparison of those fiscal and economic effects with the effects if a negotiated withdrawal agreement and a framework for a future relationship with the EU had been agreed to;
(c) any differences in the exercise of those powers in respect of—
(i) England,
(ii) Scotland,
(iii) Wales, and
(iv) Northern Ireland;
(d) any differential effects in relation to the matters specified in paragraphs (a) and (b) in relation between—
(i) England,
(ii) Scotland,
(iii) Wales, and
(iv) Northern Ireland.”
This new clause would require a review of the economic and fiscal impact of the use of the powers in section 89 in the event of no deal and in event of a withdrawal agreement passing.
Amendment 16, in clause 78, page 51, line 32, after “may” insert
“(subject to section (Review of expenditure implications of Part 3))”.
See New Clause 12.
Amendment 1, in clause 89, page 66, line 38, at end insert—
“(1A) The Chancellor of the Exchequer must, no later than a week after the passing of this Act and before exercising the power in subsection (1), lay before the House of Commons a review of the following matters—
(a) the fiscal and economic effects of the exercise of those powers and of the outcome of negotiations for the United Kingdom’s withdrawal from the European Union giving rise to their exercise;
(b) a comparison of those fiscal and economic effects with the effects if a negotiated withdrawal agreement and a framework for a future relationship with the EU had been agreed to;
(c) any differences in the exercise of those powers in respect of—
(i) Great Britain, and
(ii) Northern Ireland;
(d) any differential effects in relation to the matters specified in paragraphs (a) and (b) in relation between
(i) Great Britain, and
(ii) Northern Ireland.”
This amendment would require the Chancellor of the Exchequer to review the fiscal and economic effects of the exercise of the powers in subsection (1) before exercising those powers.
Amendment 13, page 67, line 7, leave out subsection (5) and insert—
“(5) No statutory instrument containing regulations under this section may be made unless a draft has been laid before and approved by a resolution of the House of Commons.”
This amendment would make Clause 89 (Minor amendments in consequence of EU withdrawal) subject to the affirmative procedure.
Amendment 7, page 67, line 19, at end insert—
“(7) The provisions of this section only come into force if—
(a) a negotiated withdrawal agreement and a framework for the future relationship have been approved by a resolution of the House of Commons on a motion moved by a Minister of the Crown for the purposes of section 13(1)(b) of the European Union (Withdrawal) Act 2018, or
(b) the Prime Minister has notified the President of the European Council, in accordance with Article 50(3) of the Treaty on European Union, of the United Kingdom’s request to extend the period in which the Treaties shall still apply to the United Kingdom, or
(c) leaving the European Union without a withdrawal agreement and a framework for the future relationship has been approved by a resolution of the House of Commons on a motion moved by a Minister of the Crown.”
This amendment would prevent the Government implementing the “no deal” provisions of Clause 89 without the explicit consent of Parliament for such an outcome. It would provide three options for the provisions of Clause 89 to come into force: if the House of Commons has approved a negotiated withdrawal agreement and a framework for the future relationship; if the Government has sought an extension of the Article 50 period; or the House of Commons has approved leaving the European Union without a withdrawal agreement and framework for the future relationship.
Amendment 8, page 67, line 19, at end insert—
“(7) The provisions of this section shall not come into force until the House of Commons has come to a resolution on a motion made by a Minister of the Crown agreeing its commencement.”
Amendment 14, in clause 90, page 67, line 22, after “may” insert
“(subject to subsections (1A) and (1B))”.
See Amendment 15
Amendment 15, page 67, line 24, at end insert—
“(1A) Before proposing to incur expenditure under subsection (1), the Secretary of State must lay before the House of Commons—
(a) a statement of the circumstances (in relation to negotiations relating to the United Kingdom’s withdrawal from the European Union) that give rise to the need for such preparatory expenditure, and
(b) an estimate of the expenditure to be incurred.
(1B) No expenditure may be incurred under subsection (1) unless the House of Commons comes to a resolution that it has considered the statement and estimate under subsection (1A) and approves the proposed expenditure.”
This amendment would require a statement on the circumstances (in relation to negotiations) giving rise to the need for, as well as an estimate of the cost of, preparatory expenditure to introduce a charging scheme for greenhouse gas allowances. The amendment would require a Commons resolution before expenditure could be incurred.
New clause 18—Review of effects on measures in Act of certain changes in migration levels—
“(1) The Chancellor of the Exchequer must review the effects on the provisions of this Act of migration in the scenarios in subsection (2) and lay a report of that review before the House of Commons within one month of the passing of this Act.
(2) Those scenarios are that—
(a) the United Kingdom does not leave the European Union,
(b) the United Kingdom leaves the European Union without a negotiated withdrawal agreement,
(c) the United Kingdom leaves the European Union following a negotiated withdrawal agreement, and remains in the single market and customs union,
(d) the United Kingdom leaves the United Kingdom on the terms of the draft withdrawal agreement of 14 November 2018.
(3) In respect of each of those scenarios the review must consider separately the effects of—
(a) migration by EU nationals, and
(b) migration by non-EU nationals.
(4) In respect of each of those scenarios the review must consider separately the effects on the measures in each part of the United Kingdom and each region of England.
(5) In this section—
“parts of the United Kingdom” means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland;
“regions of England” has the same meaning as that used by the Office for National Statistics.”
This new clause would require a review of effects on measures in the Bill of certain changes in migration levels.
Jonathan Reynolds
This group of amendments relates to the tax and fiscal implications of the UK’s withdrawal from the EU.
Throughout the last year Parliament has been asked to approve a series of Bills giving the Government the power to deliver every type of Brexit deal conceivable, and this Finance Bill is no different. I said when closing the Second Reading debate on the Bill for the Opposition that this approach was one of “give us the powers now and we will make the decisions later,” and as it currently stands Brexit represents the biggest transfer of power to the Executive in modern constitutional history. That is disappointing for anyone who thought Brexit would see greater powers for this Parliament, but it is also a recipe for very bad decisions, and there is a classic culprit in this Finance Bill in the form of clause 89. Innocently named “Minor amendments in consequence of EU withdrawal”, it gives the Government power to amend tax legislation without any of the usual due process in the event that the UK leaves the EU without a deal.
The Government always tell us—I am sure they will do so again—that this is simply a safeguarding provision that we will never have to use, but all of us here today know that as it stands the Government have absolutely no chance of getting their deal through, because that deal does not deliver the basics of what this country needs. It does not deliver smooth, low-friction borders for manufacturing and supply chains, nor does it deliver market access for financial services. It also fails to resolve the big question: after we leave the EU, will we prioritise market access or trade autonomy? Because of that, we will almost certainly end up in the backstop arrangements, a halfway house without any say for the UK—the very worst of all worlds.
The new clauses and amendments are therefore of seminal importance, and I am extremely grateful to the Chair of the Home Affairs Committee, my right hon. Friend the Member for Normanton, Pontefract and Castleford (Yvette Cooper), for laying amendment 7 before the House today. It is clearly a cross-party amendment, supported by the Chairs of the Treasury, Exiting the European Union and Business, Energy and Industrial Strategy Committees, but it has the Opposition’s support because it offers Parliament a chance to make a clear statement rejecting a no-deal outcome—a statement that cannot come soon enough.
Anyone pretending that crashing out without a deal is simply about resorting to World Trade Organisation schedules is dangerously misinformed. As The Economist magazine said last month:
“A no-deal Brexit is about a lot more than trade—it would see many legal obligations and definitions lapse immediately, potentially putting at risk air travel, electricity interconnections and a raft of financial services”.
It would mean tariffs on trade with the EU, but it would also affect trade beyond the EU as all our current trade agreements negotiated as an EU member would immediately cease to apply. Agriculture, aerospace, the automotive sector—all these major sectors of our economy—would face potentially irreparable damage, and while tariffs may be reduced over time, excise duties and health checks on food, plants and livestock cannot be reduced so easily. Researchers at Imperial College London have calculated that just two minutes more transit time per lorry at Dover and the Channel tunnel translates into a 47 km traffic jam, and for perishable items like food, delays of that magnitude simply could not be sustained. When we add to that higher prices through tariffs and further inflationary pressure from another inevitable fall in the value of the pound, it is a recipe for significant pressure on living standards. That is why the Opposition say that no deal is not a real option.
There has been some suggestion that the Government might accept amendment 7.
Mr John Baron (Basildon and Billericay) (Con)
Does the hon. Gentleman not acknowledge that by ruling out preparations for no deal one is in effect tying the hands of one’s negotiating team, which in effect makes a trade deal—which we all, I think, would prefer to leaving on WTO terms—more difficult to achieve and therefore makes leaving on WTO terms more likely?
Jonathan Reynolds
The facts are as they are. It is far too late for that. Everyone knows the position that this country is in. The Government have run down the clock. They lost their majority through a general election that they did not need to call, and it is far too late to start applying the logic that might have applied several years ago. Because of that, our vulnerability is evident for everyone to see. No one should underestimate the likelihood of a no-deal outcome at this stage. No one should be pretending, through semantics or parliamentary chicanery, that we might be able to present no deal as a way of giving us greater leverage in negotiations. I am afraid that the Government have got us to the point of ruin if that is the strategy that Conservative Members wish to pursue.
Kevin Brennan (Cardiff West) (Lab)
Given that the Business Secretary said in the House earlier that no deal should not be contemplated, and that my hon. Friend is outlining the possibility of the Government accepting amendment 7, would it not be right for the Government to say clearly at the end of business today that they are ruling out no deal because it would be so damaging to this country?
Jonathan Reynolds
I absolutely agree with my hon. Friend. We all know that several members of the Government take that view, even though they may not be able to say it on the record. They are quite clear as to what no deal would mean, and they would not contemplate going down that route. It would be far simpler and far better to get to a position where ruling out no deal was clearly the Government’s intent.
New clause 3 would oblige the Government to publish a review of the fiscal and economic effects of the exercise of the powers in clause 89, as well as the differences between exercising those powers in Great Britain and in Northern Ireland. As we edge closer to the reality of crashing out without a deal, clause 89 is not simply hypothetical. We are now just two and a half months away from the UK’s exit without an agreement. It is therefore of critical importance that we have a full and transparent view of the implications of a clause of this kind.
