Finance (No. 3) Bill (Sixth sitting)
Mel Stride Excerpts(7 years, 4 months ago)
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The Chair
With this it will be convenient to discuss the following:
New clause 10—Review of higher rate of tax for additional dwellings—
“(1) The Chancellor of the Exchequer shall commission a review on the revenue effects of the amendments to FA 2003 made in section 43.
(2) A report of the review under subsection (1) must be laid before the House of Commons before 29 October 2019.”
This new clause requires a review of the revenue effects of the provisions in clause 43, and for that review to report within 1 year of that clause becoming effective.
New clause 11—Annual statement on effects of provisions of section 43—
“(1) The Chancellor of the Exchequer must make an annual statement to the House of Commons detailing how the provisions in section 43 have affected instances in which land transaction returns are amended to take account of subsequent disposal of the main residence.
(2) The statement must specify—
(a) the number of such instances, and
(b) such information as the Commissioners hold as to the characteristics (including income) of those concerned.
(3) The first such statement under subsection (1) must be made before 29 October 2019, and each subsequent statement must be within twelve months of the previous statement.”
This new clause requires an annual statement on how the provisions in section 43 have impacted the number of back claims of HRAD.
New clause 12—Review of higher rate of tax for additional dwellings—
“(1) The Chancellor of the Exchequer shall commission a review on how the provisions of section 43 have affected residential property prices.
(2) A report of the review under subsection (1) must be laid before the House of Commons before 29 October 2019.”
This new clause requires a review on how the provisions in clause 43 have affected house prices, and for that review to report within 1 year of that clause becoming effective.
The Financial Secretary to the Treasury (Mel Stride)
Clause 43 makes changes to ensure that the stamp duty land tax higher rates for additional dwellings rules are easier to understand and more transparent. In April 2016, the Government introduced additional rates of SDLT for those purchasing additional residential property such as second homes and buy-to-let properties. The rates are 3 percentage points above the rates of SDLT ordinarily payable and are part of the Government’s commitment to support first-time buyers. The changes reflect feedback from the public and industry specialists about the key areas where the rules on the higher rates have proved challenging or do not work as well as they could.
In general, purchasers buying their first property, replacing a main residence or buying an additional property worth less than £40,000 will not be subject to the higher rates. Someone buying their new home before they sell their old home, however, must pay the higher rates up front but can claim a refund when they sell their old home within three years of buying their new home. When the old home is sold more than 12 months after the purchase of the new property, individuals are required to reclaim the higher rates within three months of the sale of the old property. The first change introduced by the clause will increase that period to 12 months, giving taxpayers a longer period within which to reclaim the higher rates. The change will apply to all disposals of a previous main residence from 29 October 2018.
The second change addresses the term “major interest” in relation to the higher rates of stamp duty land tax, where some stakeholders have suggested that existing legislation is unclear. The higher rates of stamp duty land tax are intended to apply when someone buys or already owns a major interest in a dwelling. “Major interest” is used to ensure that the higher rates for additional dwellings apply only to meaningful purchases of residential property and not to minor interests—for example, a right of way or a right to light. This change confirms, in line with the Government’s existing treatment, that an undivided share in land constitutes a major interest for the purposes of the higher rates. That also takes effect from 29 October 2018.
New clause 10 seeks to commission a review on the revenue effects of the amendments to the Finance Act 2003 made by clause 43. It would require the Chancellor of the Exchequer to make an annual statement to the House on those who have made a reclaim for the higher rates. The new clause is not necessary; as is stated in the tax information and impact note published at the 2018 Budget, these changes are expected to have a negligible impact on the Exchequer, so a review on the revenue effects is not required. Her Majesty’s Revenue and Customs already publishes annual and quarterly statistics setting out transactions subject to the higher rates of SDLT on additional properties and the transactions, volumes and values reclaimed.
New clause 12 seeks to require a review of the effect of clause 43 on residential property prices. Clause 43 simply increases the time from disposal for people to make a claim to 12 months and confirms existing practice on the definition of “major interest”. Neither change is expected to have an impact on house prices and such a report would not be of benefit to Parliament. I therefore urge the Committee to reject the new clauses.
The changes in the clause will help to ensure that the rules on the higher rates of stamp duty land tax are easier to understand and more transparent. I commend the clause to the Committee.
Sir Robert Syms (Poole) (Con)
I am glad I caught my right hon. Friend just as he was coming to his peroration. I have a constituent who had a home in Malaysia, where he was working. He moved back to Poole to retire and bought a flat. He was charged the higher rate of stamp duty because the flat was classified as a second home because he still owned a home in Malaysia. When I wrote to the Treasury, it said that that was because having a second home in Malaysia had an impact on the British housing market, which I did not think was a very convincing answer.
