Finance (No. 2) Bill (First sitting)

Debate between Lucy Rigby and James Wild

Committee stage
Tuesday 27th January 2026 Public Bill Committees

[Lucy Rigby]

Clause 13 significantly expands the enterprise management incentives scheme eligibility to allow greater access for scaling companies. Specifically, the changes made by the clause will expand the EMI company eligibility limits to maintain the world-leading nature of the scheme.

Government amendments 37 and 38 are consequential to the business asset disposal relief legislation, updating it to align with the EMI maximum holding period expansion provided by the clause. The change will significantly expand the EMI limits and expand access for scale-up companies.

New clause 24 would require reports to the House of Commons on the impact of the clause on recruitment and retention in qualifying companies, on high-growth and innovative businesses and on the Exchequer finances. The Government have published a tax information and impact note setting out the impact of the EMI expansion. That showed that the measure will cost £585 million in 2029-30. The expansion is expected to support an extra 1,800 of the highest growth scale-up companies over the next five years, allowing them to reward an estimated 70,000 more employees.

The Government keep all taxes under review, and monitor and evaluate tax policy changes on an ongoing basis. We have also launched a call for evidence to gather views from founders, entrepreneurs, scaling companies and investors on tax policy support for investment in high-growth UK companies.

[James Wild (North West Norfolk) (Con)]

It is a pleasure to serve under your chairship, Sir Roger, and on the Committee considering this 536-page doorstop of a Bill. We are grateful for the written contributions and evidence provided to the Committee, but I think the usual channels should consider having oral evidence sessions for future Finance Bills, so that people can make important representations on significant pieces of legislation.

I will turn to clause 13 and new clause 24 tabled in my name. We need to have an enterprise economy that incentivises investment. The tax regime clearly has an important role to play in helping to achieve that, and in doing so, backing much needed growth in the economy. Clause 13 amends the Income Tax (Earnings and Pensions) Act 2003 to expand the enterprise management incentives scheme. That scheme helps attract, keep and motivate staff by allowing employees to buy shares in the company with tax advantages. That includes no income tax or national insurance contributions at the time of grant and exercise, with gains eventually being taxed under the more favourable capital gains regime, rather than as income tax.

The changes in the clause should make it easier for start-ups and growing companies to use the enterprise management incentives scheme, helping them reward staff and link employees’ success to the company’s growth. That is something that we support and the British Private Equity and Venture Capital Association has also welcomed the change. The clause increases the company options limit from £3 million to £6 million, raises the gross asset limit from £30 million to £120 million, and doubles the employee limit from 250 to 500. It also extends the exercise period to 15 years. These are all welcome changes.

However, one important element that is not due to change under these provisions is that the scheme allows qualifying companies to grant employee share options up to a maximum value of £250,000 per individual. Has the Minister considered going further and raising the cap beyond £250,000 to attract the brightest and best to grow businesses?

In its report on competitiveness, published yesterday, TheCityUK states that,

“the UK’s tax schemes such as…Enterprise Management Incentives (EMI) offer lower relief thresholds and tighter eligibility than international equivalents such as the Qualified Small Business Stock regime in the US, weakening incentives to scale and retain activity domestically.”

I have tabled new clause 24, which would require the Government to assess and report to Parliament on the impact that the changes have on the recruitment and retention of skilled employees in qualifying companies, on high-growth and innovative companies and on the Exchequer.

The Minister referred to the tax information and impact note, but clearly that is a forecast of what the Government hope will happen, not a review of what has actually happened. I think that will be a debate that we have many times as we consider the Bill: a TIIN is not a review of what has actually happened. The numbers that the Minister gave may be higher or lower, but we need to have a post-implementation review.

According to the Budget 2025 policy costings, the objective is to increase eligibility to allow scale-ups, as well as start-ups, to access the scheme. That is, of course, something we support. Will the Minister commit to keeping the scheme under review to ensure it is delivering on its aims to support high-growth firms and to consider whether further action, such as on the individual threshold, is needed?

Given the substantial investment, can the Minister clarify what behavioural assumptions underpin these projections? How many companies just above the existing threshold are expected to utilise these expanded limits? The BVCA has said that the enterprise management incentives scheme is

“long overdue for reform: high growth companies are often unable to grant EMI options due to the constraints of the £30m gross assets and 250 employee limits.”

Does the Minister have figures showing how much these limits have actually restricted growth?

[Mr Joshua Reynolds (Maidenhead) (LD)]

It is a pleasure to serve under your chairmanship, Sir Roger, on what is not only my first Finance Bill Committee, but my first Bill Committee—a nice, simple one to start me off. The Liberal Democrats welcome the changes made by clause 13. We need to support our British start-ups and British start-up culture to grow and develop.

We would of course like the Government to go further than clause 13 in what they promise. We need to ensure that we have a British start-up culture where start-ups do not, after five or 10 years, head off to the United States, taking that capital and leaving the UK with a brain drain. I have only one question to the Minister: how can we go further to ensure that once we have implemented the Bill, we will be in a position to say that fantastic UK companies will not head overseas, taking that capital and culture with them?

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[James Wild]

Clauses 14 and 15 are a story of two halves. As the Chartered Institute of Taxation rather adeptly put it—we are grateful for its support in scrutinising the Bill—these changes give with one hand and take with the other. We support clause 14, but we have doubts about clause 15.

Both clauses deal with our risk capital schemes—the enterprise investment scheme and venture capital trusts. EIS was introduced in the UK in 1994 to stimulate economic growth and, along with VCTs, these Government-backed schemes encourage individuals to invest in smaller high-risk trading companies by offering tax reliefs on their investment. As a former adviser in the Department for Business, Innovation and Skills, I helped to develop these schemes, as well as the seed enterprise investment scheme. I recognise their importance.

As the venture capital industry has noted, these are essential tools in unlocking private capital for early-stage, high-growth UK businesses, which we all support, particularly in the knowledge-intensive sectors such as life sciences, clean energy and deep tech; however, companies now routinely require £20 million to £30 million in funding before they start to sell their products. The previous limits had prevented UK investors from following their initial investment with more capital, forcing businesses to turn to overseas capital too early. That is a problem I think we all want to fix.

The main difference between the schemes is that with EIS an investor buys shares directly in an eligible company, whereas with VCTs the investor buys shares in a listed fund-like vehicle, which then spreads their money across a portfolio of qualifying companies. These clauses increase the annual and lifetime investment limits for the EIS and VCTs in Great Britain and raise the gross asset thresholds for qualifying companies.

Clause 14 increases the annual and lifetime investment limits for the EIS and VCTs, and raises gross asset thresholds. These limits have not been uprated since 2018 for knowledge-intensive companies and 2015 for other companies. Now, all limits are being doubled, which is welcome. As we have heard, for both schemes, the limit will rise from £10 million to £20 million. The total amount that can be raised over time will increase to £40 million for those knowledge-intensive firms. The gross assets yield for qualifying companies will go up to £30 million before a share issue and £35 million thereafter. TheCityUK has said that schemes such as EIS remain vital for crowding in early-stage finance and these changes are welcomed by the industry.

Clause 15 heads somewhat in the opposite direction. This clause reduces the rate of income tax relief for investment in VCTs from 30% to 20%. This is where our doubts begin to grow. The 2025 Budget policy costings reveal a calculated trade-off. The increased limits in clause 14 will cost the Exchequer £60 million in 2027-28. Meanwhile, the reduction in VCT income tax relief will raise £125 million in the same year, delivering a net yield of approximately £65 million. The policy costings state that this rate reduction is intended to

“better balance the amount of upfront tax relief…and ensure funds are targeting the highest growth companies”,

but the costings’ own assumption that

“investors alter or reduce the way they invest into VCT”

is an acknowledgment that the relief cut will dampen investor appetite.

I am concerned by how much that tax increase will reduce investment in these high-growth companies that we all support. The British Private Equity & Venture Capital Association has been explicit about its concerns, warning that this reduction

“could lead to a decline in fundraising that would impact the high growth and high-risk investments that the Government is looking to encourage”.

VCTs are a key part of the UK’s capital mix, providing one of the few consistent sources of long-term equity for early-stage and scaling companies. Any reduction in their ability to raise funds would directly affect the pipeline of innovative businesses that the UK needs to grow.

The reduction in VCT relief to 20% creates a fundamental risk to venture capital funding, precisely when scale-ups face capital constraints. For early-stage companies dependent on VCT funding, the reduced relief translates directly into a higher cost of capital and reduced funding availability. The Budget relies heavily on revenue raising from less visible and more complex parts of the tax system. This VCT change exemplifies that approach, shifting costs to venture investors rather than implementing transparent broad-based taxation.

