Finance Bill

Lord Sikka Excerpts

2nd reading & Committee negatived & 3rd reading
Wednesday 21st February 2024 Lords Chamber

[Lord Sikka (Lab)]

My Lords, it is always a great pleasure to follow the noble Lord, Lord Leigh of Hurley, even though I do not agree with much of what he said.

This Bill is a mishmash of policies that have already given us recession, poverty, stagnation, NHS queues, food banks, inequalities and crumbling public infrastructure. Building a just society does not seem to be on the Government’s agenda at all. The Bill continues with failed policies and somehow, different outcomes are expected, which will not happen.

Since 2010, the Government have showered tax reliefs on businesses, but we continue to suffer from chronic underinvestment. The Bill hands out tax reliefs in the form of 100% first-year capital allowances, in the hope that this can somehow increase business investment by possibly £14 billion within the forecast cycle, but that is in any case too little and is unlikely to be durable.

The major reason for low investment is that people do not have enough purchasing power to buy goods and services, and that dissuades businesses from investing. Just look at any town centre and you will see that it has become an economic desert, simply crumbling away. But the Government remain wedded to real wage and public spending cuts. The real average wage is now around the 2007 level; people have not got enough money to spend.

Following the Second World War, the state invested in new industries and took the long-term risks the private sector simply was not willing to take. It invested in new industries such as biotechnology, information technology and aerospace. However, the entrepreneurial state has now been replaced by a state that guarantees corporate profits through subsidies, cash handouts and the exploitation of people and the natural environment. The result is record corporate profits and low investment in productive assets. According to the OECD table, the UK occupies the 35th spot out of 38 countries in the league for investment in productive assets. That position will not change until the state resumes its entrepreneurial role, directly invests in new industries and infrastructure, and ensures that the masses have sufficient purchasing power.

The Government offer nearly 1,140 tax reliefs but have no idea of the total cost. Little is known about the macroeconomic benefits of handing out vast amounts of tax reliefs. The Bill hands out generous research and development tax incentives to creative industries, which will be welcomed by many. Accountants would happily reclassify some business expenditure as R&D and claim higher tax relief. The National Audit Office laments that the tax reliefs for R&D routinely exceed the UK’s actual R&D expenditure. I hope the Minister will be able to tell us why.

In handing out generous tax reliefs, the Government should also ensure that the resulting profits are taxed in the UK. Oil and gas companies get generous tax reliefs, but their profits are not necessarily taxed in the UK. I worked as an accountant in our oil companies, and I am quite familiar with how transfer pricing works. The Government ought to look at that to see where the profits end up.

James Bond movies are made and marketed through a labyrinth of opaque offshore entities. UK government money is given to make those movies. E.ON, the company behind the James Bond enterprise, received £30 million for “Spectre”, £47 million for “No Time to Die”, £24 million for “Skyfall” and £21 million for “Quantum of Solace”. However, E.ON declares tax losses in the UK and very little of its profit is taxed in the UK. Despite receiving £120 million of subsidy, E.ON has been paying less than £500,000 a year in UK corporation tax. Can the Minister explain why there is no comprehensive programme of tracking benefits of tax reliefs, or for ensuring that the resulting profits are taxed in the UK?

The Government make lots of claims about curbing tax dodges, but they are soft on the enablers. If the Minister disagrees, she is welcome to tell the House how many partners of big accounting firms have been investigated, fined or prosecuted for selling unlawful tax avoidance schemes. Hopefully she can name one or two; that would suffice.

An estimated £570 billion of UK wealth is stashed in tax havens. There is little effective check on profit shifting through intragroup transactions to low or no tax jurisdictions. Despite promises, the Government have failed to publish an estimate of what is called the offshore tax gap. Civil investigations opened by the offshore, corporate and wealthy unit, part of HMRC’s fraud investigation service, have declined from 1,417 in 2018-19 to only 627 in 2022-23. This reduces any faith in the measures contained in Part 3 of the Bill.

Tax policy for the last 14 years has become a circus under this Government. There is no sensible debate of what or who ought to be taxed, and at what rate, to shape what kind of society. Special low tax rates are enacted for the rich because they fund political parties, or simply because they demand it. Prime Minister Rishi Sunak paid tax of £508,308 on an income of just over £2.2 million, which is an effective tax rate of 23%. That is the tax rate faced by somebody on a wage of around £30,000 per year.

As I said earlier, no attention is paid to building a fair and just society. The reason why the Prime Minister’s tax bill is so low is that the capital gains accruing to him are taxed at 10% to 28%, while workers’ wages are taxed at 20% to 45%. Workers pay national insurance, but beneficiaries of capital gains pay zero national insurance. Indeed, under the Government’s rules, it is possible to pay a tax rate of only 10% on capital gains of up to £10 million. That does not seem fair to me at all.

