Finance Bill

Lord Harlech Excerpts

2nd reading & 3rd reading & Committee negatived
Tuesday 20th December 2022 Lords Chamber

Moved by

[Lord Harlech]

That the Bill be now read a second time.

[Lord Harlech (Con)]

My Lords, in the face of unprecedented global headwinds, my right honourable friend the Chancellor delivered an Autumn Budget Statement acknowledging the difficult decisions that this Government must take to tackle the cost of living crisis and restore faith in the UK’s economic credibility. To address head-on the issues that we face, we will follow two key principles: first, asking those with more to contribute more; and, secondly, avoiding the tax rises that most damage growth. These two principles work together to achieve these aims in a fair and sustainable way without damaging growth.

Today we are debating a small number of tax measures that are being taken forward as a matter of priority. I am sure that noble Lords recognise the need to progress these measures at pace to provide certainty to markets and help stabilise the public finances. This Finance Bill therefore focuses on tax rises that act on the Government’s commitment to fiscal sustainability, helping to stabilise the public finances and providing certainty to markets. I now turn to its substance, beginning with the measure on the energy profits levy.

Since energy prices started to surge last year, the Government have considered how to ensure that businesses that have made extraordinary profits during the rise in oil and gas prices contribute, in the fairest way, towards supporting households that are struggling with unprecedented cost of living pressures. The Bill takes steps to do exactly that by ensuring that oil and gas companies experiencing extraordinary profits pay their fair share of tax. We are therefore taxing these higher profits, which are not due to changes in risk-taking, innovation or efficiency but are the result of surging global commodity prices, driven in part by Russia’s invasion of Ukraine.

This measure increases the rate of the energy profits levy, which was introduced in May, by 10 percentage points to 35%. This will take effect from January next year, bringing the headline rate of tax for the sector to 75%—triple the rate of tax other companies will pay when the corporation tax rate increases to 25% from April next year. The Bill also extends the levy until 31 March 2028.

However, as the Government have made clear, such a tax must not deter investment at a time when ensuring the country’s energy security is vital. Putin’s barbaric and illegal invasion of Ukraine, and the utilisation of energy as a weapon of war, have shown that we must become more self-sufficient. That is why the Bill also ensures that the levy retains its investment allowance at the current value, allowing companies to continue claiming around £91 for every £100 of investment.

The Government will legislate separately to increase the tax relief available for investments which reduce carbon emissions when producing oil and gas, supporting the industry’s transition to lower-carbon oil and gas production. Together, these measures will raise close to £20 billion more from the levy over the next six years, bringing total levy revenues to over £40 billion over the same period. The Government are also taking forward measures to tax the extraordinary returns of electricity generators, but will do so in a future finance Bill to ensure that we engage with industry on the plans.

The autumn Finance Bill also introduces legislation to alter the rates of the R&D tax reliefs. Making these changes will help ensure that the taxpayer gets better value for money, while continuing to support valuable research and development—a crucial ingredient for long-term growth.

Over the last 50 years, innovation was responsible for around half of the UK’s productivity increases, but the rate of increase has slowed significantly since the financial crisis. This difference explains almost all our productivity gap with the United States. We have protected our entire research budget and we will increase public funding for R&D to £20 billion by 2024-25, as part of our mission to make the United Kingdom a science superpower.

The Government also remain committed to the increasing focus on innovation set out in the 2021 spending review and the £2.6 billion allocated to Innovate UK over the spending review period. This represents a 54% cash increase in IUK’s budgets from 2021-22 to 2024-25, and 70% of its grants to businesses go to SMEs. These measures are significant, but ultimately businesses will need to invest more in R&D, and the UK’s R&D tax reliefs have an important role to play in this.

For expenditure on or after 1 April 2023, the research and development expenditure credit rate will increase from 13% to 20%; the SME scheme additional deduction will decrease from 130% to 86%; and the SME scheme credit rate will decrease from 14.5% to 10%. This reform aims to ensure that taxpayers’ money is spent as effectively as possible and improve the competitiveness of the RDEC scheme. It is a step towards a simplified, single RDEC-like scheme for all.

The SME scheme costs almost twice as much as RDEC and is, as it stands, significantly more generous, yet HMRC estimates that the RDEC scheme incentivises £2.40 to £2.70 of additional R&D for every £1 of public money spent, whereas the SME scheme incentivises 60p to £1.28 of additional R&D. In addition, RDEC has lagged behind other countries in generosity. Following the corporation tax rise from April 2023, the SME scheme would have become even more generous in cash terms, and RDEC less.