New clause 1 would require the Chancellor to report on the impact of the cuts to VCT allowance on early-stage investment volume, investor participation and international competitiveness. Given the Government’s own admission that this will alter investment behaviour, such reporting is essential, and I reiterate that a TIIN does not review what actually happens in practice. Amendment 29 would simply remove the provision in clause 15(2) that reduces the rate relief from 30% to 20%, keeping the relief at its current level to support investment in high-growth firms. I believe both amendments would be supported by industry and, subject to what the Minister says, I intend to press amendment 29 to a vote.

The Government are expanding VCT investment limits while simultaneously cutting the relief to 20%. How would the Minister address the concerns of the investment sector that the combined changes will dampen investor appetite for venture capital trusts at the very moment we need to encourage them?

[Lucy Rigby]

I welcome the shadow Minister’s welcoming of the majority of the changes that we are making. To address his criticism of what we are doing in relation to the venture capital trust income tax relief, I come back to the impetus behind this package of reforms as a whole on EMI, EIS and VCT, which is to make sure that the UK is the best to start, scale, list a company and to ensure that companies stay.

The specific change to VCT to reduce the income tax relief from 30% to 20% is to help rebalance the up-front tax reliefs offered across the schemes, where the VCT scheme offers tax relief on dividend income, which the EIS scheme investors do not get. VCTs tend to invest in larger, less risky, scaling companies compared with EIS scheme investors. The reduction in income tax relief therefore reflects the overall reduction in investment risk that comes with investing in later-stage companies.

It is important to bear in mind that the VCT scheme remains very generous with, as I said, 100% tax relief on dividend payments and 100% capital gains tax relief on the sale of shares, alongside that 20% income tax relief. I know that the shadow Minister does not like TIINs in general—he has made that point in the Chamber—but they do contain the full details of the assumptions and impacts, and indeed the policy rationale. I therefore commend clauses 14 and 15 and Government amendments 3 and 4 to the Committee, and ask that amendment 29 and new clause 1 be rejected.

Question put and agreed to.

Clause 14 accordingly ordered to stand part of the Bill.

Clause 15

Venture capital trusts: rate of relief and amounts and asset requirements

Amendment proposed: 29, in clause 15, page 10, line 23, leave out subsection (2).—(James Wild.)

This amendment would maintain the rate of income tax relief for investments into venture capital trusts at 30 per cent.

Question put, That the amendment be made.

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[Lucy Rigby]

Clause 16 will enable the existing enterprise management incentives scheme and company share option plan contracts agreed before 6 April 2028 to be amended to include a sale on the private intermittent securities and capital exchange system—known by its much more catchy acronym of PISCES—as an exercisable event, without losing the tax advantages. The legislation will have retrospective effect from 15 May 2025. In the interim, His Majesty’s Revenue and Customs will be able to use its collection and management powers to not collect tax on exercise.

That means that this change will benefit PISCES trading events that happen before the Finance Bill receives Royal Assent. The change will therefore support more employees of growing UK companies to access the tax advantages of EMIs, and ensures that the tax system keeps pace with innovation in the wider economy. It also, of course, supports the launch of PISCES, which will provide a key stepping stone for public markets, supporting our world-leading capital markets. I commend clause 16 to the Committee.

[James Wild]

As the Minister says, clause 16 addresses a specific but important matter by permitting employers to amend existing company share option plan and enterprise management incentives option agreements, to allow PISCES trading events to serve as exercisable events without sacrificing the valuable tax advantages. Employers frequently offer share options to employees in recognition of their service and commitment, and to grow their businesses, and when employees exercise such options, they naturally face income tax and national insurance consequences. To encourage this form of employee ownership, successive Governments have introduced tax-advantaged schemes, including CSOP and EMIs, that provide relief from those taxes when certain conditions are satisfied.

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[Lucy Rigby]

The purpose of the review, as I think is well known, was to bring the matter to a close for those who had not yet settled and paid their loan charge liability to HMRC. That by its very nature meant focusing on open cases and outstanding liabilities. The Liberal Democrat spokesman, the hon. Member for Maidenhead, referred to something like this happening again. I think we would all agree that we hope it does not. However, we would probably also agree that it is crucial that any resolution to this issue is fair to the wider tax-paying population that has never avoided tax.

The Government believe that this settlement opportunity is the most pragmatic solution to draw a line under the issue for as many individuals with outstanding liabilities as possible. The settlement opportunity being provided is substantially more generous than any opportunity HMRC has previously offered and will substantially reduce the outstanding liabilities of people who have yet to settle with HMRC, particularly those with the lowest liabilities. Most individuals, as I said, could see reductions of at least 50% in their outstanding loan charge liabilities. We estimate that 30% of individuals could have their liabilities written off entirely.

[James Wild]

In her opening remarks, the Minister referred to promoters of disguised remuneration schemes not being eligible for this settlement scheme, which I welcome. Perhaps she could update the Committee on whether HMRC is proactively pursuing such individuals, who caused such distress to my constituents and, of course, to people across the country who were sold schemes, advised that they were legitimate and had been agreed with HMRC, and then discovered they were not and have lost their homes and their life savings as a result.

[Lucy Rigby]

I managed to give way just before the end of my speech. The shadow Minister raises a good question and a fair point. Through the new measures and existing rules, HMRC will have powers that can result in criminal prosecution of promoters of tax avoidance, including the new universal stop regulation proposal, which will ban the promotion of the most fanciful schemes outright and allow the HMRC commissioners to ban by regulation the promotion of other arrangements that HMRC thinks will not work. We will consult on further measures to target promoters in early 2026—indeed, it is 2026 already, so the shadow Minister may assume that that will happen soon.

Amendment 9 agreed to.

Amendment made: 10, in clause 25, page 32, line 12, at end insert—

“‘shadow director’ has the meaning given by section 251 of the Companies Act 2006.”—(Lucy Rigby.)

This amendment inserts a definition for the purpose of Amendment 9.

Clause 25, as amended, ordered to stand part of the Bill.

Clause 26 ordered to stand part of the Bill.

Clause 27

Loan charge settlement scheme: supplementary

Amendment made: 11, in clause 27, page 33, line 15, at end insert—

“(da) adapting provision made under section 25(6), in cases where a settlement offer is made to a person who is not an individual, about the calculation of settlement amounts (including provision for the calculation to be different to what is required by section 25(6));”.—(Lucy Rigby.)

This amendment clarifies that the loan charge settlement scheme can provide for the calculation of the settlement amount to be adapted where a settlement offer is made to a person who is not an individual.

Clause 27, as amended, ordered to stand part of the Bill.

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[Lucy Rigby]

Clause 28 will reduce the main rate writing-down allowance for corporation tax and income tax, and clause 29 introduces a new first-year allowance available for expenditure on plant and machinery. As I am sure all hon. Members are aware, capital allowances allow businesses to write off the costs of capital assets, such as plant or machinery, against their taxable income. The UK continues to offer one of the most generous capital allowances systems globally and ranks top among OECD countries for plant and machinery capital allowances.

Clause 28 will reduce the main rate writing-down allowance from 18% to 14%, starting on 1 April 2026 for corporation tax and 6 April 2026 for income tax. That allows the Government to fund a new first-year allowance while also fairly raising revenue to protect the public finances. Clause 29 will introduce the new 40% first-year allowance, which will support future investment. The new allowance is available for expenditure on plant and machinery, including assets bought for leasing and assets bought by unincorporated businesses, from 1 January 2026.

The changes made by clauses 28 and 29 will raise approximately £1.5 billion per year by the end of the scorecard. The changes are UK-wide and will impact businesses with pools of historic main rate expenditure, which predate the introduction of the super-deduction or full expensing regimes for companies, as well as historic expenditure or future main rate expenditure that does not qualify for first-year allowances, or where first-year allowances were not claimed. We have heard the calls to expand full expensing to more assets and businesses. Although the fiscal climate limits what we can do now, the new first-year allowance moves us closer to that goal in a responsible way.

New clause 2 seeks to mandate reporting the impacts of clause 28 to the House. The Government have published documents much loved by the shadow Minister, the hon. Member for North West Norfolk—tax information and impact notes—setting out the impact of the reduction to main rate writing-down allowances, alongside the introduction of the new 40% first-year allowance. I therefore reject new clause 2 and commend clauses 28 and 29 to the Committee.

[James Wild]

I want to get on the record that I do not have a problem with TIINs, but they serve a different purpose from reviewing legislation after the event. I would not want any Treasury officials to feel that the Opposition do not value TIINs.