The benefits of low capital gains tax are unevenly spread, unfair and create numerous inequalities. In 2020, just 0.5% of adults in the UK paid capital gains tax and benefited from this special regime. Capital gains tax payers are concentrated in London and the south-east of England. Notting Hill, with a population of around 6,400, has more than the combined populations of Liverpool, Manchester and Newcastle. You can see where these benefits are going.

The distortions also fuel a tax avoidance industry and rob the public purse. SME directors pay themselves with dividends rather than wages because that reduces their tax bill, as dividends are taxed at a lower rate than wages. The rich hire accountants to convert income to capital gains. Just think about the number of graduates finding jobs in the tax avoidance industry, which adds absolutely zero to the economy.

HMRC data shows that a quarter of people with an income of £2 million paid tax at an effective rate of less than 20%. One in 10 of those earning £2 million paid tax at an effective rate of only 10%, which is less than what someone pays on the minimum wage. This is an utterly unfair system and an unfair society, so can the Minister explain why someone making £2 million a year pays tax at a lower rate than somebody earning £15,000 a year? How is that consistent with claims of levelling up?

Finally, no child should go hungry, so I will suggest how the Government can fund free school meals for everybody: simply deal with one tax abuse, which arises from gift aid. If somebody gives £100 to a charity, that is obviously considered to be net, and the charity can claim £25, so it becomes £125 in the charity’s books. If the donor enters it on their tax return—many do not—they can also claim tax relief. A basic rate taxpayer will claim a tax relief of £20, but higher and additional rate taxpayers claim tax relief on that £100 at 40% and 45%. They are quids in—they are getting more because they are giving to charity. That does not seem fair. If tax relief on charitable donations was curbed at 20% for everybody, that would generate £740 million extra in tax revenues, which is quite enough to fund free school meals for everybody. Hopefully the Minister will say, “Yes, that will be in next month’s Budget”.

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[Baroness Vere of Norbiton (Con)]

My Lords, I had better intervene quickly, before that continues. I am grateful to my noble friend, but I am sure he is well aware that that was not the usual procedure.

I am very grateful to all noble Lords who have taken part in the debate this evening. It has been a spirited debate, as ever, and I can definitely say at the outset that I am unable to agree with everything that has been said—by some noble Lords more than others, and by one or two almost entirely. But let us leave it at that.

There have been many excellent contributions and points raised. I am very grateful to the noble Lord, Lord Davies, who kicked off the debate with some wonderful tax questions about pensions. Clearly, the issue around pensions catching up with the personal allowance is not something that I can comment on now, but it is something that people are aware of and it will be addressed over a period of time. It is the case, too, that many political parties are committed to the triple lock. Pensioners whose sole income is the new state pension and who do not have deferred or received protected payments currently do not pay any income tax, as noble Lords will know. This year we provided the biggest ever cash increase to payments—a 10.1% rise.

The Government have doubled the personal allowance since 2010, ensuring that those with the lowest incomes do not pay income tax at all. Many noble Lords are concerned about the level of the personal allowance. I believe that over the longer period of time, looking back to 2010, there have been significant increases, such that 30% of people do not pay tax at all. I accept that, given external headwinds, certain decisions had to be made—and were made quite rightly—to freeze the personal allowance over a period of time. However, it is one of the goals of this Government that, as we return to the sort of growth that I think all noble Lords would like to see, it would be a possibility in future that we would be able to address how those personal allowances are going to change over time.

If a person has to pay tax that cannot be collected through PAYE, whether because they have no employment or they have an occupational private pension, and they are not already a self-assessment taxpayer, HMRC may issue them with a simple assessment to explain what tax they owe and how to pay it. That would be well in advance of any payment being needed. But, of course, that assumes that personal allowances and the state pension collide in future. I would not want to say that that is the case, but it is an issue that people are aware of.

The issue around the tax threshold freezes comes up quite a lot in your Lordships’ House. I absolutely accept that we have had to make some incredibly difficult choices but, having done so, a UK employee can earn more before paying income tax and social security contributions than an employee in any other G7 country. We do not tax our employees as highly as other people do, and that is to our credit. We have taken a fair approach to repairing the public finances, so we have asked everybody to contribute a little through keeping tax thresholds fixed. However, that ensures that those with the broadest shoulders pay the most. As I say, now that inflation is falling and the economy has turned a corner, we must continue with our plan, and we can responsibly return some money to taxpayers to slightly change the shift and the amount of tax that people will now pay, versus what they were going to pay in the past. But it is important that we do that in a way that supports the work and grows a sustainable economy for the future. Prioritising those in work is the best way in which to get the economy growing and reducing national insurance contributions is the best way in which to target those individuals.