Crispin Blunt (Reigate) (Con)
I am afraid that the hon. Gentleman is going to have to do a bit better than this. He talks about crashing out without a deal, but he needs to get into the detail of the implications. Perhaps he is going to start talking about planes, but amazingly, the planes are going to keep flying. Amazingly, we are still going to have drugs supplied into the United Kingdom. He needs to get down into the detail of exactly what the implications will be, because if we are faced with the reality of no overall agreement, there will be a barrow-load of minor agreements to ensure that the common interests of the United Kingdom and the European Union survive the transfer to WTO terms on 29 March with minimum impact on the citizens of the EU and the UK. It is time he got real and stopped this nonsense—
Jonathan Reynolds
Thank you, Mr Deputy Speaker.
I have just talked about some of the consequences of crashing out without a deal. I have talked about relationships, about tariffs on products and about the legal definitions under the common agreements that this country has undertaken with other European countries. We all know this—the information is readily available—so I am not quite sure what point the hon. Gentleman is making. I think he is aware of the dangers of taking this course of action.
Mr Kenneth Clarke (Rushcliffe) (Con)
With respect, it is quite right to concede that some of the fears being raised about no deal are grossly exaggerated, but the problems are quite real enough. If we leave with no deal, we will be the only developed country in the world that has no trade agreement at all with anybody and that is having to fall back on WTO rules, which are made to sound marvellous by the Brexiteers but which do not actually amount to very much. We will also be erecting new barriers to trade and investment around the borders of the United Kingdom, including along the Irish border, and that is bound to disadvantage our economy very seriously indeed.
Jonathan Reynolds
The Father of the House is as accurate as ever. Some colleagues are pursuing a dangerous argument that all our trading relationships with countries that are not in the EU are somehow currently under WTO terms, which is an absurd misconception. We have entered into trade agreements as a member of the EU that account for something like 16% of our goods exports.
Regardless of the significant impacts of a no-deal outcome, we could go further and say that to leave the EU having not secured a deal—an acrimonious departure —would damage our relationship with our most important trading partner for years to come and fundamentally undermine our credibility on the world stage. I cannot see how any serious-minded Member of this House could understand that that would not be of severe consequence for the United Kingdom, which is why it is so important that this House makes a clear statement today about the dangers of no deal.
John Redwood (Wokingham) (Con)
Can the hon. Gentleman name a single country that has a free trade agreement with the EU that will not transfer it to the UK under the novation procedures?
Jonathan Reynolds
We simply do not know the answer to that question. I always listen to what the right hon. Gentleman has to say in Treasury and Finance Bill debates, but he is one of the archetypal Members who come to the House and pursues what I call the BMW argument: “Everything will be fine because we buy BMWs and everyone will give us what we want.” That argument is still being pursued in these debates, but it has been proved completely untrue by the stage of the negotiations that we are at. It is simply not good enough to say, “It will all be alright on the night. Everyone will transfer over the benefits we currently have. It will be as straightforward as that.” If that were case, the Government would not be in this morass and the country would be in a far better position.
Chris Philp (Croydon South) (Con)
First, is it not the case that the UK and, indeed, the entire EU currently trade with major economies, such as the USA and China, under WTO terms? Therefore, while not desirable, they can be made to work. Secondly, if we adopt the shadow Minister’s approach and rule out no deal, we have no choice but to remain in the EU or to accept whatever the EU sees fit to give us, which is not a great negotiating position.
Jonathan Reynolds
I thoroughly agree that what the Government have got us into is not a great negotiating position, but that is because the negotiations have been driven by the best interests of the internal politics of the Conservative party. If the national interest had been considered, we would be in a completely different place.
Trade can exist on WTO terms. It is not that the UK would somehow no longer be a trading nation, but that is not the test of good Government policy. The test is to consider the ramifications of that decision and to decide whether it is in the UK’s best interests, but I cannot believe that anyone would look rationally at what a no-deal outcome means and say, “I would find that acceptable for this country.”
Kate Hoey (Vauxhall) (Lab)
Does not my hon. Friend think that it would be irresponsible for any Government not to be making contingency plans for WTO rules in these circumstances? Does he also agree that the Irish Taoiseach has in the past few days looked for the first time at making some changes to his intransigent approach to the backstop, precisely because the Republic of Ireland would suffer so much more from WTO terms than the United Kingdom?
Jonathan Reynolds
The merits of the Government undertaking contingency measures are different from the political case that we must consider, which is whether we would find it desirable to undertake a course of action that would mean that we had to use those contingency measures. The focus of the debate in this Finance Bill should be a seriously hard-headed look at the consequences of no deal, and there should be a statement from Members on both sides of the House that that is not what we seek for the UK and that we do not believe that it is possible.
Jonathan Reynolds
I will take an intervention from the hon. Member for Dover (Charlie Elphicke), and I may come to the hon. Member for Shrewsbury and Atcham (Daniel Kawczynski) if the intervention is good enough.
Charlie Elphicke
The hon. Gentleman is making an interesting speech. My concern is with how he can support undermining the making of contingency preparations that are in the national interest, which is the effect of amendment 7. It is just the wrong thing to do, and the Labour party ought to be more responsible than that.
Jonathan Reynolds
I completely disagree with the hon. Gentleman, and a little humility from Conservative Members on the point about responsibility for the Brexit negotiations would be appreciated. For my entire lifetime, this country’s European policy has been dictated by the internal politics of the Conservative party. Every Conservative Prime Minister in my lifetime has been brought down by the issue of Europe. To suggest that any other political party or actor in this country needs to have more regard for the national interest, when it is the Conservative party that has never been able to do so, is not something I will take.
Daniel Kawczynski
Bearing in mind that 95% of the world’s growth over the coming decades will come from outside the European Union, what assessment has he made of the opportunities that will be afforded to the United Kingdom by our being able to tailor-make bilateral trading agreements?
Jonathan Reynolds
I am extremely glad that that issue has come up, because the opportunities created by growth outside the EU have no relationship to our membership of the EU, and could possibly be undermined by our leaving the EU. If we want to compete in competitive emerging markets around the world, what better way is there to do so than from within the single market? I would wager with the hon. Gentleman that a country like Germany will do far better from that growth around the world through its continued membership of the European Union than we will. I am afraid that it is because of such statistics, which have no bearing on serious Government policy or reality, that this debate has got to where it is, but I will move away from a wider debate on Brexit and return to the Finance Bill before you tell me to do so, Mr Deputy Speaker.
I will now come to clause 89 and the relationship between Great Britain and Northern Ireland. Under the draft withdrawal agreement it is widely accepted that, under the backstop arrangements, Northern Ireland will remain in regulatory alignment with the European Union, which would be particularly the case for EU customs law but it would also apply to compliance with elements of EU single market regulation in the technical regulation of goods, state aid and other areas of north-south co-operation between Northern Ireland and the Republic. Of course, Northern Ireland would be included in parts of the EU VAT and excise regimes and in the single electricity market.
With that in mind, it is clear that the powers handed to the Treasury by this Bill may not be applicable in Northern Ireland in the legal and regulatory areas under which EU authority would remain. We are therefore seeking a review that clearly sets out any difference in application of these powers in respect of Great Britain and Northern Ireland, and I urge Members on both sides of the House to support new clause 3.
New clause 7 relates to clause 90 on establishing an emissions reduction trading regime. It would require the Government to review the expected effect of the carbon emissions tax on the UK’s capacity to meet internationally agreed climate targets. There has never been a more critical time to take urgent action on climate change to avoid environmental catastrophe. The report from the UN Intergovernmental Panel on Climate Change, published in October 2018, shows that we have just 12 years left to make unprecedented changes to prevent global warming increases above 1.5° C. Our exit from the European Union must not be used as an excuse to step back from action on climate change. Worryingly, clause 90 contains one of the Bill’s very few passing references to environmental issues, and our review, proposed in new clause 7, would ensure that the Government are held accountable for making progress on reducing emissions without using Brexit as an excuse for stalling.
This is evidently a Government in chaos, seemingly without any plan or strategy at all. The new clauses and amendments in this group would improve both the Finance Bill and the process by which we leave the European Union. They are sensible, proportionate and timely, and I commend them to the House.
Sir Vince Cable
Thank you for your indulgence, Mr Speaker. I just want to say a few words in support of amendments 7 and 8. They are Brexit-neutral, in the sense that they require the House to approve any change, but of course they relate primarily to no deal. The fiscal issues, as the right hon. Member for West Dorset (Sir Oliver Letwin) explained them, were arcane and rather gentle. I tabled a more brutal amendment that was not called.
In the 30 seconds left, I want to relate an incident from this morning, when I went to the ferry port at Portsmouth. It is very clear that the Government are totally and utterly unprepared for the chaotic impact that there will be on the road system, including access to the naval base, if a no-deal Brexit occurs. Despite repeated requests from the council and others, the Department for Transport and the Ministry of Defence are refusing to co-operate, and the police now say that the M3 motorway will have to be closed from Winchester to Basingstoke in order to provide a lorry park. Repeated efforts to get Ministers to respond have not been heeded. A meeting was held for 19 regional MPs last week, but only one attended, so I am taking on the job of representing a no-deal Brexit. It is a task I undertake with all the enthusiasm of an arsonist trying to put out a bushfire, but I will do it.
Jonathan Reynolds
This has been a significant and important debate. In fact, it is clear that the House desires a longer and broader debate—that point was well made by the Chair of the Treasury Committee. No deal is some people’s preferred outcome, and they are the same people who told us that doing a deal would be the easiest thing in history. They were wrong then and they are wrong now. I feel that the case against the unilateral use of these no-deal powers has been comprehensively made, and I urge all Members to vote for our amendments, because that is best for jobs, prosperity and the national interest.
HBOS Reading: Independent Review
Jonathan Reynolds Excerpts(5 years, 4 months ago)
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Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
Thank you, Sir Christopher, for calling me to respond to this debate for the Opposition.
I also thank the hon. Member for Thirsk and Malton (Kevin Hollinrake) for securing the debate and for his work in chairing the all-party parliamentary group on fair business banking and finance, as well as for all the APPG’s continued efforts on this matter; its commitment to securing justice for victims of banking fraud is commendable and important.
The hon. Gentleman, along with some other Members—especially my hon. Friend the Member for East Lothian (Martin Whitfield) and the hon. Member for Strangford (Jim Shannon)—outlined clearly the challenges that people face in making sure that the victims of this scandal receive the redress they deserve through the current compensation scheme.