I will speak to clauses 28 and 29 as well as new clause 2, which is tabled in my name. Capital allowances are one of the primary mechanisms through which our tax system supports business investment. They enable firms to deduct the cost of purchasing plant and machinery from taxable profits, thereby reducing their tax liability and helping them to invest and grow, which we all support. The annual investment allowance is perhaps the most straightforward example. It allows businesses to deduct the full cost of most plant and machinery up to £1 million annually, in the same the year that the expenditure occurs.

Beyond that, there are the first-year allowances with no annual cap. The most generous of those is full expensing, which the Minister referred to, which provides a 100% deduction for qualifying main rate assets and a 50% allowance for certain special rate assets. Those measures were introduced by the previous Conservative Government in order to stimulate faster investment and drive up what have been, I think it is fair to say, historically low levels of business investment throughout all parties’ periods in government. I think that we are all committed to try and address that.

Where businesses cannot or choose not to utilise those more generous allowances, they rely on writing-down allowances. They spread tax relief over several years by permitting a set percentage of the remaining pool balance to be written off annually, with assets allocated to either a main rate or special rate pool, depending on their classification.

Clause 28 reduces the main rate from 18% to 14% a year, while the special rate remains at 6%. The relevant date is 1 April 2026 for corporation tax purposes, and 6 April 2026 for income tax. For periods straddling that change, a hybrid rate will apply. New clause 2 would require the Chancellor to produce a report that examines the impact of those reductions on business investment levels, capital investment sector employment, the manufacturing sector, small and medium-sized enterprises and public finances.

The 2025 Budget policy costing document presents that as a part of capital allowance reform, but the reduction in the main writing-down rate will alter the cash flow position of capital-intensive businesses, slowing the rate at which they can recover investment costs through tax relief. Businesses with substantial brought-forward main pool balances will see their tax relief decelerate, with corresponding impacts on cash flow and the overall tax benefit. For companies planning significant investment, timing has now become more important. This is yet another structural tax increase on businesses with large asset bases, which will now recover their investments more slowly.

Make UK has described this Budget as

“a case of two steps forward one step back for manufacturers.”

The 4% in reduction in the writing-down allowance is undeniably bad news for business. It is little wonder that polling by the Institute of Directors reveals that four in five business leaders view this Budget negatively, and I think that those findings were replicated across the Federation of Small Businesses, the CBI and many other business organisations. The delayed recovery of capital costs will constrain reinvestment in modernisation and automation, precisely when UK manufacturers are already facing strong headwinds, not least from the very high energy costs that they face in this country. The reduction from 18% to 14% will diminish the speed at which businesses can recover these costs. Has the Treasury assessed the impact on business investment intentions, particularly for small and medium-sized enterprises in manufacturing and logistics? If not, I am sure that the Minister looks forward to supporting new clause 2.

Clause 29 is an attempt to balance the changes made in clause 28. It introduces a new 40% first-year allowance from 1 January 2026 for new, unused main rate plant and machinery. The new allowance expands relief to unincorporated businesses and firms that buy assets to lease out, which do not qualify for full expensing or the 50% special rate allowance once they go over the £1 million annual investment allowance. The explanatory notes highlight that this new allowance represents an expansion to include leasing, which we welcome—those activities that have traditionally been excluded from such reliefs. The allowance is not available for special rate expenditure, second-hand or used machinery, expenditure under disqualifying regimes or general exclusions.

We support the expansion set out in this clause. While these measures may have good aims, introducing an additional rate adds some complexity to the system. There is also the length of the Finance Bill that we are considering—536 pages of dense text—and that we expect businesses and individuals across the country to comply with, else HMRC will come after them. I urge the Government to monitor closely the impact on business investment and to look at options for a more streamlined or neutral capital allowances structure in future. What steps are being taken to tell businesses about these new allowances and freedoms they have to invest in leased assets—for example, by working with business organisations to get the word out? Opposition Members will certainly do that with businesses in our constituencies.

The new allowance will provide some up-front support for qualifying new investment, partly offsetting the impact of reducing the main writing-down rate to 14%. Once again, the Government are giving with one hand and taking with the other. The uplift will be of use for unincorporated and leasing businesses, but for most other businesses with historical or non-qualifying assets, there is no uplift at all. They simply face a slower rate of relief, going down to 14%, stretching allowances over a longer period and affecting their cash flow.

The Minister referred to Office for Budget Responsibility forecasts that suggest these combined measures will cost businesses more than £1 billion in 2026–27, rising to around £1.5 billion a year thereafter. That is a significant burden at a time when companies are grappling with weak investment and, to put it bluntly, the higher costs imposed in the first Budget. The £20 billion jobs tax has had a big impact, as we saw in the data earlier this week and as we see in the number of graduates who are struggling to find jobs.

As I say, the inclusion of leasing is welcome, but we do think there is benefit in reviewing those measures after the event and coming back to Parliament to explain what has happened.

[Lucy Rigby]

The shadow Minister referred to the new 40% first-year allowance, which is bringing forward relief for the leasing sector and unincorporated businesses, which have historically been carved out of the first-year allowance. In doing so, it allows for immediate relief on a significant amount of their investment from their corporation tax or income tax bill in the year in which they make that investment.

As the Chancellor has repeatedly made clear, the fiscal environment is challenging. We cannot make unfunded commitments on tax. The shadow Minister referred earlier to being an adviser to the previous Government, which is not, I suspect, to suggest that he had a role in creating the fiscal environment that we unfortunately inherited from the previous Government. We have heard the calls to expand full expensing to more assets and businesses. When the fiscal climate allows us to do so, we will look into that.

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[Lucy Rigby]

Clause 30 will extend the 100% first-year allowance for qualifying expenditure on zero emission cars and plant or machinery for electric vehicle charge points by a further year to April 2027. More specifically, it will extend the availability of these capital allowances to 31 March 2027 for CT purposes and 5 April 2027 for income tax purposes, ensuring that investments in zero emission cars and charge point infrastructure continue to receive the most generous capital allowance treatment.

New clause 3 would require the Chancellor to review and report on the impact of the expiry in 2027 of the 100% first-year allowances made under clause 30, including the case for ongoing capital allowance support for zero emission cars and electric vehicle charging points. Alongside the 2025 Budget, in which the extension was announced, a policy costings document and a TIIN were published that set out the expected economic, business and other impacts of the changes, including impacts on incentivising businesses to purchase zero emission vehicles. Those documents are of course available online.

The Government annually review the rates and thresholds of taxes and reliefs to ensure that they are appropriate and reflect the current state of the economy. For that reason, new clause 3 is unnecessary. I commend clause 30 to the Committee, and ask that new clause 3 be rejected.

[James Wild]

As we have heard, clause 30 will extend the 100% first-year allowance for expenditure on zero emission cars, including EVs, and EV charging points. As the Minister said, the extension runs for a year to March 2027 for corporation tax and April 2027 for income tax purposes. Our new clause, consistent with other amendments that we have tabled, would simply ask the Chancellor to come back and report to Parliament, and to the public, on the impact of her measures. I do not really understand this reluctance to understand the actual impact of the measures. As part of the Government’s broader regulatory reform approach, they seem keen on post-implementation reviews, but the Treasury holds out alone against its homework being scored, it would seem. We want to consider whether long-term support should continue to be provided to maintain UK competitiveness in green technology. It is, in essence, a call for evidence that could make a difference to business confidence and investment.

The allowance was first introduced in 2002 for low emission cars, and the threshold was tightened over time, reaching zero emissions from April 2021. The extension continues that policy, but only for a year, and the Government’s own costings suggest that the extension will cost £145 million. Businesses planning multi-year fleet transitions and charging infrastructure investments face repeated cliff edges. Each year, a one-year window does not help a company planning to electrify its fleet in two years’ time; it simply rewards those who are able to accelerate the investment within the next 12 months.

Does the Minister recognise that it creates a stop-start approach that could discourage investment, undermine industry confidence and, ultimately, slow the UK’s transition to clean, green technology? That is odd when, in many ways, the Government are accelerating full throttle towards 2030 electrification across the grid. Members may have pylons and other pieces of grid infrastructure being dumped in their constituencies, with no public recourse, in the name of the Energy Secretary’s net zero goals. It is worth asking whether their policy is joined up if it includes these incremental extensions.

In that spirit, I have tabled new clause 3 so that hon. Members can judge whether the Government have a coherent approach. It would require the Chancellor to assess, transparently and on the record, whether a long-term support system is justified to keep Britain competitive in the global race for green manufacturing. A formal assessment would give Parliament and businesses the information they need to plan ahead.

