Finance Bill

Lord Campbell-Savours Excerpts

3rd reading (Hansard): House of Lords & Committee: 1st sitting (Hansard): House of Lords & Report stage (Hansard): House of Lords
Wednesday 15th November 2017 Lords Chamber

[Lord Campbell-Savours (Lab)]

My Lords, the noble Lord, Lord Wakeham, has taken me back to those long nights we used to spend on the Finance Bill in the House of Commons. We would go in at around three o’clock in the afternoon and come out at seven o’clock or eight o’clock the following morning. I worked for something like eight years on those Finance Bills in the 1980s and I always remember Peter Rees, who came here subsequently, standing in his braces early in the morning asking for his breakfast in between amendments. They used to bring it in for him on a plate. However, he is no longer with us.

When I decided to speak on this Bill, I went to the Printed Paper Office and was given a copy of the Bill. I have never seen a Finance Bill as large as this in my life. When I was in the Commons the Finance Bill was about half an inch wide, now it is more than an inch wide. I do not know what is going on, so obviously something is happening which I do not quite understand.

I want to concentrate on three issues. The first is inheritance, the second is stamp duty and the third is the treatment by HMRC of private landlords. Inheritance tax is referred to in Clause 30 but is limited to dealing with rules on residence. No reference at all is made to stamp duty, although it is a hot subject in the country because of people’s concerns about the way the current system, with its surcharge, is operating. Private landlords are dealt with in Part 4 of Schedule 4, but it seems to deal only with losses on property as against profits and their taxation.

I shall start with inheritance. I should make it absolutely clear that I am totally opposed to the system as it currently operates. I am opposed to the seven-year tapered relief arrangement. Indeed, some years ago I was asked by family members to help arrange a will that would take advantage of the seven-year arrangement, but as a matter of principle I refused to do it. In my own case, I would not dream of doing it in my will. I very much favour the 10% reduction for those who make charitable donations, which in effect reduces the rate from 40% to 36%. We have taken advantage of that within my own family. I am also, as are we all, pleased with the arrangements for inter-spouse transfer free of tax. However, I believe that we could raise far more money under the inheritance tax arrangements.

I have spent some time looking at what happens in Germany, which has a very successful economy. I suspect that we could learn a lot from Germany in many areas of taxation and industrial strategy. The Germans pursue a system which for years I have been arguing for, whereby the tax is paid by the beneficiaries, not by the deceased’s estate. If we were to go down the German route, we would then pay in the UK context tax on inheritance at a person’s marginal tax rate, but we would have a differential threshold for family, friends or charities. We could have a different threshold for each group of recipients. But the recipients of a will would pay the tax at their marginal rate over and above the threshold. This has one great advantage: it really does lead to a wider distribution of wealth. Those who want to minimise their tax liability will spread their estates more widely so that more people benefit. If they are on a low marginal rate or not paying any tax, they may well gain from the arrangement I am advocating.

However, I think that overall it would actually lead to a far greater tax take. I have tabled Questions about this matter, but the Treasury has never done any work on it. I think it is somehow fearful of upsetting the public, but I do not think that it would. A lot of people in this country are worried about the effect of inheritance tax on the property market. It is grossly inflating the price of housing. I know that over the years my own party has been fearful about looking at this, but it is the way forward and we should look at what is happening in Germany and to what extent it works.

I turn now to the issue of stamp duty and the surcharge. I understand that it was introduced to slow down growth in the buy-to-let market, but its operation has consequences for the wider property market. The surcharge is slowing down the market, particularly here in London. We all know that when the market in property slows down in the United Kingdom, it always starts in London and then it radiates out. How we affect the property market in London can undermine confidence nationally, so I think that we should reconsider that surcharge. People are caught in a trap when buying and selling. If you buy a house, having not sold your existing house, you end up with the house you are purchasing being treated as your second home for stamp duty purposes.

In a Daily Telegraph article, Sam Meadows put it this way:

“An additional 3pc surcharge on second properties was introduced last year as a measure aimed to slow the growth of buy-to-let. But it quickly drew criticism, including from those home-movers who buy their next property before selling their current one. Under a ‘replacement main residence’ rule, people who do this who must pay the higher stamp duty rate upfront. They are then eligible for a refund if they sell their former home within three years. Government figures, released today, reveal HMRC has had to give refunds on 10,700 transactions at an average cost of £11,869. Lucy Brennan, a partner at accountancy firm Saffery Champness, said having to make a payment of that size could prevent families from moving on to their ideal property”.