I will check through the comments made by the noble Lord—

[Lord Sikka (Lab)]

I am grateful to the Minister. Is she saying that we cut taxes for people? Earlier she mentioned 29 million people. Can she also confirm that 17.8 million UK adults with an income of less than £12,570 a year received a zero cut in national insurance or taxes in last year’s Budget?

[Baroness Vere of Norbiton (Con)]

Yes, but let us also remember that the national living wage has gone up by 25% in real terms since 2010. There are all sorts of different things that the Government have done to protect the most vulnerable; the noble Lord is picking on just one thing. We are always looking at the most vulnerable to ensure that, for them too, work pays. That includes lifting the national living wage.

[Lord Sikka (Lab)]

I am happy to respond to the Minister—this could get interesting. The £12,570 threshold —and, as I said, 17.8 million adults have less than that —is after taking account of the increases in minimum wage. Many people have zero-hours contracts, work part-time or are maybe on a pension. That is after taking account of all the increases that the Minister said have been handed out.

[Baroness Vere of Norbiton (Con)]

Does the noble Lord want me to give them a tax cut for taxes that they do not pay? I am not following here at all, but I am not willing to get into a long debate about this right now. The noble Lord may write, and I will respond, if he would like to get into that in detail, but I am not willing to get into the debate right now.

Moving on to other issues raised by the noble Lord, Lord Davies, I will write in more detail around the specific things; I was doing very well for 80% of his speech but I lost him towards the end, around the taxation of negative pension growth, or gains. I will write on that point.

The noble Lord, Lord Desai, noted that the Bill is too late. Obviously, this is beyond a humble Minister like me. The House authorities will have guided it through. I know that it took a while to get through the Commons, and we addressed it in your Lordships’ House as quickly as we could once it had finished in the Commons. I would like to push the blame down to the other place and leave it there. However, it is always our ambition to get our Finance Bills into and through Parliament as quickly as possible, because it is a really important thing that we do.

I suspect that, particularly as we go into the Spring Budget, there will be many more debates around growth. I say again that, since 2010, we have had the fastest growth of any European G7 nation. I also suspect that there will be counterarguments to that, and that those will continue. In many of these circumstances, particularly some of the points raised by the noble Lord, Lord Desai, it is just a case of economists not agreeing. Not all economists agree—it is an art, not a science. For those of us who studied economics at university, it is clear that there are sometimes fundamental differences, as noble Lords have said today. My noble friend Lord Leigh is also a very experienced person in these matters. As he pointed out, he does not agree with much of the analysis. Sometimes, that is the case.

I am incredibly grateful to my noble friend Lord Leigh, his committee and the officials for the report of their sub-committee. I reassure him that we take those reports very seriously. Officials read them to ensure that we take into account the considerations and the recommendations made. On research and development, I think he agrees with us that we want to keep things as stable as possible. We do not intend to make any further changes. However, there are a few small areas where we will continue to engage, and any changes will be done cautiously. We hear what he and his committee say, and we will consider it carefully.

My noble friend noted the issue around HMRC data and tax administration. The Government’s economic response to the coronavirus pandemic was made possible through the powerful use of all sorts of data. However, it highlighted that there are gaps in the data that HMRC holds. New or improved data collected by HMRC, such as detailed information on employee hours and start and end dates on self-employment, will help government to address some of the gaps, building a tax system which is more resilient. I reassure him that the Government are taking a proportionate response and collecting improved data in areas where taxpayers already hold it, to minimise administrative burdens. The existing safeguards are robust, well-established and well-understood. I reassure him that we expect all taxpayers to have this information already and be able to provide it to HMRC. HMRC will take a reasonable and proportionate approach to the application of any fees or penalties in this regard. These changes will not take effect before April 2025, to give the system some time to adjust.

My noble friend Lord Leigh also mentioned HMRC customer service. Noble Lords will have heard me say this before, and indeed I have had the discussion directly with HMRC: it acknowledges that its customer service levels are simply not as good as they should be. Levels on the phone and in the post are below service standards from last year. HMRC has been working very hard to improve services for those people who need to call, but encourages people to use the digital services as much as possible, as they can be very efficient and get very good ratings from customers.

My noble friend Lord Leigh once again brought up his minority sport—a very important sport—of EIS and VCT, and why these are being extended by regulation. He hinted about it being something to do with the Windsor Framework, the EU, Northern Ireland, and the trade and co-operation agreement, and he is right. These are important schemes, and the vast majority of UK subsidies will need to comply only with the UK’s domestic subsidy regime, as noble Lords would expect. The Windsor Framework also means that the EU-UK Trade and Cooperation Agreement will now serve as the primary framework governing subsidy control between the UK and the EU. For the EIS and the VCT scheme, we are engaging with the EU on approval for extension, due to Northern Ireland’s unique access to the EU single market. We are working to meet all relevant obligations. We believe that the systems are consistent with subsidy control principles and address evidence of market failure, and therefore we think those conversations will go well.