Does this rule apply worldwide if one owns a home outside the UK? In effect, if someone has a holiday home outside the UK, they get charged higher stamp duty when they buy a house in the UK. If they sell their house in Malaysia, Spain or France within three years, do they then get a reduced rate of stamp duty land tax? As an aside, it seems bonkers that we are charging people a higher rate on the basis that they have a home halfway round the world, but that is the world we seem to live in.
Mel Stride
The central point is that if someone is UK tax resident, their income is taxed, albeit that some of it may occur in other jurisdictions and perhaps be subject to double taxation arrangements between that jurisdiction and our jurisdiction. None the less, my hon. Friend’s assumption is correct that if someone has a property overseas, it is effectively counted as if it were a domestic property in the context of this clause. The easements that the clause introduces in terms of greater time to put in an application for a rebate at the higher rate apply equally whether one of the properties is overseas or here in the United Kingdom.
Anneliese Dodds (Oxford East) (Lab/Co-op)
As the Minister explained, the clause would change the parameters for claiming a refund on the additional dwelling SDLT by quadrupling the time that claimants have to reclaim the funds, potentially for up to a whole year after they have sold their old home, if that is later than a year after the filing date for the SDLT date for the new home—so the second parameter stays the same, if that makes sense. It is quite a complex change to understand.
The “major interest” provision is also tightened to make it clearer that a major interest in a dwelling includes an undivided share in a dwelling for the purpose of the higher rates for additional dwellings. I understand that the Government have suggested that the extended time period is necessary to enable those who might find it difficult to claim to do so—for example, those who are elderly or vulnerable due to serious illness.
In principle, the changes do not water down the Government’s initial stated commitment to charge additional SDLT for those owning additional properties, provided they are held on to for more than three years and provided that they fall outside the multiple dwellings category, which I will come back to in a moment. None the less, given that the changes appear to be focused on the context for the provision of additional dwellings, as against continuously occupied single dwellings, we feel it is necessary to subject their effectiveness to review, in order to ensure that they do not water down the initial measure in any way. That is what new clauses 10, 11 and 12 ask for.
Mel Stride
I am sure that my hon. Friend will be tempted to speak by the time I have finished my remarks.
The hon. Member for Oxford East raised several points. She sought an assurance that we are not watering down the measure. I can certainly give that assurance. For example, the three-year window will be the same for people to reclaim the higher rate where a property is not sold before a new property is purchased, albeit that we are giving people more time to apply for that rebate. The essence of the measure remains very much the same.
The hon. Lady pointed out that home ownership is falling, particularly among young people. The Government are heavily engaged on that and have brought in various measures, as she will know, not least in the stamp duty area, with the stamp duty relief for first-time buyers. None the less, the statistic that she quoted of there being 1 million fewer homeowners under 45 than in 2010 is certainly something that we seek to address. I reassure her that, since the higher rates have been introduced, more than 650,000 people have bought their first home, and first-time buyers make up an increased share of the mortgaged housing market. That is what the underlying measure that we are debating is really all about: supporting first-time buyers and first-time home ownership.
The hon. Lady also raised multiple dwellings relief and gave a clear exposition of how it works by way of her example of the £1 million and the five properties. The way she described it was entirely accurate. In other words, there is a disaggregation, and then the appropriate level of stamp duty is applied to each one of those properties at, in her example, the £200,000 level. However, it is also the case that each one of those properties in her example would attract the additional stamp duty charge in a situation in which more than one property is, of necessity, owned by the same purchaser.
The hon. Lady’s final point was about the potential impact of these measures on house prices. I go back to my earlier remarks that this a change in the timing by which individuals are required to make reclaims at the higher rate; it is not a change to the window of opportunity for doing so. As I set out, that in itself is not expected to change house prices.
Question put and agreed to.
Clause 43 accordingly ordered to stand part of the Bill.
Clause 44
Exemption for financial institutions in resolution
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 90, in clause 48, page 32, line 39, at end insert—
“85B Review of possible register
(1) Within three months of the passing of the Finance Act 2019, the Chancellor of the Exchequer shall review the viability of establishing a public register on the use of the exemption from stamp duty established under section 85A.
(2) A report of the review under this section shall be laid before the House of Commons as soon as practicable after its completion.”.
This amendment would require the Chancellor of the Exchequer to review the viability of a public register of financial institutions in resolution benefitting from the exemption from stamp duty for certain financial transactions.
Clause 48 stand part.
Mel Stride
Clauses 44 and 48 will simplify and strengthen the current financial institution resolution regime by introducing an automatic exemption from stamp taxes on shares for public bodies and creditors whose interests are converted into shares, and stamp duty land tax—SDLT—for certain transfers of land arising from the exercise of resolution powers.