There is every evidence that the system is damaging the property market, and the Government should look at it in the Budget, even as early as next week.

This reminds me of the import deposit scheme that, as some Members may remember, was introduced in the 1969 Labour Budget, nearly 50 years ago. Under that scheme, importers had to pay an additional sum of money to the Revenue—what was then Customs and Excise. The idea behind that was to restrain, to some extent, the increasing level of imports into the United Kingdom. The effect was that the Government were effectively gathering in money, which was then offset when it later had to be repaid. Firms were set up to buy the liability to pay the import deposit levy, so importers ended up paying interest on the money they were borrowing to pay the scheme. Of course, they got the money back in the end, over a six-month period, I think. So, stamp duty is operating in very much the same way—being collected, then being given back.

There are two ways to deal with that. If the Treasury does not want to spend a lot of money, it could extend the time to sell property from three to five years. That is one way to deal with it; on the other hand, the more expensive—but preferable—option would be to cease upfront payments of the surcharge.

Finally, I want to move to the question of landlords and their payment of tax to HMRC. I want to pray in aid a report produced by the London Borough of Newham, which I got hold of this week. I do not know if the Minister has seen the report, but I advise Treasury officials to dig it out. It states:

“the primary purpose of Newham’s licensing scheme is foremost to protect tenants. We have shown that private rented sector licensing has ancillary benefits in ensuring landlords meet their tax responsibilities both to local and central government … Through the data collated by our private rented sector licensing regime, we have been able to assist HMRC in assessing tax compliance by landlords. It is our understanding that a significant number of Newham’s landlords are of interest to HMRC, where there are discrepancies between declared income and our records. Based on research Newham conducted, which was independently evaluated by the Institute for Public Policy Research (IPPR), we estimated that the amount of undeclared tax by landlords in London alone back in 2014 could be as much as £183.1 million. The rapid growth of the private rented sector and escalation in rent levels since means that the amount of undisclosed tax is now potentially even greater. The Treasury currently estimates that the national tax gap from rental income is £590 million”.

So, Newham is stating a figure of nearly £200 million in London alone, and the Treasury is stating £590 million nationally. I think that £590 million is a gross under- estimation of revenue lost because HMRC does not have the resources to follow up in the way that Newham Council can in the case of private landlords.

The report then states:

“Newham emailed all licensed landlords in partnership with HMRC shortly after introducing the scheme, advising landlords how they could get their tax affairs up to date. As a result, it is our understanding that a number of landlords on our register voluntarily disclosed previously undeclared rental income. Newham has also provided HMRC with the details of all registered landlords in the borough. It is our understanding that this uncovered a significant number of landlords who may not be declaring their income”.


Why do the Government not promote this idea of a registration scheme for landlords nationally, for every borough, whereby they could link up with HMRC and increase the tax take from private landlords? I was put on to this by a chap called Mr Gunston, who wrote to me last week. I had asked the noble Lord, Lord Bourne, a question on this matter. Mr Gunston said:

“Clearly Lord Bourne had not read the report by the London Borough of Newham that of the 26,254 landlords on its Houses in Multiple Occupation register, some 13,000 had not registered with HMRC for tax self-assessment. You will be aware that it is a requirement for all landlords receiving annual rent of £2,500 or above to register for tax self-assessment with HM Revenue and Customs. Given that this is just one London Borough, if replicated across London and the remainder of England, it would suggest that there is a significant problem of landlord tax evasion and the loss of significant tax revenues. In an era of limited government finances and a large government debt, clearly Lord Bourne needs to take the issue of tax evasion and tax avoidance more seriously”.


I was not expecting the noble Lord, Lord Bourne, to give me an immediate answer at the time, but I think he may wish to refer to my modest contribution to the debate.

All I am saying is that there is a lot more money to collect out there. When we hear of reductions in resources available to HMRC, that fact is worrying. The Government should act on the basis of information I have provided, which I would have thought HMRC is aware of but unable to deal with at the present time.

