Finance (No. 2) Bill

Lord Leigh of Hurley Excerpts

Committee negatived & 3rd reading
Tuesday 4th July 2023 Lords Chamber

[Lord Leigh of Hurley (Con)]

My Lords, I declare my interests as set out in the register. I am a chartered accountant and member of the Institute of Chartered Accountants in England and Wales, and a member by qualification of the Chartered Institute of Taxation. I am pleased to welcome this excellent finance Bill and congratulate the Minister and her team on it. I hope that she will not be seduced by the siren calls of my noble friend to confuse capital and income. Taxation on capital is taxation on a risk, where capital may appreciate or may be lost, and therefore merits a different rate from taxation on income, where one is paid a salary by another person without any risk whatever. That is why the rates are different.

It is a great credit to the Chancellor and my noble friend the Minister that His Majesty’s Treasury is tackling a number of difficult issues head-on. I congratulate them on producing 350 clauses and 460 pages with the perennial plea for less not more, which I quite appreciate is difficult to achieve. I also appreciate that they would probably ask the same of me. So I will focus on a few key areas, the first being R&D tax credits. I had the honour to serve as chairman of the Economic Affairs Finance Bill Sub-Committee, which looked into research and development tax relief and expenditure credit. We looked at this area because the sums are enormous. In this regard I think that the noble Lord, Lord Sikka, will agree with me. Since the scheme started, it is estimated to have cost £46.8 billion, and some £7 billion in the most recent year.

What concerned us greatly was the level of fraud, which was estimated to be some £500 million but is so unquantifiable that the National Audit Office has qualified its accounts of HMRC due to this single issue. Research and development are crucial to our economic success. I know from the response that the Minister in the other place gave to our report that HMRC has studied it carefully and will honour the commitment to keep listening and improving the system, particular in respect of the new requirements to give notice.

I ask my noble friend to have regard to the detailed comments from the Chartered Institute of Taxation, particularly in respect of the new powers that HMRC has to remove a claim. I am all in favour of giving HMRC new powers to stop suspected fraud but, as I read the wording, it seems flawed. For example, there is no right of appeal. We all want to stop the ambulance chasing that we have seen by rogue operators seeking credits for clients and then taking a percentage of the amount that is claimed. However, there remains concern about the nature of the additional information to be required and, of course, HMRC’s ability to capture and process all this.

Since our report was published, I have been contacted by practitioners highlighting real concerns. I have been sent a detailed letter by Mr Stuart Rogers of PKF accountants, which he sent to the Minister in the other place, in which he describes his frustration at HMRC’s compliance team not having the necessary training and skills in research and development. He points to clients now thinking of transferring their R&D to the United States, and to other high-tech clients who have been refused credit where it is clearly due. That is not good news. Will my noble friend agree to hear specific complaints that the R&D compliance check team is causing havoc, and satisfy herself that action needs to be taken here?

Just today, the Chartered Institute of Taxation wrote to HMRC with 11 pages of concerns. In particular, it says that the feedback from its members is that the way that R&D inquiries are being conducted by the individual and small business compliance team remains concerning. Further problems, for example around how penalties are being assessed and how inquiries are being concluded, are emerging as cases progress. The institute wrote:

“We are receiving a significant number of reports from our members about the difficulties that are being encountered in practice and they have provided numerous examples of unfairness and negative taxpayer/agent experience in their interactions with the ISBC team in respect of R&D”.


I will ensure that my noble friend receives a copy of that letter.

I will briefly mention the energy profits levy, as amended in the finance Bill. It is a really important part of the Bill and has caused havoc in the sector. The price floor will never bite—unless, heaven forbid, there is another six-month lockdown. Consequently, there has been a real flight of capital, mainly to oil and gas exploration elsewhere, specifically Asia. We need a long-term—six to 10-year—energy security policy that includes a sensible real price floor. I have made this case before and will continue to do so.

The final area that I will talk about is the taxation of multinationals. I have spoken on this issue many times in this House. Sad person that I am, I made this the subject of my maiden speech. I very much welcome the Government’s move in this direction to deal with base erosion and profit shifting on a two-pillar basis. Pillar 1 seeks to ensure that multinationals with revenues over €20 billion pay taxes where their customers are based. Pillar 2 looks for a minimum 15% tax rate for companies with presence here and revenues of over €750 million. This Bill sets out more details on pillar 2.

There are some 50 amendments to Part 3 of the Bill to try to deal with this very difficult and complicated problem of definitions, safe harbours, exemptions and so on. Creating new definitions of profit is a real challenge, but it is the only way the income inclusion rule can possibly work.

Very recently, HMRC helpfully established draft partial guidance for consultation in relation to the UK’s implementation of the OECD’s pillar 2 rules. It provides a helpful map showing how existing UK draft legislation cross-references to the OECD’s GloBE model rules, commentary and agreed administrative guidance. I accept the argument made by CIOT and others that pillar 2 may not necessarily generate more tax for the UK coffers, because multinationals may just raise the lower tax rates they currently pay in other countries. However, that does not mean that this is not the right way forward; it is the right way forward.