The actions of HBOS Reading and the then head of the impaired assets division and its corrupt partners were absolutely disgusting. I have read the accounts several times, but each time I reread the testimonies of the victims in advance of a debate such as this one it gives me a sense of rage. I find the injustices and the cynical destruction of other people’s lives unconscionable.
At a minimum, we must offer proper redress to those affected. It should not have been down to those victims to force action to be taken, but unfortunately that is not what we have heard today. Instead, we have heard about the difficulty in appealing against compensation decisions; about the lack of clarity and transparency over decisions; about documents that underpin judgments being hidden from victims; and about a fundamental lack of accountability and independence. Lloyds must explain how it plans to address those ongoing and legitimate concerns. I would like that response to be sent to the hon. Member for Thirsk and Malton and for Members present today to be copied in.
The number of contributions today, as well as their depth and detail, shows how pertinent and urgent the matter continues to be. It is important that it does not fall off the agenda, given the political situation, but I do not think it will, looking at the Members present today. We all have a responsibility to keep up the pressure to ensure that victims’ voices are heard. We are talking about much more than financial losses. Victims lost entire livelihoods, their health and, in some cases, their relationships on the basis of what happened to them.
Ten years on from the financial crisis, it is widely agreed that too many people were able to walk away from the serious damage they caused without any form of personal censure. It is clearly a good thing that the perpetrators of the fraud were brought to justice, and Thames Valley police deserves quite a lot of credit for that, as do Paul and Nikki Turner. Without securing a fair outcome for the victims, however, we have no hope of properly rebuilding trust between businesses and their banks in the long term.
Research shows that frighteningly low numbers of small businesses trust their banks to do the right thing by them, and we have to look at how we can improve that trust. We need to restore confidence that there is a level playing field for businesses when they find themselves in conflict with their banks, especially if those working at the bank have committed fraud, as was true in this case. All that makes it even more important that we agree a comprehensive package to properly address the legacy banking scandals that this country faces.
We can rebuild trust in business banking. We need a full public inquiry into all the scandals. We need an independent tribunal system for SMEs. Lastly, we need a much better and more robust system to protect and enable whistleblowing. I will briefly reiterate the case for each of those.
The first step has to be securing proper redress for SMEs that have been mistreated by their banks. Scandals such as this and RBS GRG, which we have all been present to debate in the past, have seriously dented confidence in our banking sector. That is why we have always called for a full public inquiry so that victims can get proper redress. Many colleagues in this room have argued for the same. It is not just about getting to the bottom of who was responsible for such scandals; it is about examining the wider systemic issues that allowed these events to take place. I was struck by the right hon. Member for Wantage (Mr Vaizey) making the point that he raised these issues 10 years ago. It is simply too important for us to sweep them under the carpet without securing the ability to say to people, “This will never happen again.”
In terms of disputes, part of the problem is definitely that the gap is too big between the Financial Ombudsman Service for individuals and the full legal process for very big firms. We have all seen the recent report from Simon Walker, alongside the response from UK Finance, arguing that an expanded Financial Ombudsman Service would be sufficient to meet that need. As the Opposition, we believe that, given the severity of the damage done in such cases, we need to go further.
We support the proposals from the all-party group on fair business banking and finance to establish an independent tribunal to help create that level playing field between businesses and their banks. That is also supported by the Treasury Committee, as outlined in its report on SME finance published on 26 October. We share the Committee’s ultimate conclusion that an independent financial services tribunal is needed to handle more complex disputes, complementing the expansion of the ombudsman’s remit. In our experience so far with voluntary redress schemes, they have been beset by issues. We would not be here today if such schemes were sufficient to meet the need. Ultimately, I do not believe we can convince our constituents that the industry is in a position to self-regulate. That is why an independent tribunal system is necessary.
Lastly, a potential answer could lie in exploring our approach to whistleblowing in financial services in this country. We have to look at why the fraud took so long to uncover and how we can improve internal systems and processes to stop such things ever happening again. The hon. Member for Thirsk and Malton raised a specific example of how a whistleblower was treated in this case. In the US, the Dodd-Frank Act, introduced as a central piece of post-financial crisis legislation in 2010, is a demonstration of how much more robust the whistleblower protection framework could be. Whistleblowers are entitled to awards if their information leads to enforcement action. It is structured in such a way as to disincentivise false reports and to provide protection in the event of dismissal. The UK legislation, on the other hand, is much thinner. While the Financial Conduct Authority can assist whistleblowers under the Public Interest Disclosure Act 1998, that has not been enshrined in financial regulation in the way Dodd-Frank has been used in the US. There is a case for examining whether specific financial services whistleblower protection could be a starting point in seriously improving conduct in banking from the inside out.
In conclusion, if we are to restore trust in UK business banking, two outcomes must be achieved. First, we must ensure that the victims of the HBOS scandal get proper redress for the damage done to their businesses and livelihoods as a result of the appalling conduct by individuals who worked in the bank. The same is obviously true for victims of the RBS GRG scandal. The second responsibility we all share is to ensure that such a flagrant abuse of the bank and business relationship can never happen again on such a scale. The combination of a full, comprehensive public inquiry with a broad enough scope to capture the full breadth of victims, the establishment of an independent financial services tribunal and a radical rethink of how we treat whistleblowers could begin that process. The victims of this scandal were badly let down. I want to be able to stand here and say that they will all get justice and that this can never happen again.
Draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018
Jonathan Reynolds Excerpts(5 years, 4 months ago)
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Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
Good afternoon, Mr Sharma. As ever, it is a pleasure to see you in the Chair.
Once again, the Minister and I are in Committee to discuss Treasury-related statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. On each of those occasions, my Labour Front-Bench colleagues and I have spelled out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation passing through Committee.
The frustration that we will spend time and resources creating a framework that might never be used is a point that has already been made several times in Committee. All of us hope that the draft regulations will never have to be used; no deal would be so seriously detrimental to the UK that it is hard to believe that it is anything more than a threat from the Government to try to force their deal through. However, we must recognise that the instruments passing through the Committee might well not disappear on 29 March 2019. Given the chaotic events of the past few weeks, we simply cannot treat lightly the possibility of no deal.
What we are doing today could therefore end up in real and substantive changes to the statute book, so the measures need proper, in-depth scrutiny. If the Government end up without a deal, we have to bear in the mind the stress that the financial markets would be under. We believe that the draft regulations must be considered through that lens, because they would certainly have to be robust.
Members of the Committee might be aware that this draft statutory instrument was originally scheduled for discussion on 28 November, but that was postponed. That is because the Opposition requested that a full debate take place on the Floor of the House regarding this transposition. As has been mentioned previously in these Committees, we must agree to about 70 Treasury-related SIs to ensure that markets do not grind to a halt in the event of no deal. The secondary legislation process contains, as a democratic backstop—if I dare use the word—the option for a debate on the Floor of the House. In the case of this instrument, we believe that to be essential. I will explain why.
I very much appreciate the efforts that the Minister personally and the civil service have made to brief us on the process, and the information that they have provided to us. Earlier today, in the Treasury, we had a most helpful meeting with the civil service staff working on this, as well with representatives of the Financial Conduct Authority. I understand that they are working extremely hard to draft this legislation in a tight timeframe, and I appreciate them taking the time to engage with us, but my conversation in the Treasury reinforced the enormous magnitude of the issues with which we are dealing in this Committee. We simply must have this debate on the Floor of the House, where Members may contribute and the issues can be discussed in the depth they deserve.
The draft SI is different in size and scope from those that have preceded it. The markets in financial instruments directive, or MiFID, as it is more commonly known, is a sprawling piece of legislation that affects our financial markets, from investment banks to retail investors. Now in its second iteration, named MiFID II, the directive has transformed pre and post-trade efficiency in the UK. It has progressed us towards more transparent markets, enshrined critical investor protection, and taken a tough line on inducements.
For anyone not so familiar with the recent changes, there was significant debate about what constitutes an inducement from a financial adviser to encourage an investor to buy a product or service. That resulted in sweeping changes to historical market practices, such as the bundling of free investor research by sell-side operators into execution relationships. We cannot allow any room for the UK to dial back on those measures, or any other measure that helps to improves the transparency and fairness of financial markets in the UK.
The volume of potential legislative changes from transposing MiFID has necessitated the production of a Keeling schedule, which Her Majesty’s Treasury has stated it will not draw up for any other SI. If the Government are going to the expense and trouble of producing such a schedule, it should form part of a proper process of democratic review that goes beyond the Committee Room. The shadow Leader of the House, my hon. Friend the Member for Walsall South (Valerie Vaz), made that point during business questions last Thursday.
I wonder whether anyone in the room has come across a Keeling schedule before. We have some exceptionally distinguished Members here, but I would not be surprised if the answer were in single figures, because they are not used very often. A Keeling schedule is effectively a track changes on original legislation. It is necessitated by the significant scope of the alterations to the legislation. The last one needed was for the general data protection regulation. I think we can all attest to the sprawling reach of that item, given the effect on our inboxes. Just 18 Keeling schedules have been deposited in the Library since 2002. The Treasury has told us that it will not draw up such a schedule for any other SI, so how can the Government argue that an item demands a Keeling schedule but does not require a debate on the Floor of the House?
The Treasury’s impact assessment of the SI lists the familiarisation cost of it at £9.6 million. That far exceeds the next closest figure, which is for the capital requirements regulations, at £1.7 million. By comparison, the average equivalent cost for the remaining eight SIs for which the Treasury has conducted assessments is significantly lower at just £266,000. The Minister has reassured us on multiple occasions that policy decisions are not being made in the fabric of these instruments, but we must examine closely the implication of what we would be enabling.
The EU approach to drafting regulations, known as the Lamfalussy process, is being imported into UK law. The Treasury will enact the European Commission’s powers, and the FCA will take on the responsibilities of the European Securities and Markets Authority. That has wide-ranging implications for supervision. For example, it has been decided that the European Commission’s function of assessing equivalence would be transferred to the Treasury rather than the FCA, yet historically, equivalence decisions have been made by both parties in different circumstances. That should be properly examined and debated, rather than arbitrarily assigned.