The reform is estimated to save £1.3 billion per year by 2027-28 and leave the level of R&D-related business investment in the economy unchanged. It is also expected to reduce error and fraud in the SME scheme where the generosity has made it a target for fraud. Government support for the reliefs will still continue to rise in cost to the Exchequer, from £6.6 billion in 2020-21 to over £9 billion in 2027-28, but in a way that ensures value for money. The R&D reliefs will support £60 billion of business R&D in 2027-28, a 60% increase from £40 billion in 2020-21. The Government will consult on the design of a single scheme and will work with industry ahead of the Spring Budget to understand whether further support is necessary for R&D-intensive SMEs without significant change to the overall cost.

I will turn now to the measures on personal tax. We know that difficult decisions are needed to ensure that the tax system supports strong public finances. To begin with, we are asking those with the broadest shoulders to carry the most weight. Therefore, the Government are reducing the threshold at which the 45p rate becomes payable from £150,000 to £125,140. Those earning £150,000 or more will pay just over £1,200 more in tax next year. This will affect only the top 2% of taxpayers.

We have also announced a reduction of the dividend allowance from £2,000 to £1,000 from April 2023, and to £500 from April 2024, as well as a reduction of the capital gains tax annual exempt amount from £12,300 to £6,000 from April 2023, and to £3,000 from April 2024. We have also announced that we are abolishing the annual uprating of the AEA with CPI and fixing the CGT reporting proceed limit at £50,000.

The current high level of these allowances means that those with investment income and capital gains are able to receive considerably more of their income tax-free than those with, for example, employment income only. These changes make the system fairer by bringing the treatment of investment income and capital gains closer into line with that of earned income, while still ensuring that individuals are not taxed on low levels of income or capital gains. Although the allowance will be reduced, individuals who receive a high proportion of their income via dividends will still benefit from rates that are below the main rates of income tax: these are 8.75%, 33.75%, 39.35% for basic, higher and additional rate taxpayers respectively. These two measures will raise £1.2 billion a year from April 2025.

We are also maintaining at current levels the income tax personal allowance and the higher rate threshold for longer than had previously been planned. These will remain at £12,570 and £50,270 respectively for a further two years until April 2028. This will impact on many of us, but no one’s current pay packet will reduce as a result of this policy, and by April 2028 the personal allowance, at £12,570, will still be more than £2,000 higher than it would have been had it been uprated by inflation each year since 2010-11.

I also remind the House that we are a Government who raised the personal allowance by over 40% in real terms since 2010 and this year implemented the largest-ever increase to a personal tax starting threshold for NICs, meaning that they are some of the most generous personal tax allowances in the OECD. Changing the system to reduce the value of personal tax thresholds and allowances supports strong public finances. Even after these changes, we will still have one of the most generous sets of core tax-free personal allowances of any G7 country.

We also announced in the Autumn Statement that the inheritance tax thresholds will continue at current levels in 2026-27 and 2027-28—a further two years than previously announced. As a result, the nil rate band will continue at £325,000, the residence nil rate band will continue at £175,000, and the residence nil rate band taper will continue to start at £2 million. This means that qualifying estates will still be able to pass on up to £500,000 tax-free, and the estates of surviving spouses and civil partners will still be able to pass on up to £1 million tax-free because any unused nil rate bands are transferrable. Current forecasts indicate that only 6% of estates are expected to have a liability in 2022-23, and this is forecast to rise to only 6.6% in 2027-28. By making changes to personal tax thresholds and allowances, the Government are asking everyone to contribute more towards sustainable public finances—but, importantly, we are doing this in a fair way.

Finally, in line with the Treasury’s commitment to international action on net zero, we welcome the fact that the transition to electric vehicles is continuing at pace. The OBR forecasts that, by 2025, half of all new cars will be electric. Therefore, to ensure that all motorists start to pay a fairer tax contribution, the Government have decided that, from April 2025, electric cars, vans and motorcycles will no longer be exempt from vehicle excise duty. The motoring tax system will continue to provide generous incentives to support EV uptake, so the Government will maintain favourable first-year VED rates for EVs and legislate for generous company-car tax rates for EVs and low-emission vehicles until 2027-28.

These are difficult times, and difficult decisions need to be made to repair the UK’s economy. However, these decisions will be made in an honest and fair way. This is a vital part of the Government’s broader commitments made at the Autumn Statement. The Bill demonstrates a responsible approach to fiscal policy, helping to stabilise the public finances and providing certainty to markets. The measures in this autumn Finance Bill are a key part of these plans. For these reasons, I commend the Bill to the House.

--- Later in debate ---

[Lord Harlech (Con)]

My Lords, it is a privilege to close this debate on the Finance Bill on behalf of the Government. I thank all noble Lords for their constructive and considered contributions and the welcome to the Dispatch Box. I will try to address many of the points raised in today’s debate, but will begin by reminding the House of what this Bill is designed to achieve.

We are taking these changes forward rapidly now because we are serious about fiscal sustainability and know how essential it is for economic stability and growth. As my right honourable friend the Chancellor set out at the Autumn Statement, we are facing hugely significant challenges, including on the cost of living, exacerbated by Putin’s invasion of Ukraine.