[Lord Leigh of Hurley (Con)]

My Lords, this year I served on the Finance Bill Sub-Committee of the Select Committee on Economic Affairs. I congratulate the noble Lords, Lord Turnbull and Lord Hollick, and my colleagues on the committee on, and thank the special advisers who helped us so ably for, the report’s publication. I draw your Lordships’ attention to my interest in the register, not least as a member of the Institute of Chartered Accountants in England and Wales and, by something of a fluke, as a member of the Chartered Institute of Taxation. It is something of a fluke because, somehow or other, I passed the exams in 1985, to the great surprise of my teachers and colleagues at the time. Taxation post-1985 has been a bit of a mystery to me, but I have some expertise of it pre-1985.

None the less, it is particularly gratifying to debate the report at Second Reading of the Finance Bill. I served on the sub-committee when we investigated taxation on LLPs, and was very disheartened to find that none of the many recommendations we made were adopted by the previous Chancellor. I am extremely encouraged that the current Chancellor has taken a completely different approach, and is clearly listening to submissions and reports, such as the one made by your Lordships’ committee. However, it was disappointing that the Statement of 13 July thanked many members of the public, and others, for contributions, but did not recognise our report. I think we can take it that they were listening.

As considerable time and effort goes into these reports and, equally important, members of the public give their valuable time making written and oral representations, I was pleased to learn that so much of the report is being implemented in the Finance Bill and subsequent announcements. We heard from a number of witnesses worried about the impact on their businesses and from professional advisers who pointed out that their clients were simply not prepared to tackle digitalisation. As the noble Lord, Lord Turnbull, said, it was eye-opening to learn how many taxpayers and members of the public were either digitally excluded or referred to as “assisted digital”, who would need some sort of help to interact digitally with the Government. This ranged from about 30% of micro-businesses to 45% of the adult population.

Our report welcomed the Chancellor’s announcement of a delay, but made the point that it did not go far enough to allow proper testing in pilot areas, as had been planned. Overall, it must be right to encourage all businesses to go digital, but it is not clear to me that this will close the tax gap as contended, although I of course recognise that the tax gap under this Government is the lowest ever. However, the behavioural assumptions made imply that errors, when corrected, will always be in the Exchequer’s favour. I am not sure this is the case. The Chartered Institute of Taxation surveyed its members; 41% thought that the changes would have little impact on the level of their clients’ errors, and nearly 40% considered that they would increase errors, which could of course lead to a loss of Treasury revenue.

The Association of Accounting Technicians, another institute very much at the front end of helping business, was concerned that time-consuming and costly quarterly reporting requirements would result in businesses turning to the black economy. I was persuaded that the impact of quarterly reporting could substantially increase the error rate. HM Treasury and HMRC seem confident that their estimates will hold up, but I am not convinced that the pilot studies have been as extensive or as deep as they could be.

I can see that where businesses use spreadsheets rather than software, particularly where they have partial exemptions, converting the output figures into the VAT return will be a challenge. There is still time to be flexible as the regulations are not scheduled to be laid before Parliament before spring 2018, so one can only hope that HMRC is listening and talking to those affected.

I can tell noble Lords that quarterly accounting is causing great concern in the business community. To make corporate tax quarterly returns effective will need considerable work, not least in assessing accruals, identifying provisions and computating capital allowances. Is this really a constructive use of entrepreneurs’ time?

Once again, I add my voice to those who plead for tax simplification. I do not have it but there are 640-odd pages.

[Lord Campbell-Savours]

It is 664.

[Lord Leigh of Hurley]

I thank the noble Lord. That does not seem very far along the road of tax simplification. Businesses will have all sorts of challenges when MTD hits them. I hope the Government will listen to the Office of Tax Simplification, which, in its submissions to us, was clear that its opinions had not really had an impact.

It has to be said that, despite my earlier comments, HM Treasury really has by and large listened to those with genuine concerns. One can only hope that it continues in this direction of travel.