I noted Priti Patel’s comments on this issue in the other place. She is concerned that we end up gold-plating rules, as we tend to do, and we are hamstrung by other rules at exactly the time when, finally, post the Windsor Framework, we can liberate ourselves to determine our own tax policy. As the Minister knows, I am very keen that we do that, particularly on EIS and SEIS issues. I noted her opening comments about how she has increased the rate of SEIS particularly, which is very welcome.

Priti Patel has had assurances from the Chancellor that the Government have committed to regularly updating the Commons on what the OECD is proposing in respect of pillar 2. Can the Minister repeat this assurance to our House that updates on policing pillar 2 will be presented to your Lordships, and will she commit to presenting an assessment of the progress countries are making on pillars 1 and 2 and on the policy itself? It will not work unless every other major country adopts it.

The whole world should recognise the UK Government’s track record of leadership on international tax reform. It has continued in this role and been an early mover in implementing pillar 2 rules. We need the USA in particular to do likewise with Biden’s proposals, and I am keen to know what steps HMRC is taking to pressure other countries to follow our lead. Personally, I was a fan of a reformed digital services tax, which Labour has now abandoned, but I could not persuade HMT to bring it in, so we need to make this alternative route of pillar 2 work.

To reiterate, this is the right way forward and the Government are to be commended for pursuing it.

--- Later in debate ---

[Baroness Penn (Con)]

The noble Baroness is exactly right. The increase in the headline rate of corporation tax makes a significant contribution to our public finances and to the consolidation of our public finances after Covid. All I meant to say is that, for some of the reasons set out by the noble Baroness, we have been able to exempt smaller businesses from that increase while also ensuring that bigger businesses—which often benefited a large amount from government support put in place during the pandemic—contributed their share to returning our public finances to a sustainable footing.

The noble Lord, Lord Sikka, also asked why HMRC’s budget had been cut. HMRC will receive a £0.9 billion cash increase over the Parliament, from £4.3 billion in 2019-20 to £5.2 billion in 2024-25, so I do not quite recognise the picture that the noble Lord has put forward. HMRC’s budget includes funding to tackle avoidance, evasion and other forms of non-compliance, to deliver a modern tax system and to support a resilient customs border.

I turn to another area of tax, the energy profits levy, which, I remind noble Lords, has helped to pay a significant proportion of households’ and businesses’ energy costs through the support that we have been able to provide. I want to be clear to noble Lords that the allowances in place are not a loophole. The OBR’s latest forecast is that the EPL will raise just under £26 billion between 2022-23 and 2027-28, inclusive of the EPL’s investment allowances. That is on top of £25 billion over the same period from the permanent regime for oil and gas taxations, totalling around £50 billion.

Abolishing the investment allowance would be counterproductive. The UK is still reliant on oil and gas for its energy supply and will be for several years; reducing incentives to invest would lead to investors pulling out of the UK, damaging the economy, causing job losses and leading to lower tax revenue in future.

My noble friend Lord Leigh asked about the impact of the price floor and the Government’s long-term plans for energy security. By introducing the energy security investment mechanism, the Government are providing certainty about the future of the energy profits levy. This allows companies to invest confidently in the UK and supports our economy, jobs and energy security.

On the long-term fiscal regime for oil and gas, the Government are also conducting a review to ensure that the regime delivers predictability and certainty, supporting investment, jobs and the country’s energy security. I wonder whether that predictability and certainty would be covered in Labour’s review of business taxes. I do not think the oil and gas sector sees predictability and certainty in its policy approach in recent weeks.

I turn to the electricity generator levy. Unlike the EPL, this not a tax on total profits that is calculated after the recognition of total revenues and costs. Instead, the EGL is payable only on the portion of revenues that exceeds the long-run average for electricity prices. The Government took into account the potential impact on investment when setting the benchmark price.

The Government are supporting renewables deployment through a range of policy levers, including the contracts for difference scheme, through which generators have received almost £6 billion net in price support to date. The electricity generator levy will not be payable on renewable generation produced under contracts for difference, which is the Government’s main form of support for green energy and will account for most new large renewable generation.

I turn to the point raised by the noble Lord, Lord Livermore, on non-doms. The Government recognise that issues of taxation come down to fairness. We need to have a fair but internationally competitive tax system which brings in talented individuals and investment that contribute to growth. Reforming the non-dom regime could potentially damage the UK’s international competitiveness, leading to a loss of international investment and talent. There is a great deal of uncertainty over the wider economic impacts of complete abolition.

Non-doms play an important role in funding our public services through their tax contributions. They pay tax on their UK income and gains in the same way as everyone else, and they pay tax on foreign income and gains when those amounts are brought into the UK. The latest information shows that that non-UK domiciled taxpayers are estimated to have been liable to pay almost £7.9 billion in UK income tax, capital gains tax and national insurance contributions in 2020-21 and have invested over £6 billion in the UK using the business investment relief scheme introduced in 2012.

[Lord Leigh of Hurley (Con)]

On another point of clarification, is my noble friend saying that HM Treasury’s calculations are that, if the reliefs that apparently exist for non-doms were withdrawn, as has been suggested elsewhere, there would be a net loss to Treasury revenue, given the mobile nature of such non-domiciled persons?

[Baroness Penn (Con)]

I am saying that that is most certainly a risk. There is a high amount of uncertainty about the impact of any changes in that area, and it would not necessarily lead to an increase in revenue, as is being relied upon by the Labour Party.