My noble friend mentioned the complexity of Pillar 2. I agree that it is complex and difficult to administer—it is necessarily complex, because of the wide variety of different corporate structures which exist. However, we are reassured that we have simplified processes as much as we possibly can, such that compliance from business will be at the sorts of levels that we want to see.

On stooge directors, as noble Lords would expect, these measures are targeted at the promoters of tax avoidance schemes. Stooges enable these promoters to hide their activities, and, frankly, that is not what we are after at all. The Government understand the need for strengthened HMRC powers to be proportionate and balanced. Those are the two words that are absolutely key. Nobody wants to put anybody in jail because they did something under the duress of somebody else.

The noble Lord, Lord Sikka, raised a number of points and many rhetorical questions, and, I suspect, lots of really good ideas for the Labour Party manifesto. I, unfortunately, cannot agree with much of what he said, particularly his insistence that the state needs to substantially increase investment which is traditionally private sector activity. The state does invest, but it invests in those areas where we feel it is right for the public sector to be investing. We believe that the private sector is much better at picking up that sort of investment.

The noble Lord seemed to imply that the Government have done nothing against tax avoidance and that it is all terrible out there, etcetera. I am afraid that is just not right. The amount of money lost to the Exchequer from tax avoidance has fallen from £3.6 billion in 2010—to pick a year—to £1.4 billion in 2021-22. That is a significant reduction in the amount of tax avoidance. Again, I do not expect the noble Lord to agree with me. He went on to ask me for specific examples. HMRC already prosecutes promoters. Since 2016, more than 20 individuals have been convicted of offences relating to arrangements which have been promoted and marketed as tax avoidance. Our interventions are working, and there are interventions in the Bill to make our levers stronger. This Government do not tolerate tax avoidance and we will do whatever we can to stop it.

The noble Baroness, Lady Kramer, raised a number of issues. I have already mentioned thresholds; from the Government’s perspective, we understand what had to happen over that time. She raised the issue of public spending, which I note is going up in real terms by 0.75% over the forecast period. What slightly concerns me now is the question of where it would stop. If it is going up in real terms every single year, after how many years would we say that that is enough? However, I also put it to her that, as important as productivity is in the public sector, in the private sector you would not get away with the lack of focus on productivity. That is why the Chief Secretary to the Treasury is looking at a productivity review across all areas of government, to ensure that public spending is the right amount. At the end of the day, the best way to increase the amount of money that we have available for public spending is to grow the economy, and that is exactly what this Government are doing.

The noble Baroness mentioned productivity. It has been estimated that supply-side measures from the Autumn Statement 2023 could close up to half of our productivity gap with France, Germany and the US. We feel that we are making good progress, investing in the right areas to improve productivity.

The noble Baroness mentioned climate change, which is incredibly important. It is also interesting that she mentioned Labour in her appeal to keep climate change front of mind, because Labour still has its very unachievable climate plans, with now literally no funding. It used to have £28 billion of funding, which shadow Front-Bench Members managed to commit to over 300 times. Unfortunately, that £28 billion has now disappeared, but all the policy seems to remain in the same place. That goes back to the point that the noble Lord, Lord Livermore, made. Apparently, in the stability, investment and something else he said—their plan to deliver, which I am still looking for the detail on—all Labour policies will be fully costed, apart from those on climate change. Is that right? I am looking forward to it. I do not know; the £28 billion has disappeared but the policies have not.

The noble Lord asked me to commit to certain things for the Conservative Party manifesto, which I will not do, but the Government have just introduced permanent full expensing. It would be a great surprise to me if, all of a sudden, it were to disappear again, because we believe that it is a very valuable thing to do.

The noble Lord mentioned non-domiciled individuals. I, too, am very interested in that and will keep an eye out for how much money will be raised from the changes to non-domiciled individuals’ tax arrangements. I suspect that it will not be anywhere close to the amount of money that Labour platitudes and unfunded promises will need as we head into the election. But we believe that non-UK domiciled individuals play an important role in funding our public services through their tax contributions. The Government want the UK to be a destination that will attract talented people to work and do business, and that includes people from overseas. It is only right that those who choose to live here for a long time pay their fair share of taxes—namely, that they cease to become non-domiciled.

I believe that I owe various noble Lords a letter, which I will ensure gets to them as soon as possible. In the meantime, I commend the Bill to the House.