The UK is not alone in dealing with these issues, with one-third of the global economy forecast to be in recession this year or next. However, it is clear that we must prioritise restoring sustainability in our own public finances; only then will we be able to face down the economic storm, while protecting the most vulnerable. That stability will provide the foundation that is essential for economic growth.

The Autumn Statement set out a clear plan to deal across all these areas, with three priorities: stability, growth and public services. Even in these difficult economic times, we are still protecting public services by investing billions of pounds in the health service and education. We will continue to emphasise these facts as we move on with this work.

This small, focused Bill forms the essential next part of that plan. It implements tax measures which will provide certainty to markets and help stabilise the public finances, and does so in a fair way, with the heaviest burden falling on those with the broadest shoulders. In summary, the Bill makes changes to the energy profits levy to ensure that oil and gas companies experiencing extraordinary profits pay their fair share of tax. It also takes forward changes to R&D tax reliefs, to ensure the taxpayer gets better value for money and to continue to support valuable research and development needed for long-term growth. The Bill’s changes to personal tax ensure that while we are asking everyone to contribute a little more towards sustainable public finances, the better-off will shoulder a greater burden. The changes to the taxation of electric vehicles ensure that all motorists start to pay a fairer tax contribution, while continuing to provide generous incentives to support EV uptake.

Let me turn to points raised during the debate. The noble Lord, Lord Davies of Brixton, raised the issue of public sector pensions. It cannot be overstated how much the Government value the work of all public sector staff. Public sector pension schemes are mainly defined benefit schemes and are among the most generous schemes available. The tax relief offered on pension contributions is expensive, costing the Exchequer £67.3 billion in 2020-21, with around 58% relieved at higher and additional rates. The annual allowance affects only the highest-earning pension savers. The Government estimate—

[Lord Davies of Brixton (Lab)]

Whoever wrote the brief clearly assumed I was going to talk about public service pensions, but I conspicuously did not mention them, as they are not relevant to this Bill. I do not want to dump an official in it, but I did not raise that issue; I raised a completely separate issue.

[Lord Harlech (Con)]

I thank the noble Lord for the intervention. I will have to go back and check Hansard. I heard him raise pensions in general but also public sector pensions, but if I am wrong, I apologise, and I stand to be corrected.

All noble Lords raised the issue of the personal tax thresholds. Our mantra throughout this process has been to make sure that those with the broadest shoulders carry the most weight, which is the fairest approach to take. The changes to personal tax ensure that, although we are asking everyone to contribute a little more towards sustainable public finances, we do so in a fair way, with the better off shouldering a greater burden.

We have tried to balance the needs of the country as a whole with the need to protect the most vulnerable. However, as I mentioned, we must continue to improve the health of our public finances, which is why the personal allowance has been frozen. The changes for most will remain small, with the average taxpayer paying only an additional £38 in income tax and NICs by 2028, and the personal allowance will still be £2,150 higher in April 2028 than it would have been if it had been uprated by inflation since 2010.

The noble Baroness, Lady Bennett of Manor Castle, raised the issue of a wealth tax. The Government’s priority is restoring stability, but we will try to do this in a fair and compassionate way which protects the most vulnerable and ensures that those on higher incomes pay a fair share. The Autumn Statement reduces the additional rate threshold, which will raise revenue from the top 2% of taxpayers. The income tax and gains tax systems are also being reformed to reduce the generosity of certain allowances, which will bring the treatment of investment income and capital gains closer in line with employment income.

This year, the Government raised the threshold at which workers start paying national insurance contributions to £12,570 and have reversed the health and social care levy. This comes on top of the energy price guarantee to support households with their energy bills over the winter, and a further £37 billion of support for the cost of living.

The noble Baroness, Lady Kramer, raised council tax. The Government expect that local authorities will exercise restraint in setting council tax, balancing the extra income for local services against the tax burden on residents for the cost of living pressures. Local authorities have the flexibility to design their own working-age local council tax support schemes to protect their most vulnerable residents. The UK does not have a single wealth tax but has several taxes on assets and wealth. As set out by the Wealth Tax Commission report in December 2000, the UK’s taxes on wealth are on a par with those of other G7 countries.

[Baroness Bennett of Manor Castle (GP)]

I should perhaps declare my position as a vice-president of the Local Government Association. The Minister said that he expects councils to exercise restraint with regard to council tax rises. However, the Government’s own forecasts, based on the provisional local government finance settlement released this week, indicate that they are expecting all councils to raise their rates by the maximum allowed. Those two realities do not seem to add up.

[Lord Harlech (Con)]

I will have to disagree with the noble Baroness. I did not say that councils were not going to increase council tax rates but that we expect them to show restraint.

