Finance (No. 2) Bill

Mel Stride Excerpts

2nd reading
Tuesday 13th April 2021 Commons Chamber

[Mel Stride (Central Devon) (Con) [V]]

I shall speak in support of Second Reading.

The opening remarks by my right hon. Friend the Financial Secretary to the Treasury were extremely well made. He pointed out the huge challenges that we face as a country due to the economic crisis and the worst drop in GDP for 300 years, but he also rightly spoke of the extraordinary work that the Treasury and HMRC have carried out over the past 12 months to ensure that, at pace, we have had bold initiatives that have supported the economy, not least the labour force. I know, having held his position for about the same time as he has held his position, just how high-quality those people are and how hard and imaginatively they will have worked over the previous months.

My right hon. Friend was right also to draw the attention of the House to the improved outlook across the various forecasts. I think he mentioned the OBR, but he could equally have mentioned the IMF, whose recent forecasts for the UK economy point to a lower peak in unemployment than was feared at the start of the crisis. All of that is due, not just to the work that has been done to roll out the vaccine, but to the support packages that the Government have provided. I am not saying that everything has been perfect, but overall I think the effort has been pretty impressive.

The Bill is one step in an important journey to restore the health of the public finances. My right hon. Friend did not tell the House, because it is not his role to frighten the horses, what the consequence would be if we did not signal clearly to the markets that we are serious about getting on top of both our debt and the deficit. That would be an increase in interest rates, and we know from the forecasters that, roughly, a 1% increase in interest rates would lead to a £25 billion additional black hole in the public finances. To put that in some perspective, it would be equivalent to all the money that has been raised through the increases in corporation tax and the income tax threshold freezes. It is therefore essential that this Bill goes through the House to demonstrate that the Government are serious about getting on top of the public finances.

I would like to focus on some of the measures in the Bill. I turn first to income tax. I think that was the right place to go—a broad-based, important, very high-yielding tax—in order to raise the kinds of amounts that are required. The fact that the Chancellor has chosen to freeze thresholds rather than increase rates allows him, of course, to maintain the triple lock commitment in the Conservative manifesto. Incidentally, I have always argued that, depending on how things pan out, the public might perhaps—under the circumstances—forgive the Government were they to decide to breach the manifesto in one or two areas, given the extraordinary times in which we live, but it is good that the Chancellor has managed to avoid doing so, at least on this occasion.

We need a progressive tax system. Of course, with income tax—the wealthiest 1% paying some 28% of income tax—that is exactly what we have; but we also need an income tax system that does not undermine the link between those who pay tax and public spending. Through freezing the personal allowance, as well as raising more money, there is some benefit in ensuring that those who benefit from public services do, at least to some degree—albeit that we want a very progressive system—also pay tax to support those services.

Corporation tax also provides a large amount of money to the Exchequer. The Bill provides for quite a large increase in corporation tax, from 19% to 25%. The critical point is that we remain internationally competitive. The shadow Minister mentioned on a number of occasions President Biden and his tax policy. Well, his policy is to increase corporation or federal taxes from 21% to 28%. If we add on state taxes, that still leaves us very competitive—even at 25%—and certainly among members of the G7.

I was pleased to see in the Bill the small business rate relief. It will be important to support particularly our small and medium-sized enterprises as we come through this crisis. There are many reasons, which I will not go into in huge detail now, why that particular sector of the economy may be especially vulnerable as we come through the crisis. In the event that large swathes of SMEs go out of business, we could well see increases in market concentration and a contingent decrease in competitiveness across the economy, so it is important that we are careful and that the Treasury is mindful of the fact that those small and medium-sized enterprises will need ongoing support.

I want to say just one thing about the Laffer effect. In the context of corporation tax, it is often argued that—because corporation tax fell from 28% to 19% between 2010 and the present day, and at the same time the yield from corporation tax rose by 50%— there is some kind of causation, rather than correlation. I would argue quite strongly against that. I think that the improved yield from corporation tax was as much to do with improvements in the economy across that period, the bank levy, the bank surcharge and various anti-avoidance measures such as the corporate interest restriction. We should not fool ourselves into believing that raising taxes on companies will necessarily yield less in the medium to longer term—albeit that in the longer term we of course want to see those taxes as low as possible.