I turn my attention to a couple of other areas in the Finance Bill, not the report. I will not touch on inheritance tax, but it was extremely interesting to hear some radical views on it. I would welcome further debate in this House on taxation. It is a little disappointing that so few of your Lordships are able to speak tonight, but although we are not allowed to comment on rates, allowances and so forth, I would have thought we were allowed to comment on structures and new and radical ideas. I hope the usual channels might permit debate on this subject at a later date.

The area I will talk about relates to Clauses 48 to 59, which deal with fulfilment of third-country goods coming in to the UK via online marketplaces. This follows measures in last year’s Budget and gives HMRC much greater powers, as my noble friend Lord Bates said. I first raised this issue in an Oral Question in December 2015 and have, together with my noble friend Lord Lucas, continued to address it in a number of speeches in your Lordships’ House. Accordingly, I welcome these important clauses, but I am concerned that much greater work needs to be done. Only last month I asked in a Written Question whether HMRC obtains data on the amount of goods that non-UK sellers of the likes of Amazon and eBay import into the UK and, if so, whether HMRC reconciles that data with declared sales. The answer from my noble friend the Minister—I join my noble friend Lord Wakeham in congratulating him on his performance here and in other roles—was a little disappointing as it, shall we say, avoided, if not evaded, the question.

I have also asked whether the Government will treat Amazon as a supply chain for VAT purposes and was very encouraged by that answer. I remind my noble friend that there is nothing more irritating to UK retailers than seeing overseas, third-party, non-EU companies sell their goods into the UK without VAT, effectively undercutting UK retailers.

I do not think the importance of these clauses has been recognised. I urge my noble friend to read the written submissions by Richard Allen of vatfraud.org to the Public Accounts Committee hearing on 13 September this year. It states that the VAT registration numbers of traders on Amazon are either not being displayed, or, where they are, could be completely bogus. As a result, customs authorities are unable to police abuse. Consequently, it could be that certain internet retailers will not and should not be regarded as fit and proper fulfilment operators as defined by these clauses. There are many examples of certain internet retailers being aware of abuse and just not acting.

To the extent that Clauses 48 to 59 give HMRC great power, they are very welcome. I do not agree with the Chartered Institute of Taxation; the fact that they could be guilty of committing a criminal offence is a good thing. My concern is that there is evidence of HMRC not using its existing powers and this has now become a national issue. The level of VAT loss here is estimated by HM Treasury to be in the region of £1 billion to £1.5 billion—huge numbers. So, yes, HMRC needs to be properly resourced to pursue this, but the third parties must also share the costs as the ones who are benefiting. They now bear joint and several liability, and action is the only way to tackle this huge loss of VAT and damage to regular UK traders. It is vital that HMRC acts on these clauses and related ones, and a number of us in this House and in the other place will monitor this issue with further Written Questions and debates.

I want finally to address the clauses covering the EIS, or enterprise investment scheme, and VCTs, or venture capital trusts. The clauses in the Finance Bill largely implement previously announced changes to the scheme, but their very existence implies that the Treasury is committed to the VCT scheme and EIS. It was pleasing to see that there were no substantial changes, negatively, in the Finance Bill and I make a plea for no more dramatic changes to the VCT and EIS legislation over the next few weeks, or even days. We of course await the patient capital review, but it is clear that VCT funding is of a longer term, typically seven years, and plugs the finance gap of equity funding in the £2 million to £10 million range. Some excellent research has been done by the venture capital trust association which shows an increase in the number jobs created by VCT investees. I am aware that the Treasury does not like to see a loss of revenue, which occurs when investment is made in such businesses, but to maintain the UK’s position as one of the leading countries for start-up businesses, it would be a great shame if either of these incentives for new business and growing businesses was in any way hampered.

There are many other areas in the Bill which merit further discussion, such as tax avoidance and interest deduction by companies, but I think I have said enough for the moment and eagerly look forward to the proposals in the Budget in a couple of weeks’ time, which I hope will enable your Lordships’ Economic Affairs Finance Bill Sub-Committee to meet again and take on new and fresh challenges.