In the debate on clause 11, the Minister referred to the long-term certainty provided by committing to a 25% corporation tax rate for this Parliament. Of course, that is not actually in the legislation, but we welcome that commitment and the greater certainty, and similar certainty could be given in this area. A formal assessment could also ensure that public money is being used wisely and that policy provides the certainty to unlock the investment we all want to see.

Given their 2030 obsession, why have the Government again chosen a one-year extension that provides limited certainty for fleet operators or for the charging infrastructure sector? I see that the hon. Member for Banbury is getting ready to dive into the debate. Will the Minister support new clause 3 and commit to a proper assessment of the lasting framework that is needed to secure Britain’s place in the green technology economy of the future?

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[Lucy Rigby]

Clause 34 makes a minor legislative amendment to the R&D tax relief rules to put beyond doubt that the overseas restrictions apply to R&D expenditure credit claimants with a registered office in Northern Ireland. The Government are making this amendment to provide clarity to businesses and ensure that the legislation aligns with the original policy intent of the Finance Act 2025. I commend clause 34 to the Committee.

[James Wild]

Clause 34 will amend the Corporation Tax Act 2009 to clarify restrictions on relief for overseas R&D applied to companies across the entire United Kingdom, including Northern Ireland and Great Britain. It applies retrospectively on claims made on or after October 2024. It puts beyond doubt that the geographical restriction on R&D expenditure credit relief applies uniformly across all jurisdictions. Can the Minister confirm that, notwithstanding this clarification, exemptions under the enhanced R&D intensive support scheme still apply to firms based in Northern Ireland?

[Lucy Rigby]

I thank the shadow Minister for his question. The Government are committed to supporting R&D investment across the UK through R&D tax reliefs; they of course play a vital role in supporting the mission to boost economic growth, which he will know is this Government’s No. 1 priority.

The legislation clarifies that the rules are the same for all R&D expenditure credit companies across the UK. The overseas restriction was introduced in regulations in 2024 before being included in the Finance Act 2025. It was always intended to apply to R&D expenditure credit claimants across the UK, so the change is purely to clarify the Finance Act 2025 to put that position beyond all doubt.

Question put and agreed to.

Clause 34 accordingly ordered to stand part of the Bill.

Clause 35

Restriction of relief on disposals to employee-ownership trusts

Question proposed, That the clause stand part of the Bill.

Finance (No. 2) Bill (Second sitting)

Debate between Lucy Rigby and James Wild

Committee stage
Tuesday 27th January 2026 Public Bill Committees

[Lucy Rigby]

Clause 42 abolishes the notional tax credit available to non-UK residents on UK company dividends. That credit no longer serves a purpose, under the modern dividend taxation system, and the change brings non-UK residents in line with UK residents, who do not receive the notional tax credit. It will impact fewer than 1,000 non-UK resident individuals who have UK dividend income and other UK income, such as property or partnership income, a year. The clause removes the outdated notional tax credit for non-UK residents receiving UK dividends, aligning their position with that of UK residents. I commend the clause to the Committee.

[James Wild (North West Norfolk) (Con)]

As the Minister says, clause 42 abolishes the notional tax credit that non-residents have historically been able to claim on their UK dividend income. Under the current system, non-domiciled individuals can offset that notional credit against other UK income streams, such as rented income or partnership profits. However, from April, that arrangement will no longer apply. Non-residents will no longer be treated as having already paid UK tax on dividends received from UK companies, meaning that they will lose the ability to reduce their overall UK tax liability from using the credit.

It is worth noting that UK residents lost access to the notional dividend tax credit back in April 2016, so in one sense the clause simply removes what is perceived as a potential unfair advantage enjoyed by non-UK residents. The disregarded income regime will continue to operate, providing some limitation on the tax paid by non-residents in specific circumstances.

We need to look at the clause, and the ones coming up, in the broader context. It represents a shift in how UK tax dividends flow to foreign investors and, in practice, it will effectively increase the tax rate burden on dividend recipients who are non-UK residents. At a time when the UK needs to attract international capital, we need to look at the measures in the Budget as a whole and whether they strengthen or undermine our competitive position. Attracting capital to be invested was a topic that we discussed this morning. International investors might be forgiven for concluding that the Chancellor is creating a tax and regulatory environment that feels increasingly unpredictable compared with some of our international competitors. Stability and certainty matter enormously in investment decisions. [Interruption.]

The Chartered Institute of Taxation has also raised concerns about the figures underlying this policy. The Treasury estimates in the famous tax information and impact note, which was referred to by the Minister, that fewer than 1,000 resident individuals will be affected. The institute has questioned whether that can be accurate, given what its professional members are seeing on the ground. There is particular uncertainty about whether non-resident trust taxpayers have been properly included within those calculations. I welcome a response and assurance from the Minister either way on that. That said, even the institute agrees that those impacted will represent a small minority of the overall non-resident taxpayer population. We concur that this charge brings a welcome simplification to tax calculations.

[Lucy Rigby]

Again, I welcome the shadow Minister’s support for these measures. However, he is absolutely wrong to suggest that these measures and the broader package will discourage foreign investment in UK companies. He will have heard the titter of laughter when he talked about the importance of stability—that not being something that was provided by his party at all when it was in government. The removal of the notional tax credit will not discourage foreign investment in UK companies, as it will not impact the overwhelming majority of overseas investors who remain outside the scope of UK tax.

In order to be affected by the measure, overseas investors will also need to have other taxable UK income, typically rental income or partnership income. If they do not have that, their dividends will not be taxable in the UK while they remain overseas. The shadow Minister is right to refer to my earlier figure that fewer than 1,000 non-resident individuals have taxable UK income in addition to their UK dividends, and that remains the figure that we are working with.

Question put and agreed to.

Clause 42 accordingly ordered to stand part of the Bill.

Clause 43

Non-resident, and previously non-domiciled individuals

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[James Wild]

Clause 45 will extend the PAYE notification process to include treaty non-residents and introduce the 30% cap, to which the Minister referred, on overseas workday relief that can be claimed through PAYE. In simple terms, clause 45 and schedule 4 will change how employers operate PAYE for people who move to the UK but are treated as resident in another country under a tax treaty. The clause will let employers agree with HMRC that the part of the employee’s salary that is expected to be exempt overseas be left out of PAYE during the year, and it will formally limit how much foreign employment relief can be given to 30%.

The changes under the clause will require employers to send further notification to HMRC whenever there is a change in the employee’s circumstances that affects the proportion of earnings subject to PAYE. That sounds reasonable in practice, but I want an assurance from the Minister about the potential administrative burden that it will place on employers. It could mean that employers will now be expected to monitor the day-to-day working practices of globally mobile working employees. They will need to track whether individuals are working from home or from a hotel room in Boston, which is not necessarily a simple task. For multinational companies with hundreds of employees, this represents a potentially significant compliance burden at a time when we want to reduce the burdens on business. For smaller businesses venturing into international markets for the first time, it could be a disincentive—indeed, a barrier—to their trying to do so.

The Government must provide clear, comprehensive guidance on exactly what level of review and monitoring employers are expected to undertake not to fall foul of the rules. Without that clarity and guidance, we risk creating a compliance minefield in which well-meaning employers inadvertently break rules that they could not reasonably be expected to follow. Guidance can help employers to comply with the law, as we all want them to do.

The Government like to talk about making Britain the best place to do business and to champion our competitive advantage in attracting global talent—we have just discussed one area in which that may or may not be the reality—but we should seek to avoid introducing measures that potentially add to the compliance burden without giving guidance to employers. I hope that the Minister can assure the Committee that she will look at the case for publishing clear guidance to ensure that businesses are not adversely impacted.

[Lucy Rigby]

I can confirm that guidance will be forthcoming, and I am absolutely sure that it will be clear. I am also pleased to confirm that there will be no additional administrative burden on employers, because employers already have to enter a percentage figure on the PAYE notification form; as I say, this change will just require them to limit the in-year relief provided to no more than 30%. The guidance will be given to employers in April when the changes go live.

Question put and agreed to.

Clause 45 accordingly ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 46

Unassessed transfer pricing profits

Question proposed, That the clause stand part of the Bill.

[Lucy Rigby]

Clause 46 will introduce a new corporation tax assessing provision for unassessed transfer pricing profits. It will replace the diverted profits tax, a stand-alone tax that will be repealed in its entirety, providing a significant simplification.