In a letter to my colleague the noble Lord Tunnicliffe after the instrument was debated in the other place last month, Lord Bates explained that the intention is to continue the MiFID pre and post-trade transparency regime in the UK. To achieve that, the FCA will have the power to suspend the obligations for pre and post-trade transparency for a specified non-equity financial instrument or a class of non-equity financial instruments during a transitional period of up to four years beginning from exit day. That sounds to the Opposition like a very slippery slope.
Although the intention is that the balance of powers will be examined in future, we cannot be expected effectively to sign a blank cheque on the UK’s regulatory regime for four years. We understand, as the Minister explained, that the reason behind it is that the FCA will not be ready to operate the required framework of specified thresholds for transparency on day one. However, my hon. Friend the Member for Oxford East (Anneliese Dodds) raised that issue very early on in the process. It is frustrating that we are receiving clarity on it only now.
Equally, it is challenging for the Opposition to assess the transfer of powers to the FCA without an accompanying policy statement. We are told that the policy statement will be made available before exit day, but it is difficult for us comprehensively to assess the implications of the SI without that information. That is before we have even touched on the FCA’s resources to cope with the new regime, a point raised by my hon. Friend the Member for Oldham East and Saddleworth and my right hon. Friend the Member for Tottenham.
There are other issues bound up in the SI that we believe need further debate. Paragraph 7.15 of the explanatory memorandum states that EU trading venues will be denied
“the right to request access to a UK central counterparty (CCP)”
under the temporary permissions regime
“unless an equivalence decision is made by HM Treasury”
for that market segment. A lot of assumptions are bound up in that. It means that the European Commission’s function of assessing equivalence will be transferred to the Treasury, rather than the FCA. Is the Treasury set up to do that? Historically, the FCA has made decisions about equivalent jurisdictions.
Just two weeks ago, in this same Committee Room, the Minister and my hon. Friend the Member for West Ham (Lyn Brown) debated the draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, through which the Bank of England was given powers on equivalence decisions. What governs the decision-making process for restoring those powers to different institutions? A small addendum is included on the future of UCITS—undertakings for the collective investment of transferable securities—funds, which is a significant product segment across the EU with inflows of tens of billions of dollars every month. I know from stakeholders that it suffers particular issues related to temporary permissions regime applications.
For more than a decade, MiFID has acted as the cornerstone of how financial markets operate in the UK. Today, we are proposing hauling that entire operation back into the purview of our own regulators and the Treasury if we end up leaving the EU without a deal. More than any other instrument in this process, this one cannot be subject to a top-level discussion by a small group of Members in Committee. The Government helpfully cleared an easy 90 minutes of time to debate this instrument last week when they pulled the debate on the Brexit agreement. That was our window to discuss things further.
There was ample time for this debate to take place on the Floor of the House this week, too; that would have allowed Members to contribute to the analysis. Any reasonable Government in any other reasonable circumstances would have agreed to that request, but this Government cannot afford to allow any EU-related business on to the Floor of the House of Commons, because they are not sure of their majority, but Governments who do not have a majority in the House of Commons are not Governments at all.
As stated at the outset, a no-deal scenario would be so disastrous for the UK that it is difficult to see it as much more than a negotiating tool, by means of which the Government will try to force Parliament’s hand. We do not want markets to be unprepared, but there must be proper scrutiny on what we decide, with objections recorded and recognised.
The Opposition believe that this instrument must be debated properly on the Floor of the House. That is why we intend to divide the Committee. I urge fellow Members who support real scrutiny and the sovereignty of Parliament to join us in voting against it.
Draft Capital Requirements (Amendment) (EU Exit) Regulations 2018
Draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018
Jonathan Reynolds Excerpts(5 years, 4 months ago)
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Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It really is a pleasure, Ms Buck, to serve under your chairmanship. Once again, the Minister and I find ourselves in this room, as we work through the list of dozens of Treasury statutory instruments that are needed as we prepare for EU withdrawal. It is nice to see that there is a crowd this morning—there must be something else going on today, perhaps later on.
On each of these occasions, I and my Front-Bench colleagues have spelled out our objections to secondary legislation being used in this manner, as well as the challenges of ensuring that there is proper scrutiny, given the sheer volume of legislation passing through these Committees. All of this legislation is speculative, as it prepares us for a UK no-deal exit. It feels surreal to stand here discussing the finer points of financial regulation when the overall process is in total chaos.
It is near inconceivable that we are now so close to exit with no agreement in place and no vote scheduled on any such agreement. That places even greater importance on the work we are doing here, as with every passing day that this chaotic situation is not resolved, we inch closer to crashing out of the EU without a deal. That is a frightening prospect, particularly for financial services and especially for those parts of financial services that cannot operate within an equivalence framework.
Therefore, it is of the utmost importance that the statutory instruments are rigorous in their approach to ensuring the EU financial regulatory framework. The two instruments up for discussion today are of central importance to the stability of our financial system. Both the capital requirements and the recovery and resolution regime were designed to prevent the events of 2008 ever being repeated, given the catastrophic economic consequences. They required considerable co-operation across Europe, supported by wider efforts to comply with new rigorous international standards. Dismantling any element of that regime would be very ill advised, and we do not want to find ourselves in a position where Governments ever have to bail out the banks again.
With that in mind, I will begin by addressing the draft capital requirements instrument. I want to flag a major concern at how this provision is being transposed into UK law, and the potential disadvantage for UK banks. Colleagues will know that the EU capital requirements regulation mandates banks and financial institutions to maintain levels of sufficient quality capital, so that they are more resilient in market downturns or distress and, therefore, less likely to collapse. Different metrics are used to assess the quality of capital, and institutions are required to hold assets in certain ratios to comply with the regulation. It appears that this statutory instrument will remove preferential treatment for EU government debt for UK banks and, therefore, put UK banks holding EU government debt as a capital buffer at a disadvantage, as the Minister confirmed in his opening remarks.
EU member states’ government debt is considered very safe by the EU and banks do not need to hold much to meet regulatory requirements. If there is no agreement on equivalence for financial assets, the capital requirements statutory instrument says that UK government debt will no longer be considered so safe by the EU itself and, therefore, the UK Government will respond by removing preferential treatment for EU debt.
The guidance states:
“Once the UK has left the EU, in the absence of an agreement and where no equivalence determination has been made, the EU27 would automatically fall into the category of a third country where EU27 exposures would no longer receive preferential capital treatment. Therefore, this SI will remove preferential treatment for EU27 exposures.”
On the face of it, that will leave UK banks that hold EU government debt suddenly at a higher risk from a pricing perspective. It will become more expensive for them to hedge their risks in a no-deal environment, where markets are likely to be extremely volatile anyway. Trade publication GlobalCapital expresses that simply as a
“hit to UK bank capital ratios at the worst time imaginable”.
Where does that leave UK banks with significant EU operations, which are likely to hold this type of debt in large quantities? The Minister has repeatedly assured us that no substantive changes are being made from a policy perspective in the transposition of the rules through statutory instruments, but it seems this risks having a real and negative impact through a decision to change the treatment of EU government debt. Will the Minister please explain how the decision was reached and how it could be remedied to prevent increasing costs for UK banks and the requirement to re-hedge their positions?
The second instrument relates to a framework closely associated with the capital requirements: the recovery and resolution regime. That relates to so-called living wills for financial institutions if they fall into credit-related difficulties. That is another mission-critical strand of post-crisis regulation that continues to evolve.
The Bank of England has announced its plan to bring in a self-assessment regime for UK banks from 2020, which will require them to demonstrate their own winding down and restructuring plans for times of distress, without causing market contagion or requiring a taxpayer bail-out.
The guidance to the bank recovery and resolution statutory instrument states that:
“HM Treasury’s approach to onshoring the Bank Recovery and Resolution Directive is to ensure that the UK’s Special Resolution Regime is legally and practically workable on a standalone basis once the UK has left the EU.”
The challenge is how we can ensure that the recovery and resolution regime continues to be effective while potentially operating in isolation. Realistically, most of the biggest firms in this country are cross-border, so close co-operation will be needed with our EU counterparts to ensure that the risk of contagion is minimised and our approach is consistent. The statutory instrument is very light on detail in that regard. Will the Minister elaborate on the Treasury’s role in ensuring that this approach is followed? Is there an existing interaction with a third country or with third-country firms that the Treasury is using as a guide?
The banking framework in the UK has evolved significantly since 2007 to the benefit of both the taxpayer and market stability. Much of that has been achieved through close international co-operation with the EU and G20. We need to make sure that any future framework enshrines that hard work, especially as banks and financial institutions are likely to be highly stressed by market conditions if we crash out without a deal. Sadly, given the chaotic back and forth of the Government this week, the reality is that the prospect of no deal is becoming likelier by the day.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their questions, and acknowledge concerns about the rigour of the process. All I can say to the Committee is that I am doing everything I can to ensure that it is as rigorous as possible.
For both statutory instruments, there was significant engagement with industry and the regulators. The draft Capital Requirements (Amendment) (EU Exit) Regulations 2018 were laid on 21 August, with an explanatory note seeking to draw out concerns. The draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 were laid on 8 October for consideration.
The hon. Member for Stalybridge and Hyde accurately characterised the global drivers of the regulations. I want to address the specific concern he raised about the directive on the change in capital requirements consequent on our leaving in a no-deal scenario. He is right to say that the capital requirements regulation specifies how much capital and liquidity firms must hold against different types of exposures. He is right that certain EU assets are subject to a 0% risk weight, meaning that no capital needs to be held against those exposures. However, in a no-deal scenario, the UK will treat the EU as a third country and vice versa.
Without an assessment of equivalence between the EU countries and the UK, the EU would end preferential capital treatment for UK exposures, so it has been Government policy not to grant the EU unilateral preferential treatment in the absence of equivalence, and the SI makes the appropriate amendments to ensure that EU sovereign debt is no longer treated more favourably than other assets of a similar nature.
John Glen
Perhaps I may just make the next point, and see whether it addresses the hon. Gentleman’s concern.
EU sovereign debt will none the less retain the low risk ratings that sovereign debt typically attracts. In addition, we are introducing transitional powers for the regulators to phase in the new requirements. That is up to two years, mitigating much of the impact.