Incidentally, if my right hon. Friend the Chief Secretary to the Treasury were looking for areas where there might be a Laffer effect, I would point him to three taxes: the higher rate of capital gains tax; the stamp duty land tax on high-value properties; and duty on cigarettes. There is scope for reducing rates and getting a higher yield in all three of those areas.

I very much welcome the super deduction. I guess that there was an inevitability to it; if we signal that corporation tax rates will go up in future, we tend to find that companies delay investment such that they can gain the offset from those investments against a higher corporation tax rate. It is therefore important that the super deduction came in—in a sense, to stop that forestalling. What happens after that two-year period of the super deduction will be critical.

I urge the Treasury to look carefully at the way in which companies are undertaking investment expenditure. We know there have historically been weaknesses, quite outside the crisis. Measures such the R&D tax credits will be important in that respect. I notice that clause 19 provides a cap on those for SMEs, which, if I understand the clause correctly, is about ensuring that there is no double counting or double relief between a principal company and a subcontractor. When the Bill goes into Committee, that provision should be given careful scrutiny. I welcome clause 15, on the extension of the annual investment allowance at the £1 million level, albeit that that is temporary.

Turning briefly to the diverted profits tax, I will pick up on one or two remarks made by the shadow Minister, who seemed to imply that the Government’s record on clamping down on avoidance and evasion was rather wanting. My recollection of my time as Financial Secretary to the Treasury is quite the opposite. I direct the hon. Gentleman to HMRC’s annual report on the tax gap—the amount of money not collected that could be collected—which I think in recent years has been at historic lows, and has certainly been among the best of the figures available across tax authorities around the world.

Remarks were made about tax breaks for tech giants. It is for the Government to decide whether their corporation tax policy is to go in lock step with President Biden’s idea of minimum corporation tax rates across the world. That could be one solution to profit shifting. We must not forget, however, that this country has been in the vanguard, unilaterally rolling out the digital services tax to make sure that companies including Amazon, Google and eBay pay the appropriate level of tax. It is for the Americans to join us in a multilateral endeavour to make sure that such taxes actually work. I am quietly optimistic that the new American Administration is at least leaning in the right direction. I would be interested to hear the Exchequer Secretary explain why the diverted profits tax increase just maintains the punitive margin between the level of that tax and the increased corporation tax in the years ahead, rather than the decision being made to widen the margin, given how successful the diverted profits tax has been in preventing profit shifting.

Free ports feature prominently in the Bill. The Chancellor is, of course, enthusiastic about these, and they have exciting potential, particularly in terms of the levelling-up agenda, but I point to two areas where caution is needed. One is the possibility of fraud in free port areas. Careful scrutiny is needed of the tax incentives, albeit it that SDLT structures and building allowances and enhanced allowances for plant and machinery seem to be tax breaks that are difficult to game, because they relate to fixed assets in a specific geographical location. The second issue is possible displacement of economic activity. We do not want activity that would have occurred anyway, perhaps nearby, occurring in a particular location simply because there are advantageous economic and tax arrangements in place. The scrutiny Committee will certainly be interested in the operation of free ports.

One element of the Bill that I was especially pleased to see that has not been mentioned so far and probably will not be mentioned again in this debate is the change that ensures that where an employee receives a covid test provided by an employer in their place of work, it does not count as a taxable benefit in kind. Were it to do so, millions of workers up and down the country would find that they were liable for tax in relation to those tests. I raise the matter because there is a small but important lesson in scrutiny here. Tony Verran, who is a member of the Treasury Committee secretariat, having joined us on secondment from HMRC, spotted this anomaly in HMRC guidance. Within about 24 hours, I was able to raise it with the Chancellor on the Floor of the House in Treasury Questions, and within 24 hours of that, to his great credit, he changed the guidance, and now we see the provision in the Bill. That is how Parliament should work, so I am grateful to Tony and others who were able to point me to that issue.

In conclusion, I very much welcome the Bill. There are areas that will need considerable scrutiny. When I had my time as Financial Secretary to the Treasury I think I took through three Finance Bills with more than 1,000 pages of legislation, and I know the extraordinary amount of work involved in that, and the extraordinary amount of detail that my right hon. Friend will be going through over the coming days and weeks. I wish him well. The Treasury Committee will, of course, closely scrutinise the Bill, and will no doubt have much to say about it.