The changes made by the clause will make the rules clearer and more straightforward for businesses to implement, and will support access to treaty benefits, including relief from double taxation under the mutual agreement procedure. The removal of the diverted profits tax as a stand-alone tax is a very significant simplification, and bringing the rules into the corporation tax framework will clarify the interaction with transfer pricing and access to treaty benefits. I therefore commend clause 46 and schedule 5 to the Committee.

[James Wild]

The clause introduces schedule 5, which will repeal the diverted profits tax and replace it with new rules to tax unassessed transfer pricing profits within the corporation tax regime, coming into effect for periods beginning on or after 1 January. The diverted profits tax will continue to apply for prior accounting periods. In effect, the clause creates a higher tax charge on profits that should have been taxed here, but were shifted out of the UK by using non-market prices between groups.

Like the DPT, the new transfer pricing profits rules are intended to target structured arrangements that are designed to erode the UK tax base by omitting profits that are subject to transfer pricing. These unassessed transfer pricing profits will be taxed at a rate that is six percentage points higher than corporation tax. In simple terms, if a global business structures its arrangements to shift profits from the UK in a pricing manipulation, HMRC will be able to bring those diverted profits into UK tax at a higher, penalty-style rate.

In principle, we support that approach. Moving away from the stand-alone tax and bringing diverted profits under corporation tax provides better treaty access and clarity, and clearly the six percentage point charge works as a deterrent, as countries that play games with their transfer policies will risk paying more tax than if they had priced their UK dealings properly in the first place. However, I would welcome the Minister’s response to the concerns that the Chartered Institute of Taxation has raised about the drafting of the clause.

First, the new tax design condition is very broad: it captures transactions designed to reduce, eliminate or delay UK tax liability. There is a question as to whether legitimate commercial decisions made for regulatory compliance or capital requirements could be caught by the condition simply because they are deliberate and happen to reduce tax liability, even when tax planning is not the primary motive. I know that is not the intention behind the drafting, but that point has been raised, so I hope that the Minister will respond in order to avoid any uncertainty as to whether businesses that think they are operating within the law, without seeking to reduce, eliminate or delay tax liability, may be captured.

Will the existing arrangements be grandfathered? Can HMRC revisit settled positions under these broader rules? As the Chartered Institute of Taxation rightly says, it is unsatisfactory to pass legislation with a wide definition and simply hope that HMRC guidance and rules will narrow it down later. That is not how we in Parliament should legislate. We discussed the loan charge during this morning’s sitting; HMRC applied rules in a way that most MPs did not consider reasonable, and we have now had to make changes through this Bill to address that historical issue. The law should be made clear in the Bill, not left to administrative interpretation.

I would be grateful if the Minister confirmed how many multinational companies HMRC estimates are using pricing manipulation to avoid tax. Can she guarantee that legitimate business structures that have previously been accepted by HMRC under the DPT will not suddenly fall foul of the scope of the new rules? Will she also comment on the main purpose test, to provide clarity and certainty for businesses?

[Lucy Rigby]

I hope that what I am about to say will provide a good deal of reassurance to the shadow Minister. The purpose of the reform was to simplify the legislation and bring the regime into the corporation tax framework. There is no intention at all to change the scope of the regime.

I appreciate that the question as to when the reforms will come into effect is of some importance. I can confirm that they will take effect for chargeable periods beginning on or after 1 January 2026. For prior periods, the diverted profits tax will continue to apply.

The shadow Minister asked how many companies would be affected. I am afraid that I do not have the statistics to hand, but I can investigate and confirm them to him in writing.

Question put and agreed to.

Clause 46 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 47

Transfer pricing reform

Question proposed, That the clause stand part of the Bill.

[Lucy Rigby]

Clause 47 will simplify the UK’s transfer pricing rules, which protect our tax base by ensuring that transactions between UK companies and related parties are priced appropriately. The changes made by the clause include the general repeal of UK-to-UK transfer pricing where there is no risk of tax loss. This will provide a meaningful simplification for businesses. Alongside it, amendments have been made to the participation condition, intangibles, commissioners’ sanctions, interpretation in accordance with OECD principles, and financial transactions.

Government amendment 20 will ensure the consistent use of terminology with respect to financial transactions throughout the legislation.

The changes made by the clause will update UK law in line with international standards, will reduce compliance obligations and will address areas of potential legislative weakness. I commend clause 47, schedule 6 and Government amendment 20 to the Committee.

[James Wild]

Clause 47 and schedule 6 mark an evolution in the UK’s transfer pricing regime. The Opposition recognise the importance of getting this right: it goes to the heart of how multinational profits are attributed and taxed, and therefore how we ensure that companies pay the correct amount of tax in this country. The principle behind transfer pricing is simple, even if it is rarely simple in practice. I believe that these measures flow from a consultation process launched by the last Conservative Government, so they have a good origin. I hope that they will lead to greater certainty and reduce the burden that some companies may face.

[Lucy Rigby]

I confirm that the shadow Minister is right about the origin of the proposals and the date of the consultation. It is entirely right that we are bringing UK transfer pricing legislation up to date; it was last materially updated in 2004, so it is high time that these rules were updated.

Question put and agreed to.

Clause 47 accordingly ordered to stand part of the Bill.

Schedule 6

Transfer pricing

Amendment made: 20, in schedule 6, page 318, line 41, at end insert—

“(ba) in subsection (4)(b), for ‘issuing company’, in both places it occurs, substitute ‘borrower’,”.—(Lucy Rigby.)

The amendment deals with a missing consequential change to section 154 of the Taxation (International and Other Provisions) Act 2010 (transfer pricing).

Schedule 6, as amended, agreed to.

--- Later in debate ---

[James Wild]

New clause 4 stands in my name and that of my hon. Friend the Member for Wyre Forest. As the Minister says, clause 48 introduces a power for HMRC to implement a new reporting obligation: the ICTS, which will come into force in 2027.

This new power would require businesses engaged in significant cross-border transactions to disclose specified information about their dealings. Rightly, the intention is to give HMRC better tools to identify transfer pricing and international tax risks that could affect the tax take, and to allow it to conduct more efficient and better-targeted compliance activity. I recognise that objective and support it in principle. I agree that the ICTS could help HMRC to identify risk earlier and to avoid wasting the time of the Department and businesses. Chasing down questions and embarking on inquiries can often lead nowhere and can cost businesses time that could be spent on growing their business.

However, it is also important that the Government explain how the system will work in practice and how it will be seen to work. Our new clause 4 would therefore require a report on the impact of these changes on cross-border trade and the administrative burden on businesses.

During the consultation last year, the Treasury acknowledged that more needed to be said about how the data collected through the ICTS system would be used and how it would fit alongside existing obligations such as master and local files. That remains a crucial point of detail that the industry and advisers will be looking for as this measure is implemented. Can the Minister shed some light on those concerns today?

As the Minister rightly says, most major economies already have some equivalent form of reporting, but it should be pointed out that the differences between them are significant. Australia, for example, operates a single transaction-driven disclosure process through its international dealings schedule; the United States of America relies on a more fragmented, relationship-based approach spread across multiple forms. Each system clearly has its benefits and disadvantages. What matters is that each country has a clear, consistent model to which businesses can understand and readily adapt.

What the Government seem to be proposing is a hybrid. That might mean that we have the best of both worlds—let us all hope so—but it might also lead to an approach that is inconsistent with the systems that some multinationals already have.

The Treasury has said that it will consult on detailed regulations in the spring of this year. We welcome that commitment. Can the Minister give an assurance that she will make sure that businesses and representative bodies will be closely involved in shaping how the system is put into practice? With the planned 2027 start date, there is not a lot of time to get the rules in place or for companies to build or modify systems to provide the new data. Can that be done without causing undue cost and disruption to businesses?

Finally, I want to make a slighter broader point on the clause. We clearly understand the importance of robust compliance and the need to protect the UK tax base on behalf of our constituents so that we can deliver public services. However, each new requirement—whether it is the ICTS, pillar two returns or transfer pricing documentation—adds to the cumulative impact on businesses.

We need to see these obligations in the round, not as each one being reasonable on its own terms. What is the overall picture of what we are imposing on companies? If that load becomes too great, the UK will be seen as a less attractive place to invest, which is certainly not what we want. Although we support the principle of better risk assessment, we continue to press Ministers to ensure that we have proportionate and workable solutions that add value for HMRC, businesses and our constituents. New clause 4 would simply require a report setting out those impacts.

I would add that, according to the Budget costings, the reporting duty would raise around £25 million in 2026-27, growing to £350 million a year, helping HMRC to tackle artificial profit shifting. That is welcome, but we should also consider the one-off and ongoing costs for businesses that have to re-engineer their systems. I would be grateful for the Minister’s response to my points about implementation and whether the hybrid model will actually be the best of both worlds.