--- Later in debate ---

[Lord Bates]

My Lords, I thank all noble Lords for their contributions in this short but very helpful debate, which was significantly strengthened, as many noble Lords said, by the excellent report on making tax digital prepared by the sub-committee, which I again pay tribute to. There were, rightly, some concerns about consultation and the steps which have been taken. My noble friend Lord Wakeham, although very generous towards me personally, then lulled me into a false sense of security by reminding me of the limitations of consultation. As he was saying that, I was thinking back to a text that used to be above the kitchen steps in my parents’ home, from Proverbs 16, verse 18:

“Pride cometh before a fall”.


I certainly do not want to go down that route, but we in your Lordships’ House can be proud of the contribution that it has made in terms of improving the way in which these measures have been introduced.

In no particular order, I will try to address some of the issues in the time that I have available. The noble Baroness, Lady Kramer, asked how we expect the process of making tax digital to bring in more tax. In 2014-15, more than £3.5 billion was lost due to mistakes in VAT tax returns alone, and the Office for Budget Responsibility will certify costings for the revenue programme and how yields from taxation are forecast to increase in the course of the Budget.

The noble Baroness also said that not enough action was being taken to dissuade tax avoiders. Clause 65 and Schedule 16 introduce a new penalty for any person who enables the use of tax avoidance arrangements which are later defeated by HMRC. Tax avoiders face significant financial costs when HMRC defeats them, but those who enable them to bear little risk; they gain financially as their clients foot the bill. One of the purposes of this legislation is to tackle that injustice.

The noble Baroness asked whether there would be a general anti-avoidance rule rather than a general anti-abuse rule. The Government are legislating on the general anti-abuse rule, drawing on the recommendations of an independent expert study group led by Graham Aaronson QC. It is robustly founded. The Bill takes forward a number of specific and significant provisions that will tackle areas of tax avoidance.

My noble friend Lord Leigh referred to some of the issues raised by the committee’s report, and raised concerns regarding the administrative burden of making tax digital for VAT. As VAT already requires quarterly digital returns, no business will need to provide information to HMRC more regularly that it does now; nor will it need to provide extra information.

The noble Baroness, Lady Kramer, mentioned the difficulties of filling in VAT tax returns, and I can empathise with that, having filled them in myself. It is a tortuous process. But digitisation of this, we believe, can actually make tax recording simpler in the long term by making use of the technology that is available.

My noble friend Lord Leigh also asked about spreadsheets. Businesses can continue to use spreadsheets as part of maintaining digital records and performing tax calculations to meet making tax digital requirements. Any business choosing to keep its digital records in performing tax calculations using spreadsheets must ensure that it meets the making tax digital requirements, including automatically sending the required digital updates and other recording to HMRC. As part of the pilot started earlier this year, HMRC has already received the first update from someone keeping their records on a spreadsheet. It is also worth saying, more generally, that the Government will not force the system on anyone who cannot handle it—a point which the noble Lord, Lord Turnbull, rightly led on. Indeed, 3 million businesses under the VAT threshold will be able to move forward towards making tax digital at a pace that works for them. Even larger businesses will be asked to use making tax digital for VAT only from 2019.

My noble friend also brought the attention of the House to Clauses 48 to 59 on fulfilment houses and the previous Finance Act 2016 provision that allows HMRC to make online marketplaces jointly and severally liable for the unpaid VAT of their non-EU sellers. Together, this package of measures, first announced in the Budget, is expected to raise £875 million by 2021.

I, too, enjoyed the contribution of the noble Lord, Lord Campbell-Savours; it was a thoughtful contribution on the wider issue of taxation. It was nice to see cross-party consensus between him and my noble friend Lord Leigh. The noble Lord, Lord Davies, also mentioned talking more about the principles of taxation, and I agree.

The noble Lord asked whether inheritance tax should be paid by the beneficiary rather than from the estate. This would be a very large-scale reform, with significant impacts across a wide range of situations and would need careful consideration. He raises the example of Germany. That was not one that I was aware of, but I am keen to look at that. The Government keep all taxes under review, and I will ensure that the noble Lord’s remarks are brought to the attention of my colleagues in the Treasury.

The noble Lord, Lord Turnbull, asked when a revised impact assessment will be published. It will be released shortly, following the Budget. He also asked whether there will be at least one year of systems testing before introduction. The making tax digital for VAT pilot will commence by the end of the year, starting with small-scale technical testing, followed by a wider live pilot in the spring. This will allow for more than a year of testing before any businesses are mandated to use the system, and testing of all MTD elements and processes. I hope he will feel that that is a step towards what he was asking for.