Jonathan Reynolds
I am grateful for that clarification, and for the second point in particular. I understand the political case for not having a unilateral preferential regime that is not reciprocated by the EU. However, when we think about all the market volatility and stress that no deal gives us, to reclassify the capital adequacy of UK resident banks feels quite difficult, even if it is phased in over a period of two years, which is not that significant to be honest.
Mr Richard Bacon (South Norfolk) (Con)
May I say how delighted I am that the Government are taking an approach that allows discretion? That was one enormous problem at the time of the financial crash, which was also a sovereign debt crisis. The hon. Member for Stalybridge and Hyde forgot to mention who was in charge at the time. That crisis was exemplified perhaps most clearly by Gordon Brown standing outside the shiny new Lehman Brothers office when it opened, shortly before the crash. The capital regime was so inadequate at the time under that regime—
Oral Answers to Questions
Jonathan Reynolds Excerpts(5 years, 4 months ago)
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Mel Stride
The hon. Lady suggests that the analysis does not model the White Paper deal. It does exactly that, but it does it in terms of the future relationship and the political declaration which, as she will know, is a range of potential outcomes—so that is entirely what the analysis does. As I say, what it shows is that the deal we have negotiated with the European Union is the best deal available for the things that she and I hold dear: growth across our economy, growth in Scotland, jobs in Scotland and even lower unemployment in Scotland. The Scottish National party should now row in behind this deal to make sure that we do the best for the whole of the United Kingdom.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
Scotland, just like the rest of the UK, has a substantial and successful financial services sector that is heavily dependent on market access to the EU. Will the Financial Secretary confirm that under the terms of the Government’s Brexit deal the financial sector gets no greater degree of market access than the equivalence arrangements that are already on offer to any third country, including for sectors such as insurance where no comprehensive equivalence regimes exist at all?
Mel Stride
I can enlighten the hon. Gentleman, although it is contained in the documentation that has come out of the negotiations. There will be an enhanced equivalence regime in respect of financial services. It is there in black and white. I am very happy to speak to him after questions and take him through the relevant paragraphs.
Finance (No. 3) Bill (Ninth sitting)
Jonathan Reynolds ExcerptsTuesday 11th December 2018
(5 years, 4 months ago)
Public Bill CommitteesRead Full debate Finance Act 2019 View all Finance Act 2019 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 11 December 2018 - (11 Dec 2018)
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—
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.
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.
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.
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.
Finance (No. 3) Bill (Eighth sitting)
Jonathan Reynolds Excerpts(5 years, 4 months ago)
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Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I beg to move amendment 122, in clause 65, page 46, line 6, at end insert—
“(7) The Chancellor of the Exchequer must review the revenue effects of the changes made in 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 revenue effects of the changes made by Clause 65.
Jonathan Reynolds
It is lovely to be able to give my hon. Friend the Member for Norwich South some well earned respite before he leaves the Committee briefly.
Opposition amendment 122 would require the Chancellor to publish a review of the impact on inheritance tax revenue of clause 65’s changes to the residence nil-rate band, six months after they are adopted. As we have stated in debates on previous clauses, the lack of an amendment of the law resolution has significantly hindered our ability to properly amend such clauses, beyond requesting a general review.
The nil-rate band, also known as the inheritance tax threshold, is the amount up to which an estate does not have to pay inheritance tax. Everyone has their own nil-rate band, which is currently £325,000, or £625,000 for a married couple. Any part of the estate up to the nil-rate band threshold is chargeable to inheritance tax at a rate of 0%. Any part of the estate that exceeds the nil-rate band threshold is usually chargeable to inheritance tax on death at 40%. The nil-rate band applies to non-exempt property passing on death, together with any taxable gifts made within seven years of death.
Clause 65 focuses specifically on the residence nil-rate band—an additional nil-rate amount available on top of the nil-rate band when the deceased has left a residence, or the proceeds of the sale of a residence, to his or her direct descendants. In its current form, the residence nil-rate band is particularly complicated when the individual in question has downsized before their death by selling their residence and either buying a less valuable property or going into residential care. Given the crisis in social care and the growing pressure on elderly people to sell large homes and downsize, that is sure to be fairly common. A recent survey by McCarthy and Stone, one of the UK’s leading retirement house builders, found that 48% of pensioners—nearly 6 million people—are considering moving to smaller homes, or would be encouraged to do so if there were a stamp duty exemption. The attraction of downsizing is clearly growing.
The Opposition understand the logic behind the Government’s proposed change, which aims to simplify the residence nil-rate band in cases where homes are downsized. However, we remain concerned about the rate at which the residence nil-rate band is set, particularly since the Government plan to increase it from £125,000 to £150,000 in 2019-20, and to £175,000 in 2020-21. For estates with a net value of more than £2 million, there is a tapered withdrawal of the residence nil-rate band at a rate of £1 for every £2 over the threshold.
Like many colleagues in the Opposition and some on the Government Benches, I have profound concerns about the impact of inherited wealth on social mobility, inequality and social cohesion in the UK, but I think there is a consensus that people should be able to pass properties and family homes—or, if they have sold that home and downsized, the equivalent material value—to their direct descendants. However, we believe that inheritance tax on the whole is simply not fit for purpose. It is not only a universally unpopular tax, but one that fails to raise significant revenue.
According to the Government’s own figures in this year’s Budget Red Book, the Treasury is set to raise just £5.5 billion in inheritance tax receipts—substantially less than it raises from tobacco duties, alcohol duties, environmental levies, vehicle excise duties and even the insurance premium tax. It is therefore no surprise that there is a growing surge of public opinion in favour of reforming inheritance tax and replacing it with something better. The Institute for Public Policy Research’s commission on economic justice, which brought together economists, academics, the business community and members of civil society, recommended scrapping the tax and replacing it with a new gift tax.
The commission’s report identified that the inheritance tax system is easy to avoid and favours the wealthy, healthy and well advised. It concluded that wealth transfers confer an unearned advantage on the recipient, and should be taxed more effectively to promote equality of opportunity. I would go further and say that the principle of taxing income from work more heavily than income from wealth heavily distorts the UK tax system.
Mel Stride
As my hon. Friend pointed out in his remarks on earlier clauses, we have frozen fuel duty for nine successive years—but perhaps we had better get back to the matter in hand, revolutions and fuel not featuring particularly in clause 65.
First, the hon. Member for Stalybridge and Hyde feels that this tax is seen as one of the least fair. It is certainly true that it is one of the least popular taxes; I would accept that. However, it only typically applies to about 4% or 5% of estates, although the public generally assume that it applies much more widely. That, of course, is a consequence of the policies we brought in to extend the thresholds, which we have been discussing. As the hon. Gentleman suggests, it brings in about £5 billion a year and, in terms of its fairness across the range of different wealth levels, I can inform him that 70% of inheritance tax is raised from those with estates valued at over £2 million, so the vast bulk of it comes from those who are significantly wealthy.
The hon. Gentleman quite rightly raises the general question of keeping taxes under review and looking at inheritance tax. He gave various examples of the work of others in that respect and made various suggestions. He will be aware that the Office of Tax Simplification is reviewing inheritance tax, and has already reported on the administration and guidance relating to it, with which there are various issues. In the spring of next year, it will also report on the policy area itself, and we will look with great interest at the report when it comes out. [Interruption.] May I correct something I have just said? Perhaps I am bad at reading handwriting here. The 70% relates to those with an estate of over £1 million, rather than £2 million.
The hon. Gentleman raises perfectly legitimate questions that we should be asking about the reliefs associated with agricultural land and woodlands, and the different approaches that those who can afford advisers and so on may seek to take to lower their inheritance tax. All those things will make for interesting debate and consideration when the OTS reports back in spring.
The Government are introducing these changes to clarify the working of the downsizing rules, and to provide certainty about when a person is treated as inheriting property. The residence nil-rate band reduces the burden of inheritance tax for families by making it easier to pass on the family home to children or grandchildren, and the band is an additional threshold available when a residence is being passed to a direct descendant. As the hon. Gentleman set out, the value in 2018-19 is £125,000. That will rise to £175,000 by 2020-21. Any unused threshold can be transferred to a surviving spouse or civil partner. The unused threshold is also available when a person has downsized to a less valuable property and passes on the proceeds from selling their home, instead of the property itself, to their children or grandchildren.
The Government announced those reforms in 2015 to ensure there would be an inheritance tax threshold of up to £1 million for married couples and civil partners by the end of this Parliament. That was a manifesto commitment, which I am pleased we have delivered, but it is right that we make changes to the legislation where necessary to ensure that the policy works as intended.
The changes made by clause 65 will correct two areas of the residence nil-rate band. First, the downsizing provisions were introduced to ensure that people would not lose access to this additional nil-rate band by, for example, moving house to meet their long-term care needs. However, the wording in the current legislation means that these provisions could apply in an upsizing scenario. That was never the intention and the changes will correct it.
Secondly, we believe that the additional threshold should be available only when the family home passes directly from an individual to their direct descendant on death. The changes will correct an anomaly in the legislation whereby the threshold could be available for a family home passed into a trust, where the direct descendants do not inherit the property. While the changes are important for revenue protection, we expect them to affect very few estates.
There has been one amendment proposed to this clause, which proposes reviewing and laying a report on the revenue effects of the changes. Amendment 122, however, is not necessary. The clause corrects the working of the residence nil-rate band and has no impact on wider inheritance tax policy. Consequently, there will be no revenue effects as a result of the clause. I therefore ask that the amendment be withdrawn and commend the clause to the Committee.
Jonathan Reynolds
I wish to press the amendment to the vote.
Question put, That the amendment be made.
Finance (No. 3) Bill (Seventh sitting)
Jonathan Reynolds ExcerptsThursday 6th December 2018
(5 years, 4 months ago)
Public Bill CommitteesRead Full debate Finance Act 2019 View all Finance Act 2019 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 6 December 2018 - (6 Dec 2018)
Clive Lewis
I begin by welcoming the long overdue change to the heavy goods vehicle road user levy. As the Minister will no doubt lay out, the clause will differentiate the rates paid by efficiency, rewarding freight operators for using less polluting trucks on the UK’s roads.
Department for Transport statistics show that HGV traffic has grown on average by 2.3% per year since 2008, making it the second fastest growing type of traffic in that period. That has resulted in HGV traffic increasing, on motorways and rural A roads in particular, to an overall 17.1 billion vehicle miles. Inevitably, that has had an enormous impact on greenhouse gas emission and climate change targets, road congestion and traffic levels, road safety, and air quality—the key issues on which our amendments are based.