[Lucy Rigby]

The ICTS will help HMRC to focus compliance resources, as has been discussed, on the most meaningful transfer pricing risks. We think that it will also lead to greater efficiencies by encouraging up-front compliance and reducing the length of transfer pricing inquiries. Those outcomes will benefit the compliance of taxpayers and HMRC.

Clause 48 gives the commissioners of HMRC the power to issue regulations that will determine the detailed design of the ICTS, including the information to be provided, the format of the schedule and the commencement date of the filing obligation. A consultation was held in 2025, and we will carry out a technical consultation on the draft regulations in spring 2026. The obligation is expected to take effect for accounting periods beginning on or after 1 January 2027, which is designed to allow time for businesses to adapt to what they need to do.

The shadow Minister suggested that the proposal will lead to an administrative burden; actually, it is intended to mitigate additional administrative burdens by requiring the reporting of readily available objective information. We will continue to be guided by these principles as we move into the detailed design phase, working—as one would expect—with affected businesses.

Question put and agreed to.

Clause 48 accordingly ordered to stand part of the Bill.

Clause 49

Permanent establishments

Question proposed, That the clause stand part of the Bill.

[Lucy Rigby]

Clause 49 modernises and simplifies the UK’s law on permanent establishments, which governs how the UK taxes non-residents who are carrying out business here. Specifically, the changes made by clause 49 reduce uncertainty over how profit should be attributed to permanent establishments under UK law. The greater clarity provided by these changes, in the same way as the previous clause, will assist taxpayers and HMRC by offering greater clarity. I commend clause 49 and schedule 7 to the Committee.

[James Wild]

Clause 49 and schedule 7 make changes to the rules that decide, where a company has a permanent establishment in the UK, how its profits are then taxed and when they apply. The Minister talked about modernising and simplifying the rules to bring them into line with international best practice.

To clarify, in November 2025 the OECD published new guidance on the definition of a “permanent establishment”. Can the Minister confirm whether the UK’s current approach reflects that updated guidance, as I have been advised that it does not? Some expert bodies have pointed out that the OECD changes are generally helpful and would bring more consistency across countries, so does the Minister agree that it would make sense for the UK to broadly adopt them? Is that the Government’s approach, or have they deliberately decided to have a set of UK rules? If so, what is the purpose of that, considering that we might be dealing with multinational companies operating in multiple jurisdictions that would have to follow separate rules when the OECD has brought together a coherent package?

--- Later in debate ---

[Lucy Rigby]

Just to warn anyone who is not aware, clause 50 and schedule 8 are not the shortest. The changes they make are technical, but very important. Paragraphs 20 to 22 of schedule 8 prevent multinationals from trying to reduce their pillar two liability by entering into favourable tax arrangements to create pre-regime deferred tax assets or liabilities. Paragraphs 24, 25 and 34 ensure that the profits and losses relating to a UK real estate investment trust are excluded from the charge to domestic top-up tax to avoid double taxation. Paragraph 32 allows the UK to recognise the qualifying undertaxed profit rules of other jurisdictions before the OECD inclusive framework has completed a formal peer review.

Paragraphs 36 and 37 provide for a payment for group relief to be treated as a covered tax amount for domestic top-up tax purposes. Paragraph 39 reduces compliance burdens for smaller or non-material entities within a multinational group. Finally, paragraphs 2, 3, 6 to 12 and 16 to 19 update the rules on flow-through entities, permanent establishments, intragroup amounts and cross-border allocations of deferred tax so that the regime operates more smoothly in practice.

Taxpayers can elect for most amendments to apply retrospectively from the introduction of pillar two on 31 December 2023. However, taxpayers cannot select individual amendments to apply retrospectively; one election covers the whole package to prevent cherry-picking of favourable amendments. I should remind Members that, in line with the written ministerial statement of 7 January 2026, the clause does not include any amendments connected with the publication of the side-by-side agreement by the OECD/G20 inclusive framework earlier this month. The Government will introduce legislation to do that in the next Finance Bill following a technical consultation.

Government amendment 23 ensures that the legislation works as intended by making a small correction to legislative references used. Government amendments 21, 22 and 24 temporarily extend the deadline for making elections to give taxpayers more time to bed in the new IT systems needed to meet their filing obligations.

New clause 5 would require the Chancellor to review those technical amendments to the pillar two rules every six months and report on the international implementation of pillar two, among other things. We have already committed to the implementation of pillar two, which, as hon. Members will know, aims to ensure that large multinationals pay their fair share of tax. As a matter of course, the Government keep all areas of tax policy under review, so I reject the new clause.

Taken together, these changes implement internationally agreed changes, respond to taxpayer consultation, and ensure that the pillar two rules continue to be effective and administrable in the UK. I therefore commend clause 50 and schedule 8, together with Government amendments 21 to 24, to the Committee.

[James Wild]

I rise to speak to clause 50 and to new clause 5, which is in my name. Clause 50 will amend parts of the Finance (No. 2) Act 2023 and implement the multinational top-up tax and domestic top-up tax. As I set out in the last Finance Bill Committee, in October 2021 more than 135 countries signed up to the G20/OECD agreement on reforming international transactions and taxation, which the clause refers to—a major achievement that aims to ensure that multinational groups pay a fair share of tax where they generate profits. Pillar two delivers a minimum global effective tax rate of 15% for large multinational groups in every country they operate in, and the UK has been one of the first jurisdictions to legislate for the changes.

New clause 5 would require the Chancellor to review the changes on a six-monthly basis and lay before Parliament a report assessing three key issues: whether other major economies are implementing pillar two on comparable timelines and with comparable scope, whether any competitive disadvantage is arising for UK-based multinationals, and the impact of differentiated treatment for the United States. Crucially, if that review identified a material competitive disadvantage to the UK and UK businesses, the Treasury would be obliged to provide remedial measures within three months.

In rejecting new clause 5—another new clause that asks for a review—the Minister says that the Treasury is always conducting regular reviews of measures. If it is conducting this work anyway, why not share it with Parliament, and accept that it is a proportionate step to ensure ongoing parliamentary scrutiny in a very important area—a level playing field for British firms? The Minister referred to the length of the schedule. The sheer volume of amendments, coming less than two years after pillar two was first introduced, highlights the extreme technical complexity of the global minimum tax and the challenges for businesses that have to comply with it to keep up to date.

The Government’s aim is to ensure that UK rules remain consistent with the OECD model legislation, and schedule 8 is therefore aligned with the guidance and technical fixes. Those are sensible to maintain international consistency, but throughout last year there was growing international uncertainty about pillar two, the subject of the clause, as political divergence emerged over how it should operate, particularly regarding the treatment of US-parented companies.

The Minister referred to the side-by-side agreement made between G7 Governments last summer—and formalised, I think, this month—allowing certain UK and US multinationals to be exempt from parts of the rules while retaining access to the newly defined safe harbours. The agreement might bring some short-term stability, but it raises questions, and clearly we will be scrutinising it when, as the Minister said, it comes forward in future legislation. The US Treasury Secretary has described the side-by-side deal as

“a historic victory in preserving US sovereignty and protecting American workers and businesses from extraterritorial overreach.”

Will the Minister comment on what pillar two means in that context and on the UK’s position?

The impacts that might flow from that are precisely why new clause 5 is needed. The Government say that the UK is aligned with international developments, but the international landscape is shifting. Other major economies have delayed implementation or have adopted narrower regimes; meanwhile, the US has its own agreement and has not legislated for this framework at all. Without scrutiny, the risk is that UK-headquartered multinationals will find themselves complying with complex and burdensome rules, while their competitors operating elsewhere face a lighter regime. I simply note that the Chartered Institute of Taxation pointed out that it thinks the burdens of pillar two

“continue to appear disproportionate to the amount of tax that will be raised”.

If the Government truly believe that the regime provides a balanced and proportionate approach to a level playing field and that we can be assured that the competitive advantage does not go to other countries, let us have that report, see it set out to Parliament and have the matter resolved. To conclude, international co-operation on tax is essential, but we need to ensure not only that the UK is honouring its commitments, but that other countries are meeting theirs, so that UK companies are not losing out as a result.

[Lucy Rigby]

I am grateful to the shadow Minister for his comments. International co-operation on such matters, as he said, is extremely important. The side-by-side agreement, as I have made clear, will be the subject of future legislation, which will be the opportunity for scrutiny. However, as I also made clear, that agreement ensures that all large multinationals will pay their fair share of tax through the application of pillar two and pre-existing minimum tax rules, while offering welcome simplification and stability to UK businesses.