[Lord Campbell-Savours]

The Minister referred to the specific issue of inheritance tax, but what about stamp duty?

[Lord Bates]

I was coming to that.

[Lord Campbell-Savours]

Fair enough. I thought he had dealt with me—that was all. Forgive me.

[Lord Bates]

I would never be so pompous as to pretend that I should deal with the noble Lord, but I shall certainly be responding to his comments. I said earlier that because I have not been able to sort my papers into chronological order, I was just taking them as they came, but I will certainly come to his point on stamp duty.

The noble Lord, Lord Turnbull, asked about businesses that have difficulty in engaging digitally. The noble Baroness, Lady Kramer, also referred to this. The Government have been clear from the outset that those businesses which are unable to go digital will not be required to do so. We are legislating to exempt taxpayers who cannot engage digitally. All businesses currently digitally exempt for VAT will continue to be so under MTD. This will be based on existing VAT online filing exemptions, which stakeholders have recognised as a sensible definition.

I turn now to the question raised by the noble Lord, Lord Campbell-Savours, about whether the stamp duty surcharge was harming the market and should be reformed. He referenced a report by Newham Council. I have not seen it, but I will certainly make sure that it is drawn to colleagues’ attention. Since 1 April 2016, higher rates of stamp duty have been charged on purchases of additional residential properties, such as buy-to-let. This is part of the Government’s commitment to supporting home ownership, alongside other measures on both the supply and demand side of the market. This Government keep all taxes under review.

I thank the noble Lord for his contribution. He asked specifically about Newham, which is an issue that the Government take seriously. HMRC reduced the tax gap in 2015-16 to an historic low. On the time-specific matter raised by the noble Lord, I shall be happy to write to him and endeavour to answer his questions on the Newham experience. That applies to all other points raised by noble Lords which I may not get the chance to cover in my remarks.

My noble friend Lord Wakeham asked about the wider lessons for HMRC’s consultation arrangements. I was almost tempted to say that I would be delighted to invite him back to his former parish at the Treasury where he could meet us and talk about the consultation exercise. I think that that would be a very good thing, so I put it on the record, and my colleagues will ensure that that happens. He talked about the informal conversations and people talking through particular problems. That would be helpful. There are standard guidelines on how consultations are now supposed to be undertaken in operation across government, and there are areas where that could be improved.

The decision to move to a single, annual autumn Budget allows more time to consult before tax changes take effect. The Government have made significant commitments to improve tax policy-making since 2010, and we remain committed to them. On a point raised by the noble Lord, Lord Davies, I recognise that the Bill is a very substantial piece. He rather unkindly referred to parts of it being somehow dealt with in the wash-up before the general election.

There is a general point here. I know that there is always a tension: do you make changes explicit in law, and therefore run the risk of criticism for producing a Bill of 664 pages, or do you establish general principles? Because that often leads to contested cases going through the courts, trying to determine what was in the mind of the legislators, we recognised that we should try to be explicit about our intentions wherever possible. We are introducing some significant changes, and 70% of the clauses in this Finance Bill were announced prior to the spring Budget in 2017 and consulted on extensively. Effectively, we will continue that discussion, including through the publication of draft legislation. There are over 390 pages of draft legislation: 98 clauses and 22 schedules were published for technical consultation in December 2016. Further draft legislation was published for technical consultation in January 2017: seven clauses and six schedules in over 200 pages of new draft legislation.

The noble Lord, Lord Leigh, asked about the Office of Tax Simplification, which was established by the Government last year, and placed on a statutory footing. It is dedicated to reducing tax compliance burdens on both businesses and individual taxpayers. It investigates where the tax system is overly complex and advises government on how to reduce that complexity.

I am conscious that time is moving on and that I have addressed a number of the points raised by noble Lords, though not all. A number of the points were worthy of more detailed consideration so, with the leave of the House, I undertake to reflect on the debate, which has been thoughtful and of a very high quality, and to write, perhaps following the Budget, to update colleagues as we go forward. With that, I commend the Bill to the House and beg that the House grant this Bill a Second Reading—or words to that effect.