Amendment 115 would require the Chancellor to review the revenue impact of the clause. We believe that there is an urgent need for a financial assessment of the measure, as the freight sector has been left in the dark about the overall impact of these tax reforms. The Department has failed to publish any conclusions from its call for evidence, which closed in January. We therefore argue that it is the Treasury’s responsibility either to produce the evidence and conclusions or to undertake any new research that is needed.
We believe the analysis should focus on the costs and benefits of remaining on a time-based charging system rather than one based on distance. Will the Minister tell us what comparative analysis has been undertaken to date by Government, and agree either to publish it or to commission the relevant work and publish it in due course?
The analysis should also assess how well the HGV road user levy reflects the costs imposed by road freight on other road users, the road network itself and society at large. Metropolitan Transport Research Unit research, issued in April 2017 and sponsored by the DFT, suggests
“that a very significant amount of the real marginal costs imposed by the largest HGVs is not being met.”
That has led to poor economic efficiency and a misallocation of scarce resources. Will the Minister undertake a review of the real marginal costs imposed by the latest HGVs so that we may assess their relative economic efficiency?
Similarly, when considering the overall revenue effect of differing levels of road user levy for different categories of heavy goods vehicles, we believe it is important to factor in the huge disparity between the costs of wear and tear on road surfaces caused by HGVs and those caused by cars and lighter vehicles. The Campaign for Better Transport estimates that the standard 44-tonne HGV does 100,000 times more damage to road surfaces than a Ford Focus.
Clive Lewis
Yes. An update of the DFT’s mode shift benefit values technical report in 2015 doubled previous estimates of the cost per HGV mile to road infrastructure. Campaign for Better Transport research suggests that HGVs are paying for only 11% of their UK road infrastructure costs, predicting a shortfall of about £6 billion.
Will the Minister tell us whether the Government have made their own such estimate during the development or passage of the Bill, or does our amendment give them the opportunity to assess it for the first time? Will he produce a fresh assessment of the cost shortfall that the new HGV road user levy rates will leave for other road users and taxpayers in general to pick up? In any case, will he give us the Government’s view of whether the total revenue raised will reflect a fair share of the total tax take from road users, as compared with that of those who drive smaller vehicles? In the Chamber, many MPs complain about potholes and funding for them. The statistics give a clue as to where in part the responsibility lies for so many potholes on our roads.
Finance (No. 3) Bill (Fifth sitting)
Jonathan Reynolds Excerpts(5 years, 4 months ago)
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Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I beg to move amendment 73, in clause 32, page 19, line 23, at end insert—
“(6) The Chancellor of the Exchequer must review the likely effect of extending the first-year allowances on energy-saving plant or machinery or environmentally beneficial plant or machinery to 2030 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 effects of extending first-year allowances to 2030.
The Chair
With this it will be convenient to discuss the following:
Amendment 74, in clause 32, page 19, line 23, at end insert—
“(6) The Chancellor of the Exchequer must review the likely cost of extending the first-year allowances on energy-saving plant or machinery or environmentally beneficial plant or machinery to 2022 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 cost of extending first-year allowances to 2022.
Amendment 75, in clause 32, page 19, line 23, at end insert—
“(6) The Chancellor of the Exchequer must review the effect of ending the first-year allowances on energy-saving plant or machinery or environmentally beneficial plant or machinery and lay a report of that review before the House of Commons within one year of the passing of this Act.
(7) A review under subsection (b) must consider the effect on—
(a) the energy technology sector, and
(b) the water technology sector.”
This amendment would require the Chancellor of the Exchequer to review the impact on the energy and water technology sectors of ending first-year allowances.
Amendment 76, in clause 32, page 19, line 23, at end insert—
“(6) The Chancellor of the Exchequer must review the effect of ending the first-year allowances on energy-saving plant or machinery or environmentally beneficial plant or machinery, on foreign direct investment in the energy technology and water technology sectors 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 ending the first-year allowance on foreign direct investment in the energy and water technology sectors.
Amendment 77, in clause 32, page 19, line 23, at end insert—
“(6) The Chancellor of the Exchequer must review the effect of the provisions in this section on the United Kingdom’s ability to comply with its third, fourth and fifth carbon budgets 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 impact of Clause 32 on the UK’s ability to meet its carbon budgets.
Amendment 78, in clause 32, page 19, line 23, at end insert—
“(6) The Chancellor of the Exchequer must lay before the House of Commons a report on any consultation undertaken on the provisions in this section within two months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to report on any consultation undertaken on the provisions in this clause.
Clause stand part.
Jonathan Reynolds
It is lovely to see you again in the chair, Ms Dorries, as we reconvene for this Committee’s second week. It is particularly good to see the Minister still here—I am never quite sure at the minute who will turn up on behalf of the Government.
I speak to Opposition amendments 73, 74 and 78 to clause 32, which focuses on first-year allowances and first-year tax credits. This measure would end the first-year allowance for all products on the technology and energy list and on the water technology list. Before I move on to why the Opposition feel strongly that the Government are wrong to end the first-year allowance, it is important to establish the extent of the allowance, its qualifications and the logic behind its introduction.
Enhanced capital allowances legislation was introduced in 2001 to encourage the use of energy-saving plant and machinery, low-emission cars, natural gas and hydrogen refuelling infrastructure, water conservation plant and machinery construction projects and so on. Under the relief, businesses that pay income or corporation tax can claim 100% of the first-year capital allowance on investment in ECA qualifying items. In addition, adoption of ECA qualifying items improve a project’s building research establishment environmental and assessment method—the BREEAM rating—and contribute to an improved energy performance certification rating.
To qualify, the item acquired must qualify as plant and machinery and satisfy the following criteria: it must not be second hand; the expenditure must have occurred after 1 April 2001; and the plant must either be a listed product or meet the energy saving or water conservation criteria specified by the Carbon Trust. Energy-saving technologies are things such as air-to-air energy recovery, automatic monitoring, boilers including biomass, combined heat and power units, compressed air equipment and so on. Water conservation technologies include efficient showers, taps and toilets, energy-efficient washing machines and more.
The Department for Business, Energy and Industrial Strategy describes enhanced capital allowances as different from standard capital allowances. It estimates that enhanced capital allowances are between 5.5 and 12.5 times greater than ordinary capital allowance relief. This accelerated cost saving further shortens the period of time and builds the business case for investment in energy-efficient equipment.
It is clear that this allowance encourages businesses to mitigate their environmental footprint and is designed to help the UK transition to a green and low-carbon economy. It is therefore disappointing that at a time when, as we have already discussed in this Committee, the United Nations Intergovernmental Panel on Climate Change has warned that climate change is at the point of becoming irreversible, the Government would choose to end such an effective relief.
Despite the positive steps that national Governments are taking all over the world to get citizens to recognise and limit their personal carbon footprint, businesses clearly have a role to play, too. We feel that the best way is to incentivise businesses, making it worth their while to use energy-saving and water-conserving technologies through tax relief. Taking away first-year allowances with little notice would only further alienate business at a time when we all need to do what we can to transition our economy to deal with the realities of climate change.
Although in its policy notes the Treasury suggests that small and medium-sized businesses will be shielded and the vast majority will be able to claim relief under the separate annual investment allowance, it concedes that large businesses will face additional costs and some level of disruption. Similarly, the Chancellor has stated that the revenue saved will be used to fund the industrial energy transformation fund. However, details about the fund remain scant, aside from the fact that it will be targeted at smaller businesses and funded through the end of these first-year allowances.
From the Opposition’s perspective, the change appears to be little more than a rebranding exercise designed to take an effective relief—first-year allowances—away and simply redirect that revenue into the Chancellor’s new fund. It is far from the radical industrial strategy that the UK needs to ensure that businesses and citizens are equipped to deal with climate change and the evolving energy market.
In the Budget, the Chancellor announced a consultation on a new business energy efficiency scheme, yet there appears to be little mention of whether businesses were consulted about ending this vital relief. Opposition amendment 78 would therefore require the Chancellor to report on what consultation has taken place.
The Government’s decision to end first-year allowances for energy-saving and water conservation technologies raises a further question about the effectiveness of this relief. Put simply, it is not broken, so the Government need to explain why they are planning to scrap it. That is certainly the sentiment behind Opposition amendments 74 and 73, which would require the Chancellor to undertake a review of the cost of extending the allowance to the end of this Parliament, and to 2030, respectively.
The reality is that the changes made by the Government in clause 32 appear to be revenue-led. They put the short-term priorities of the Treasury ahead of the UK’s long-term obligation to tackle climate change. Rather than empowering businesses to do their part and invest in energy-saving and water conservation technologies, it appears likely to deter them. We cannot see the logic of that. If the Government are sincere in their desire to create a better-targeted and more effective relief, they need to offer the Committee further details about the supposed industrial energy transformation fund to replace first-year allowances. If the Committee is being asked to endorse that change, let us have all the details first.
The Exchequer Secretary to the Treasury (Robert Jenrick)
It is a pleasure to serve under your chairmanship, Ms Dorries. After two days in the reassuring embrace of the Financial Secretary to the Treasury, the Committee has a brief interlude.
Clause 32 will make changes to end, from April 2020, first-year allowances for all products on the energy technology list and the water technology list, including the associated first-year tax credit. The environmental first-year allowances aimed to encourage greater take-up of environmentally friendly technology. Capital expenditure by businesses on plant and machinery normally qualifies for tax relief by way of capital allowances. Environmental first-year allowances allow 100% of the cost of an investment in qualifying plant and machinery to be written off against taxable income in the year of investment, providing a cash-flow benefit. The first-year tax credit provides a tax credit for loss-making businesses that invest in qualifying items.
The first-year allowance was introduced in 2001 for products on the energy technology list, and in 2003 for products on the water technology list. However, the allowances have made the tax system more complex, and there is very limited evidence that they have driven greater uptake of such technologies. A report by the Office of Tax Simplification found significant barriers to accessing the allowances, including the administrative burden of making claims. Government analysis suggests that less than 25% of energy managers would increase investment in energy-saving technology because of the allowances, while fewer than 20% of manufacturers report a positive impact on sales.