We have to be clear that US multinationals, like every other multinational company, are still subject to the UK’s 25% corporation tax on the profits that they make in the UK. They are also still subject to the UK’s domestic minimum tax rate of 15%. We recognise that a degree of complexity is inherent in pillar two, but we must not forget that it applies only to large multinational businesses and that it is needed to stop businesses shifting their profits to low-tax jurisdictions and not paying their fair share of tax in the UK. I think the shadow Minister acknowledges that that is exactly why we need it.

That being said, in relation to the complexity, the UK continues to be a strong proponent of work to develop simplification of the system, including the recently agreed permanent safe harbour. As stated in our “Corporate Tax Roadmap”, the Government will also consider

“opportunities for simplification or rationalisation of the UK’s rules for taxing cross-border activities”

following the introduction of pillar two.

Question put and agreed to.

Clause 50 accordingly ordered to stand part of the Bill.

Schedule 8

Pillar Two

Amendments made: 21, in schedule 8, page 358, line 9, leave out “50” and insert “50A”.

This amendment is consequential on Amendment 22.

Amendment 22, in schedule 8, page 379, line 26, at end insert—

“50A In Schedule 16 (multinational top-up tax: transitional provision), after paragraph 2 insert—

‘Transitional extension to deadline for elections

2A (1) Schedule 15 (multinational top-up tax: elections) has effect in its application to a pre-2026 election as if in paragraphs 1(2)(b) and 2(2)(b) of that Schedule for “no later than” there were substituted “before the end of the period of 12 months beginning with the day after”.

(2) In sub-paragraph (1), a “pre-2026 election” means an election which specifies an accounting period ending before 31 December 2025 as—

(a) in the case of an election to which paragraph 1 of Schedule 15 applies, the first accounting period for which the election is to have effect, or

(b) in the case of an election to which paragraph 2 of Schedule 15 applies, the accounting period for which the election is to have effect.’”

This amendment extends the deadline for making an election to which Schedule 15 of the Finance (No. 2) Act 2023 applies in cases where the election specifies an accounting period ending before 31 December 2025.

Amendment 23, in schedule 8, page 379, line 27, leave out paragraph 51 and insert—

“51 (1) In FA 1989, in section 178 (setting of rates of interest), subsection (2) is amended as follows.

(2) In paragraph (x)—

(a) for ‘51’ substitute ‘33A’;

(b) after ‘Finance’ insert ‘(No.2)’;

(3) In paragraph (y), for ‘51’ substitute ‘33A’.”

This amendment deals with a consequential amendment that was missed when paragraph 33A was inserted in Schedule 14 to the Finance (No.2) Act 2023 by the Finance Act 2024.

Amendment 24, in schedule 8, page 379, line 38, at end insert—

“(3A) The amendment made by paragraph 50A has effect in relation to accounting periods beginning on or after 31 December 2023.”—(Lucy Rigby.)

This amendment provides for the amendment inserted by Amendment 22 to have effect in relation to accounting periods beginning on or after 31 December 2023.

Schedule 8, as amended, agreed to.

Clause 51

Controlled foreign companies: interest on reversal of state aid recovery

Question proposed, That the clause stand part of the Bill.

[Lucy Rigby]

The clause makes changes to ensure sufficient repayment interest is paid to affected companies following a successful challenge of a European Commission decision. It provides that interest is also paid on the amounts of late-payment interest that were recovered and are now repayable. It will affect a small number of UK companies that had amounts collected and later repaid following the successful challenge of the Commission decision. The changes are expected to have a negligible impact on the Exchequer.

[James Wild]

As the Minister said, this is a fairly straightforward measure allowing HMRC to pay interest to companies that have had to hand over money under a now overturned EU state aid ruling relating to the controlled foreign company rules. The 2019 ruling was subsequently annulled. My only question for the Minister is: does the clause mark the final chapter in the UK’s compliance with the EU state aid rules relating to the controlled foreign companies regime, or could other outstanding matters give rise to further issues or payments?

[Lucy Rigby]

The shadow Minister will appreciate that it is a requirement of UK domestic legislation to put companies in the position that they would have been in had the recovery legislation not been introduced, and it is that principle on which the clause is based.

Question put and agreed to.

Clause 51 accordingly ordered to stand part of the Bill.

Clause 52

Legacies to charities to be within scope of tax

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Lucy Rigby]

Clause 52, in combination with the other clauses in the Bill, will support the Government’s aims of closing the tax gap by strengthening compliance powers to challenge abusive arrangements by which donors or trustees of charities can enrich themselves. The clauses also simplify the tax rules by equalising the tax treatment of investment types and tax reliefs used by charities. The changes made in clause 52 will bring legacies into the definition of “attributable income”.

New clause 6 would require the Government to report on the impact of clause 52 on charitable giving through estates and on the income of the charity sector. The changes are aimed at those charities and donors who seek to make a financial gain. They will not penalise charities when legitimate donations are received and investments are made. The Government have published a tax information and impact note that sets out the impact of the changes, and it showed that the measures will have a negligible impact on businesses and civil society organisations such as charities. Once the measures have been implemented, HMRC will assess the impact by monitoring tax reliefs claimed by UK charities, so a formal evaluation is not required. I therefore propose that clause 52 should stand part of the Bill, and that new clause 6 should be rejected.

[James Wild]

Charities are a very important topic. We need to ensure that we give it appropriate scrutiny, given the importance of charities in our society and communities. Clause 52 and new clause 6—which I will speak to—relate to extending the definition of attributable income to include legacies left to charities. In practice, that means that when a charity receives a gift left in a person’s will, it could face a tax charge if that money is not spent on its charitable activities.

How charities use their funds is a topical subject in the context of the Church of England, which is planning to spend £100 million on its fund for healing, repair and justice—effectively a reparation fund for slavery, which many consider not to be an appropriate use of the funds, or what people gave funds to the Church for.

I now turn to the clause. The change will apply to gifts made on or after 6 April this year. New clause 6, in my name—it bears repetition—would require the Chancellor, within six months of the Act becoming law, to publish a report on the impact of the measure on charitable giving through estates and on the wider impact on the charity sector.

Concerns have been raised that expanding rules to cover legacies could have unwelcome implications if charities do not apply inherited funds quickly enough to their charitable purposes, leading to them being taxed. The Institute of Chartered Accountants in England and Wales warns that that uncertainty, particularly around the timing, may discourage potential donors from including charities in their wills. Clearly, none of us would wish to see that.

HMRC has said that it will not set a deadline for how soon money must be used, although that ambiguity creates issues in itself. If the rules are unclear, HMRC could later decide that a gift has not been applied appropriately and withdraw the tax relief, undermining confidence that legacy gifts to charities will remain tax-free. Perhaps the Minister could give the Committee some clarity on that point, and on how HMRC will determine what counts as timely or appropriate application of funds.

There is also a concern about the administrative burden it may place, particularly on smaller charities, which will have to prove that each legacy received has been properly applied to charitable purposes, even when the money is placed in long-term endowments or reserves. The Charity Finance Group warns that the changes could mean more record keeping, compliance checks and bureaucracy, taking money away from frontline charitable activities and towards administration. I do not think that anyone would wish to see that. I do not know whether the Minister has anything more to add on that complexity.

Adding complexity could also make life harder for executors and delay the administration of estates, which could affect the timing of cash flows to charities at a time when finances in the sector are under considerable pressure, and income is critical for them to do their job. There is also a risk that wealthier donors might think twice about leaving legacies to smaller charities, if they think that the charity might struggle to comply with HMRC rules.

I am really asking for the Minister’s assurance that HMRC will take a sensible and proportionate approach, particularly with smaller charities that are seeking to do the right thing in applying these rules. We all want to avoid the potential risk that this measure could deter charitable giving, when that is clearly not the intention. It is important that the concerns raised by the sector are aired in the Committee, and it is our role to do so.

[Lucy Rigby]

I will start with the principle that, because legacies have received tax relief, it is important that they are spent on charitable purposes, otherwise they will be subject to a tax charge. More broadly, the Government are very much committed to supporting charities and their donors through tax relief, which was worth over £6.7 billion in 2024.

The changes in the clause are aimed at those charities and donors that seek to make financial gain. They will not penalise charities where legitimate donations are received and investments are made. The measures are intended to protect the integrity of the charitable sector by ensuring that donations, investments and charity expenditure are deployed for charitable purposes, not the avoidance of tax.