The issue of public sector pay was raised by the noble Baronesses, Lady Bennett and Lady Kramer, and the noble Lord, Lord Tunnicliffe. The Government have accepted the recommendations of the independent pay review bodies for the NHS, teachers, police and the Armed Forces for 2022-23. This delivered the highest uplifts in nearly 20 years, with most awards targeted towards the lower paid. Pay awards for 2023-24 will be determined by the normal pay-setting process, and the Government will be seeking recommendations from pay review bodies where applicable. It is important that public sector employers can recruit, retain and motivate qualified people, and this is a key consideration for pay review bodies when they make their recommendations to government. Pay awards this year must also strike a careful balance between recognising the vital importance of public sector workers while delivering value for the taxpayer and being careful not to drive prices even higher in future through contributing to a wage-price spiral.

On the energy profits levy, which was raised by the noble Lord, Lord Tunnicliffe, and the noble Baronesses, Lady Bennett of Manor Castle and Lady Kramer, the Bill is part of our plan to deal with the international pressures caused by the challenges of Putin’s invasion of Ukraine, inflation and the hangover from the pandemic. The changes to the energy profits levy will make sure that the oil and gas companies that have been gifted extraordinary profits pay their fair share of tax. Combined with the electricity generator levy, these taxes will raise £55 billion over the next six years from companies that could not have expected such enormous profits. The investment allowance remains at its current value to allow companies to claim around £91 of tax relief for every £100 of investment.

I recognise that the Opposition disagree with this step, but it is our firm belief that businesses must be able to invest. The weaponisation of energy by Putin has made it abundantly clear that we must ensure our energy security over the coming years. This is how we will do it. Again, I remind noble Lords that our changes mean that the headline rate of tax for companies in this sector will increase to 75%—triple what other companies will pay when the corporation tax rate increases to 25%.

[Lord Tunnicliffe (Lab)]

Does the Minister deny the almost obvious fact that none of these big oil companies is going to pay a penny more? He correctly explained how they will get to that not paying a penny more, but the tax is having no impact.

[Lord Harlech (Con)]

I do not have a crystal ball so I cannot say whether there will be an impact but we want to be careful not to disincentivise investment to move away from fossil fuels.

[Lord Tunnicliffe (Lab)]

My understanding is that the present investment programmes that they had before this tax came out just carried forward, with a limit but well behind, the relief on so-called investment— because it is not fresh investment—which will offset any extra tax that they are likely to pay. I do not know whether my Liberal Democrat friends agree with that analysis but I am sure that it is either true or very close to true.

[Lord Harlech (Con)]

I am sorry; I do not understand the question.

The noble Lord, Lord Tunnicliffe, raised the issue of non-dom status. It is important to recognise that non-doms play an important role in funding our public services through their tax contributions. In the year ending 2021, the most recent full year for which we have data, non-doms were liable to pay £7.9 billion in UK income tax, capital gains tax and national insurance. What is more, they have invested £6 billion in investment schemes since 2012, which is why we are taking a careful and considered approach.

As the Chancellor told the Commons Treasury Select Committee, we will continue to look at such schemes. Indeed, the Government keep all aspects of the tax system under review; this includes the non-dom regime. I reiterate that, if you look at this package as a whole, we have not tried to protect wealthier people—quite the opposite. We are protecting the most vulnerable and asking those who have more to contribute more. In 2017, permanent non-dom status was ended.

I turn to the question from the noble Lord, Lord Rogan, about the rollout of the energy bills support scheme in Northern Ireland. The Government have confirmed that all households in Northern Ireland will receive a single payment totalling £600 to help with their energy bills, with payments starting in January. This will be made up of £400 of support under the Government’s energy bills support scheme in Northern Ireland and £200 of support under the alternative fuel payment scheme, which will go to all households in Northern Ireland irrespective of how they heat their home.

Energy policy in Northern Ireland is the responsibility of the Northern Ireland Executive and Assembly. However, in their absence the UK Government have stepped in to ensure that households do receive support. The UK Government have worked closely with Northern Ireland electricity suppliers, the distribution network operator, and the utilities regulator, in designing the scheme.

In conclusion, as we are all aware, the UK is facing challenging headwinds. Despite having experienced the third-highest growth in the G7 over the past 12 years, behind only the US and Canada, economic times are tough. The Government have chosen to take difficult decisions needed to support public finances, providing stability and certainty to markets, and providing the foundation for future growth. The OBR has confirmed that the recession is shallower, inflation has reduced and roughly 70,000 jobs have been protected as a result of these decisions. This small autumn Finance Bill will help to deliver these outcomes and, importantly, will do so in a fair way. It forms an essential part of our plan for the economy, now and in the future. For these reasons, I commend this Bill to the House.

Bill read a second time. Committee negatived. Standing Order 44 having been dispensed with, the Bill was read a third time and passed.