Jonathan Reynolds
I am listening carefully to the Minister, but if the increase in the annual investment allowance replaces the first-year allowances or mitigates their loss, it seems that there is no fiscal incentive to invest in energy-efficient or climate change-relevant technology. The Opposition believe that we should try to operate the policy as a fiscal instrument to direct investment into the technologies that we need, but I do not see that described in the Minister’s answer.
Robert Jenrick
I have described it; that is the rationale for replacing the first-year allowance with the energy transformation fund. Had we chosen simply to remove the allowances and replace them solely with the increase in the annual investment allowance, the hon. Gentleman would be correct: 99% of businesses could proceed broadly as they do today, but they would not have a specific incentive to choose environmental equipment, plant and machinery or energy efficiency measures. However, by coupling the increase in the annual investment allowance with the transformation fund, we hope to shift the dial in favour of technology that helps the environment.
Amendment 77 would require the Government to review the impact of clause 32 on the UK’s ability to meet its carbon budgets. I assure the Committee that there are already robust requirements to report on progress towards the UK’s emissions reduction targets. When the measures in the Budget and the Bill become law, they will become part of that regime.
The Climate Change Act 2008 provides a world-leading governance framework that ensures that progress towards carbon targets is robustly monitored and reported to Parliament. First, the Government are required to prepare and lay before Parliament an annual statement of emissions that sets out the total greenhouse gases emitted to and removed from the atmosphere across the UK, and the steps taken to calculate the net UK carbon account. Secondly, the independent Committee on Climate Change is required to prepare and lay before Parliament an annual report, to which the Government are required to respond, on the Government’s progress towards meeting the UK’s carbon budgets. I would expect the committee to take the changes made by clause 32 into account in their deliberations. Thirdly, the Government are required to prepare and lay before Parliament a statement that sets out performance against each carbon budget period and the 2050 target.
Robert Jenrick
I understand that this would apply only to private businesses. Other interventions help the public sector, such as the charging infrastructure investment fund, which local authorities can become involved in if they wish to develop infrastructure in their area. There were a number of wider measures in the Government’s Road to Zero strategy, including consulting on changes to the planning system to ensure that new business and residential properties, as well as public sector projects such as new council offices, hospitals and so on, are built with the infrastructure in place to support these vehicles.
The allowance will expire on 31 March 2023 for corporation tax purposes and on 5 April 2023 for income tax purposes. This extension is expected to have a negligible impact on the Exchequer. There are no anticipated costs to Her Majesty’s Revenue and Customs and neither will there be any significant economic impact nor any additional ongoing costs for businesses beyond the investment that will be generated.
In conclusion, this extension will incentivise the use of cleaner vehicles by encouraging companies to invest in electric vehicle charge points, giving confidence to drivers to shift away from current combustion propelled options in the knowledge that the further roll-out of charge points will continue and accelerate in the years ahead, and reduce all the damage to the environment and public health that follows. I commend this clause to the Committee.
Jonathan Reynolds
Having just passed clause 32, which ended first-year allowances on the basis they were little known about and ineffective, I cannot help but comment how clause 33 extends the first-year allowance for another technology for four years on the basis it will provide the incentives and drive Government policy in that direction. Forgive me for pointing out that there are mixed messages from Ministers on these clauses.
It is disheartening that this is one of the relatively few mentions of environmental issues in the Finance Bill. We were all at Mansion House in June when the Chancellor gave a speech about how we would lead the way on green finance, yet there have been no legislative measures to follow up on that promise. We still lag behind our European counterparts on things such as mandatory climate disclosure laws or sovereign green bonds, but we should welcome any measures we like the look of when we see them.
Transport is a major source of emissions and we agree that we rapidly need to shift away from fossil fuels towards electricity and renewable sources and, to a certain extent, hydrogen for heavier vehicles. Thankfully, electric vehicles are coming through the system quickly and are expected to move rapidly through their cost curves, getting cheaper and cheaper. I have been hugely impressed by the electric vehicles I have experienced. Some estimates have cost parity for purchasing an electric vehicle as soon as 2022, after which buying an electric vehicle will become cheaper than buying a fossil fuel powered car.
The transition to a decarbonised, clean and smart economy will offer the UK many advantages, particularly considering how tech-savvy and early adopting much of the UK population is. The Nissan LEAF is the most-sold electric vehicle in the world. I say with some local pride, as someone born in Sunderland, that Sunderland has been the sole producer in Europe of the Nissan LEAF, creating over 50,000 vehicles. Of course, electric vehicle and hybrid production in the UK has provided a £3 billion trade surplus.
With a growing list of countries setting a date to ban combustion vehicles and modelling showing strong uptake curves, the global move to electric vehicles will be rapid. The first mover advantage to capture supply chains and jobs in this coming market will be considerable.
Alex Sobel (Leeds North West) (Lab/Co-op)
Norway is planning to ban combustion vehicles by 2025—the incentives and the infrastructure in Norway are sufficient for that. We are not planning that until 2040. Does my hon. Friend agree that there is a policy failure not just on this measure but more generally in terms of building our electric vehicle infrastructure?
Jonathan Reynolds
I agree with my hon. Friend, who has taken a major interest in these issues both before and during his parliamentary career. The availability of charge points is the greatest concern when it comes to achieving this shift. My hon. Friend the Member for Manchester, Withington and I were just talking about the local charge points in Greater Manchester, which we have both experienced.
A recent World Wildlife Fund report on accelerating the electric vehicle transition made some predictions about how it might evolve. It said:
“Private charging infrastructure will be in most homes and many workplaces. The opportunity to charge at home rather than relying on public charging infrastructure is an attractive feature of electric vehicles, and we assume that owners who are able to charge at home will do so when convenient (for example overnight). Workplace chargers are also likely to be required; evidence suggests that around 20% of electric vehicles currently make use of workplace charging…In the 2040 scenario, 11 million home chargers and around 2.2 million workplace chargers are needed by 2030.”
That last point is key in relation to the clause.
Electric vehicle charging will be facilitated by a combination of home and workplace charging, running to millions of stations. That is why it is essential to grasp every chance to promote the installation of infrastructure in companies. We support this capital allowance to help achieve that. However, although it is a positive move, it is a drop in the ocean of what needs to be done to encourage the use of cleaner vehicles. More than half of new car registrations last year came from businesses, so ensuring that there is an attractive package to encourage companies that are reliant on cars to use electric vehicles is clearly fundamental to tackling emissions.
Will the Minister elaborate further on how this measure will work for smaller companies? Our concern is that smaller companies, which have vast competing spending priorities, may find it difficult to source the cash they need to build charge points. We would also like to know the Government’s long-term plans for the charging infrastructure investment fund, which has recently changed its grant system for the installation of plug points. Will the Minister elaborate on what the take-up of the programme has been among small businesses? How is the scheme being promoted to ensure the maximum possible take-up?
My hon. Friend the Member for Bootle raised a key issue about business rates. We must aim high to ensure workplace charging infrastructure is as widespread as possible. We should compare how this might evolve with the uptake of solar panels. A change in valuation methodology meant that some institutions had a 400% increase in their business rates after they deployed solar technology. That runs counter to everything we all want to incentivise. Why would we penalise those who lead the charge? In such a generous package of capital allowance for businesses, it is difficult to see why any Government would build a tax disadvantage into the system for users of renewable or climate change-solving technologies. That is not simply our view. That point has been heavily put across by trade associations, including the Solar Trade Association, which launched a fairly scathing attack on Budget 2018.
In conclusion, the extension of the first-year allowance on workplace charging infrastructure is a step in the right direction, but these things cannot operate in isolation. The Government must take serious further action urgently to promote the transition to a greener economy. Although this is a start, I hope the Minister can reassure us of the Government’s ambition to go even further.
Robert Jenrick
I hope I can reassure the hon. Gentleman on those points. The first point was about why we would choose to extend this measure at the same time as bringing another to an end. We chose to bring the other one to an end because the evidence was not there to support its continuation. Having given the matter careful analysis, we believed that there was a better way forward.
We are still at a very early stage in the process. It is too early to assess the precise impact of this measure. We know that the total number of electric charge point connections has increased from more than 13,000 in November 2017 to more than 18,000 in October 2018—a 38% increase. Clearly, we would like that to accelerate even further, because that is still a small number across the whole of the country. We believe, anecdotally, that the measure is working and that it has been welcomed by the industry, but it is too early to assess that precisely. We are placing an extension in the Bill to ensure it can continue and to give certainty to the market. We will review this measure in time, as we have done with other measures, to determine its effectiveness. If it is not working correctly, we will take action accordingly.
The hon. Gentleman asked why the Budget did not do more for the environment. Of course, I contest that. The Budget did set out a wide range of measures to help the environment, from the new plastics tax, which will be consulted on and legislated on in the next Finance Bill—we hope it will be one of the world’s first plastic packaging taxes—to the measures already set out in the Finance Bill, such as this one and the vehicle excise duty measure on taxis, which we brought into effect a year early, and which has ensured that cities such as London and Manchester are seeing a great increase in low emission taxis.
We have already spoken about the industrial energy transformation fund, which we hope will put heavy users of energy on a more sustainable path. These things build on recent announcements, whether it is the industrial strategy and its commitment to the environment and to clean growth, or the Road to Zero strategy with respect to electric vehicles. Across Government, we are taking a wide range of measures to support the environment and to help businesses and individuals to cut their energy bills and lower carbon emissions.
The hon. Gentleman asked about the electric vehicle charging infrastructure fund. This was announced at the Budget last year, and we have now progressed the fund. We are in the final stages of selecting a fund manager, and once they are appointed we expect the fund to be formally launched and to start investing in early 2019. I hope to be able to give the hon. Gentleman and others more information on that very shortly so that businesses that wish to participate in it can start to access that £200 million and we can increase public and private investment in charging infrastructure very rapidly.
Small businesses, which the hon. Gentleman raised, will be able to claim under the annual investment allowances, which we have debated on a number of occasions. As I have said before, 99% of businesses will be able to claim under the annual investment allowances, which is a considerable increase as a result of the Budget and will help businesses that want to invest in this area.