The shadow Minister fairly referred to any burden that may fall on smaller charities. The Government of course recognise that many small charities are run by unpaid volunteers, and for that reason we have sought to design the new rules in a fair and proportionate way. HMRC will help the sector to understand and prepare for the changes by providing clear communications and guidance.

I also want to be clear, in response to the shadow Minister, that the changes to the attributable income rules mean that legacies received by a charity will become chargeable to tax if they are not spent charitably. The changes reflect the fact that this income may have already received considerable tax relief. We have no plans to stop charities accumulating donations, so there will be no deadline for the spending of legacy funds.

Question put and agreed to.

Clause 52 accordingly ordered to stand part of the Bill.

Clause 53

Approved charitable investments: purpose test

Question proposed, That the clause stand part of the Bill.

--- Later in debate ---

[Lucy Rigby]

Clause 53 changes the definition of “approved charitable investments”. The Government recognise 12 types of investments for charitable tax relief, but presently only one type of investment is required to be for the benefit of the charity and not the avoidance of tax. The Government are extending this rule to all 12 types of investment, making the rules both simpler and tighter.

New clause 7 would once again require the Government to report on the impact of clause 53 on charity investment strategies. As with clause 52, these changes are aimed at those charities and donors that seek to make financial gain. They will not penalise charities where legitimate donations are received and investments are made. As the shadow Minister may expect, we have published a TIIN setting out the impact of these changes, which showed that these measures will have a negligible impact on businesses and civil society organisations such as charities. I commend clause 53 to the Committee, and I ask that new clause 7 be rejected.

[James Wild]

I rise to speak clause 53 and new clause 7, which was tabled in my name. My comments will reflect submissions from people involved in the charitable sector and my discussions with them. The clause extends the allowable purpose to all categories of recognisable charitable investment—at present, it applies to only one, but it will cover all 12. The Institute of Chartered Accountants in England and Wales has raised a suggestion that the test be reframed from

“for the sole purpose of”

to “wholly or mainly” to the benefit of the charity. The concern is that there could be increased obligations for compliance on trustees who have to demonstrate that their every investment in, for example, their portfolio was made for the benefit of the charity rather than an ancillary purpose therein. Was that more flexible approach something that the Government have considered, and if so why did they chose to reject it?

[Mr Reynolds]

As the Minister has outlined, clause 53 extends the purpose test from one category to all 12 categories. What guidance will HMRC provide for charity trustees to determine where the line is to be drawn between a legitimate investment strategy and those that are seen as having an ulterior purpose, because anti-avoidance should not penalise prudent charitable investment strategies?

Can the Minister also confirm exactly which charity sector bodies were consulted on these provisions and how they responded to that consultation, because many charity trustees are volunteers and this seems to place a significantly larger burden on those charity trustee volunteers to determine where to draw the line? It would be interesting to see what the consultation came back with as to where they would see that line and how they would attribute it.

--- Later in debate ---

[James Wild]

I rise to speak to clause 54 and to new clauses 8 and 9 tabled in my name. The clause makes significant changes to how tainted donations are treated. At present the donation is considered tainted only if it was made with an improper purpose. This clause replaces the motive-based test with an outcome test. If someone connected to the donor under the new regime receives financial assistance from a charity, such as a grant, guarantee or loan, the donation will be deemed tainted regardless of the donor’s intent. I have tabled new clause 8 to require the Government to publish a report on how the change affects legitimate charitable giving, or genuinely tackles tax abuse.

New clause 9 would require a review of the implementation of the new outcome test after two years and would assess whether it proves to be clearer than the existing purpose test. The Minister and the Government said that this measure is about tightening anti-avoidance rules and the challenge of proving intent. But I have been approached by the Charity Finance Group, which represents over 1,400 organisations and manages one third of the sector’s £20 billion annual income, and it has raised concerns around the change. It warned that the outcome test could unfairly penalise both donors and charities for results outwith their control.

For example, a donor could make a genuine good faith contribution only for a charity months later to make a routine investment or financial arrangement that inadvertently benefits a linked person. That donor could then find themselves caught by the anti-avoidance rules without ever having done anything wrong. That could cause uncertainty and raise concerns about people leaving legacy gifts that the charity sector relies on.

It is not just the charity and that one body. The Institute of Chartered Accountants in England and Wales has warned that donors may have limited influence over the outcome once the donation has been made. It, too, questions the fairness and practicality of shifting from a motive to an outcome test. Indeed, it proposes that the existing rules are not altered for that precise reason. We tabled the two new clauses to introduce proper scrutiny of the measures and ensure Parliament understands the effect on the charitable sector and whether donations continue to be given.

Does the Minister consider there is a risk that shifting to such an approach could have the effect that the charitable sector has set out? If so, will she commit to perhaps providing some practical guidance, with examples that charities and their compliance teams could look at so that they can see that charitable giving is not undermined? None of us on this Committee would want to do anything that would undermine the ability of charities to raise money and disincentivise anyone from giving money for fear that they might be caught inadvertently by rules when they have done nothing wrong.

[Lucy Rigby]

It is important to recognise that the tainted donations rules ensure that the usual tax reliefs are not available where someone gives money to a charity with the intention to benefit financially from it. Previously, HMRC was only permitted to consider the intention of a donation and whether a donor had received a financial advantage from a donation, but now, with these changes, it will also be able to consider the outcome of the donation and whether a donor had received financial assistance. In that respect, considering the outcome of a tainted donation is a positive step towards challenging abusive arrangements. As I have said in relation to previous clauses, HMRC will come forward with clear guidance on the application of the clauses, and, to the shadow Minister’s point, that guidance might well contain examples.

We are taking a range of steps to ensure that the charity sector and the wider public are aware of the changes, which I hope reassures the shadow Minister. A detailed summary of consultation responses has been published. As I said, HMRC will provide clear and practical guidance in advance of implementation.

Question put and agreed to.

Clause 54 accordingly ordered to stand part of the Bill.

Schedule 9 agreed to.

Ordered, That further consideration be now adjourned. —(Mark Ferguson.)

Oral Answers to Questions

Debate between Lucy Rigby and James Wild

Thursday 20th March 2025 Commons Chamber

[Ben Obese-Jecty (Huntingdon) (Con)]

6. What steps she is taking with the Crown Prosecution Service to help ensure the effective functioning of the courts.

[James Wild (North West Norfolk) (Con)]

9. What steps she is taking with the Crown Prosecution Service to help ensure the effective functioning of the courts.

[The Solicitor General]

This Government unfortunately inherited a record Crown court backlog, with the human impact felt most severely by victims. Lengthy delays are much too common and victim attrition much too high. The Lord Chancellor has set out swift action to address that, including by increasing the number of Crown court sitting days and increasing magistrates courts’ sentencing powers to take pressure off the Crown courts.

--- Later in debate ---

[The Solicitor General]

I remind the hon. Member that the Conservative Sentencing Minister at the time wrote to the Sentencing Council making it clear that they welcomed the new guidance. Equality before the law is core to the application of the rule of law in this country and a foundational principle of our legal and judicial systems. I am sure that colleagues will welcome the fact that the Lord Chancellor met the chair of the Sentencing Council last week, and they had a constructive discussion around the guidelines.

[James Wild]

Justice delayed is justice denied. Will the Solicitor General confirm that the court backlog is rising rather than falling, and can she explain why the Lord Chancellor has not maximised the number of sitting days so that victims of rape and other serious crimes do not have to wait unduly for their cases to be heard?

[The Solicitor General]

The criticism would carry a little more weight were it not for the fact that the Conservatives spent the last 14 years driving up the record court backlog. The root causes of the backlog are a direct result of the Conservatives’ choices. The previous Government closed over 260 court buildings, and the record court backlog now stands at 73,000 cases. As we have said, the human cost of those delays is considerable—victims are waiting years for justice. The Lord Chancellor is taking robust action. She has increased the number of Crown court sitting days, increased magistrate courts’ sentencing powers and asked Sir Brian Leveson to lead an independent review of our criminal courts to look at options for longer-term reform. The previous Government did not act; they drove up the backlog. This Government are taking action.

Attorney General’s Office: Conflicts of Interest

Debate between Lucy Rigby and James Wild

Thursday 23rd January 2025 Commons Chamber

[James Wild (North West Norfolk) (Con)]

Under the ministerial code, every Minister has a responsibility to address a conflict of interest or a perception of such an interest. Will the Solicitor General be open with the House about whether, when the Attorney General was appointed, he chose or was required to recuse himself from advising on issues relating to his previously representing clients such as Gerry Adams?

[The Solicitor General]

I have already addressed that point.