On solar, the feed-in tariff scheme has supported over 800,000 small-scale installations, generating enough electricity to power 2 million homes. The scheme has helped to drive down the cost of renewable electricity, including small-scale solar photovoltaic. We therefore think it is right to protect consumers and to review the incentives as costs begin to fall. The Government—and indeed the Government before us—have made significant interventions in this area. With those reassurances, I hope the hon. Gentleman will support the clause.
Question put and agreed to.
Clause 33 accordingly ordered to stand part of the Bill.
Clause 34
Qualifying expenditure: buildings, structures and land
Jonathan Reynolds
I beg to move amendment 79, in clause 34, page 19, line 38, at end insert—
“(4) The Chancellor of the Exchequer must lay before the House of Commons a report on any consultation undertaken on the provisions in this section within two months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to report on any consultation undertaken on the provisions in this clause.
The Chair
With this it will be convenient to discuss the following:
Clause stand part.
New clause 2—Review of changes to capital allowances—
“(1) The Chancellor of the Exchequer must review the effect of the changes to capital allowances in sections 29 to 34 and Schedule 12 in each part of the United Kingdom and each region of England and lay a report of that review before the House of Commons within six months of the passing of this Act.
(2) A review under this section must consider the effects of the changes on—
(a) business investment,
(b) employment, and
(c) productivity.
(3) The review must also estimate the effects on the changes if—
(a) the UK leaves the European Union without a negotiated withdrawal agreement
(b) the UK leaves the European Union following a negotiated withdrawal agreement, and remains in the single market and customs union, or
(c) the UK leaves the European Union following a negotiated withdrawal agreement, and does not remain in the single market and customs union.
(4) In this section—
‘parts of the United Kingdom’ means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland;
‘regions of England’ has the same meaning as that used by the Office for National Statistics.”
New clause 5—Aggregate effect of changes to corporation tax and capital allowances—
“The Chancellor of the Exchequer must, within one year of the passing of this Act, lay before the House of Commons an analysis of the effect of the changes to corporation tax and capital allowances made under sections 25 to 28 and 29 to 34 of this Act.”
This new clause would require the Chancellor of the Exchequer to review the aggregate effect of the changes to corporation tax and capital allowances made under this Act.
Jonathan Reynolds
I regret to inform the Committee that we are reaching the end of the section of the Bill relating to capital allowances.
The capital allowances regime clearly requires a holistic review by the Government. We all agree that we want to make the UK a competitive and attractive place for businesses. As we contemplate our departure from the EU, that requirement has never been more pressing. Yet, these measures all come at a cost. The annual investment allowance increase will cost £1.24 billion in its first three years. By 2023-24, the buildings and construction expenditure allowance will cost over half a billion pounds. They need an assessment in the round so we can aggregate these reliefs against the corporation tax reductions and see what the package really looks like, what the economic justification is for these changes, and whether that money should be reprioritised elsewhere.
With the UK becoming such an outlier among other developed countries in relation to corporation tax, with an eventual rate of corporation tax well below the average of OECD countries, we need to ensure that our overall package of measures is properly targeted. That is why Labour is moving new clause 5, which would oblige the Government to present an analysis in a year’s time of the full effect of these changes and the corporation tax alterations. We need to understand what this package looks like in the round, whether it is providing value for money, and what the real cost is to the taxpayer in aggregate. Only then can we make a judgment on whether this is the right and appropriate way to spend the money, when the UK has so many other priorities after eight difficult years of austerity.
That is why I urge Members to vote for new clause 5, which would obligate the Government to publish a review in a year’s time. By then, we will be in a position to see how these allowances have been taken up, as well as to make some initial judgments on Britain’s business investment landscape post our exit from the European Union.
Clause 34 will amend the Capital Allowances Act 2001 to clarify that land alterations qualify for capital allowances where plant or machinery is installed that qualifies for the same allowances. It helps to clarify the qualifications in place for businesses that seek to carry out such work. The Opposition have no particular objection to ending the mismatch, but this is another tidying-up measure. Will the Minister provide some insight on whether any further such measures are to come? How was the inconsistency brought to the Government’s attention? Is there any estimate of the cost associated with this measure? There should be greater transparency and understanding of exactly where such a measure has come from. If there has been pressure from a particular sector, that needs to be clear. Opposition amendment 79 calls for the Government to present to the House a report on any consultation undertaken on these provisions. I call on Members to vote for this amendment to provide proper transparency on process to the House, so that the cost and benefit can be properly scrutinised and we can assess the motivations for bringing about this change.
Kirsty Blackman
It is a pleasure to speak in this Committee and to serve under your chairpersonship, Ms Dorries. I want to focus my comments on new clause 2, but if the Labour party presses amendment 79 or new clause 5 to a vote, we will support it. What we are trying to do in new clause 2 is not dissimilar from what Labour is trying to do in new clause 5—we are just going about it in slightly different ways. Putting the two new clauses together would make a lot of sense, to encompass what we are both trying to achieve.
New clause 2 looks at clauses 29 to 34 and schedule 12 to the Bill and provides for a review of the changes to capital allowances. It asks for a number of reviews and for us to measure against a number of outcomes that we hope the Government will seek through any changes they make to capital allowances or through having a capital allowances system in the first place.
The first review is of business investment. What changes do the Government expect for business investment as a result of all the changes made to capital allowances? Any tax system tries to do three things: disincentivise undesirable behaviour, incentivise desirable behaviour and get money for the Exchequer. It is important to consider whether the legislation does any of those things in the way we would hope. Business investment is key; surely, the point of capital allowances is to incentivise good business investment. Therefore, it is reasonable that the Government come back and explain to us the potential changes they expect to business investment resulting from their legislative changes.
The second review is of employment. That is important; the Government are never off their high horse about the level of employment they say we have. If they hope the changes will make a difference to employment levels, they should tell us how much change they expect so that we can measure their performance against whether that has been achieved. We just heard that the previous tax allowances put in place for first-year allowances did not have the desired effect, and the Government have to change them. Therefore, it would be useful to know what the Government expect to happen to the number of employed people as a result of their changes. We can measure the Government against that and say whether the measure has failed or has achieved what they intended to achieve.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve under your chairmanship, Ms Dorries. I thank the hon. Members for Stalybridge and Hyde and for Aberdeen North for their contributions, and I will endeavour to pick up the various points that have been made.
Since 1994, capital allowances have not been available for most buildings and structures, including aqueducts, bridges, canals, roads and tunnels. It has been long understood by HMRC—and by taxpayers—that nobody can claim plant and machinery allowances where the expenditure relates to an excluded structure or building. Specifically, nobody can claim capital allowances for expenditure on altering land for the purpose of installing an asset that is excluded from allowances. Expenditure on buildings and structures is excluded in this way by sections 21 and 22 of the Capital Allowances Act 2001.
To answer one of the specific points raised by the hon. Member for Stalybridge and Hyde, doubt has been cast on that principle by a recent tribunal decision, which HMRC is appealing against. The purpose of the clause is to ensure that the law remains clear and that plant and machinery allowances can be claimed only in relation to alterations of land to install qualifying assets. The clause clarifies the legislation to provide certainty going forward and to protect the Exchequer from potential spurious and windfall claims for historical expenditure.
The clause should be read alongside the introduction of a new structures and buildings allowance, which in time will become a very substantial relief that fills a significant gap in our capital allowances system. Taxpayers who alter land for the purpose of installing a structure or building should claim this new allowance—we covered it when debating clause 29—and should not claim the plant and machinery allowance.
As I have said, the clause clarifies that expenditure on land alterations cannot qualify for capital allowances unless it relates to the installation of qualifying plant and machinery. No expenditure on structures or buildings, as defined in sections 21 and 22 of the Capital Allowances Act 2001, will be counted as plant. This will apply to all capital allowance claims made from 29 October 2018 onwards, but not to claims already in the system—to do otherwise would be unfair. However, as this does nothing more than restore the commonly held interpretation of the law, we do not consider it to disadvantage any company that has already incurred expenditure. If we did not make this amendment, there is a strong probability that some businesses might make spurious or windfall claims, as there is no time limit for making a capital allowances claim.
Amendment 79 seeks a legislative commitment by the Government to report on any consultations that are undertaken on this measure. However, the measure addresses a potential source of ambiguity in the capital allowances legislation and protects revenue that we need for our vital public services. That needs to be done quickly to maintain a level playing field and to provide certainty for businesses incurring expenditure in this area. The Government’s view is that this measure is not best supported by consultation, which would delay this change. In any case, it restores the interpretation of the law that HMRC and taxpayers commonly understood before the recent tribunal case.
New clause 2 aims to commit the Government to report on the impact of the capital allowances changes in the Bill, including under a number of different EU withdrawal scenarios, as well as on the impact on different parts of the United Kingdom. The Office for Budget Responsibility has provided its independent view of the impact of these policies, in particular on business investment, in its “Economic and fiscal outlook” report, in the box titled “The economic effects of policy measures”. When available, HMRC will publish updated statistics on capital allowances claimed, split by asset type and by industry. Data on capital allowances claimed are based on where companies are registered rather than where the activity itself takes place. Requiring businesses to provide the more detailed information that this report would require about the precise location of their expenditure would represent a significant new administrative burden.
On the impact of the policies in different EU exit scenarios, the capital allowances package in the Bill is intended to boost business investment in all scenarios. The Government have already laid before Parliament a written ministerial statement under the title “Exiting the European Union: publications”, representing cross-Whitehall economic analysis on the long-term impacts of an EU exit on the UK economy, its sectors, nations and regions and the public finances. The document is available on gov.uk and from the Printed Paper Office. Committee members will be aware that I also answered an urgent question at length on this very matter.
New clause 5 is intended to commit the Government to assess the aggregate effects of the changes to corporation tax and capital allowances made under the Bill. However, that information is already largely set out in the public domain. The independent Office for Budget Responsibility certifies the Exchequer impact of all the measures in the Bill, set out in table 2.1 and table 2.2 of Budget 2018. When they are announced, the OBR will also provide its independent view of the impact of these policies on business investment in its “Economic and fiscal outlook” report, in the box titled “The economic effects of policy measures”.
Finally, every year HMRC will publish updated statistics breaking down corporation tax paid and capital allowances claimed. For those reasons, I urge the Committee to reject the amendment and new clauses, and I
commend the clause to the Committee.
Jonathan Reynolds
We would like to press amendment 79 to a vote.
Question put, That the amendment be made.