Under the Banking Act 2009, the Government have the power to exempt from stamp taxes on shares and SDLT transfers of property, in the form of shares or land that arise from an exercise of resolution powers. However, the current legislation requires the Government to pass secondary legislation exempting a defined set of transfers. This introduces potential timing challenges and creates additional complexity when resolving a failing financial institution.
The changes made by clause 48 avoid that by specifying exempt transfers in primary legislation. The stamp taxes on shares exemption will be limited to transfers of shares to a bridge entity or a public body that holds the shares temporarily while the institution is being resolved, and to the transfer of shares in exchange for temporary certificates issued to creditors that demonstrate their entitlement to the shares. The exemption does not cover the private sale and transfers of shares in a failing institution to a private sector purchaser, where stamp taxes on shares will be charged as usual.
Similarly, the changes made by clause 44 specify SDLT transfers in primary legislation. This exemption will be limited to transfers of land to a bridge entity or public body that holds the land temporarily while the institution is being resolved. The exemption does not cover the private sale and transfer of land of a failing institution to a private sector purchaser, where SDLT will be charged as usual.
The changes will simplify and strengthen the process of resolving a failed institution. In the event that a creditor is found to be worse off as a result of resolution action, when compared with an ordinary insolvency, they are entitled to compensation, which would be paid by the Treasury. The changes will protect taxpayers by reducing the risk of the Government having to compensate creditors in order to prevent the “no creditor worse off” principle being violated. They were announced in the autumn Budget 2017 and the draft legislation was subject to consultation. Officials from the Treasury and HMRC have worked closely with officials from the Bank of England to develop the legislation.
Turning to the amendments that have been tabled, amendment 90 seeks a review, within three months of the enactment of the Bill, of the viability of establishing a public register on the use of the exemption from stamp duty—something that I have already raised—and would require a report of the review to be laid before the House of Commons soon after its completion. The clauses do not create any tax exemptions for failing institutions themselves. The exemption would apply to creditors of failing financial institutions who see their debt holdings bailed in for equity, to ensure that affected creditors are not penalised inadvertently. The exemption also applies to the Bank of England, which may, in certain circumstances, need to take temporary ownership of a failing institution’s assets, in order to protect financial stability.
The clauses will strengthen and add transparency to the resolution process by providing further clarity for affected creditors and the taxpayer. The register would impose an additional and unnecessary burden on the Bank of England and provide no great benefit to the public. By creating an exemption from stamp taxes on shares and SDLT for certain transfers arising from the use of resolution powers, the Government are simplifying and strengthening the UK’s resolution regime, and I therefore commend the clauses to the Committee.
Anneliese Dodds
I am grateful to the Minister for his explanation. As he intimated, clause 44 ensures that SDLT is not charged on transfers of land following the exercise of certain resolution powers under the special resolution regime. It is paralleled by clause 48 for stamp duty. As he has intimated, our amendment 90 would require the Government to produce a review and potentially introduce a register of financial institutions in resolution that might benefit from the exemptions for SDLT and stamp duty for certain financial transactions resulting from the measure.
We are asking for such a review to have a clearer understanding of which firms might be relieved of SDLT and stamp duty in this manner. This is without prejudice to the function of the clauses, which we understand and support. In other words, we support the concept that the Bank of England should be able to use its resolution stabilisation powers to manage failing financial institutions in an orderly manner and should as part of that, where required, be able to transfer property, potentially including land held by that body, to a temporary holding entity appointed by the Bank of England or to a temporary public body. In that context, we agree that it does not make sense for SDLT or stamp duty to be paid. We are willing not to press our amendment, because of the general acknowledgment of the importance of the measure.
Mel Stride
Taking up the points made by the hon. Member for Oxford East, I will begin with her final point about why we have approached this by way of primary legislation rather than relying on existing powers to make regulations. At the heart of that is our ability to act quickly in the circumstances of the resolution powers being brought into effect, to ensure that everything goes smoothly and we do not end up in a situation where compensation might be due, where it could be shown that the measures we had taken had not been as effective as they might otherwise have been under a normal insolvency process. That is why relying on a general position in primary legislation would be preferable to a number of exercises of secondary powers.
The question of why we have made changes to the Finance Act 2003 rather than the Banking Act, and the associated question that the hon. Lady asked about whether the Office of Tax Simplification was content with our approach, are highly technical and certainly not questions to which I have a ready answer, I am afraid. I undertake to the Committee to go away and ensure that I write to the hon. Lady with a full explanation on both those points.
Question put and agreed to.
Clause 44 accordingly ordered to stand part of the Bill.
Clause 45
Changes to periods for delivering returns and paying tax
Anneliese Dodds
I beg to move amendment 95, in clause 45, page 29, line 19, at end insert—
“(11) The Chancellor of the Exchequer must lay before the House of Commons a report on any consultation undertaken on the provisions in this section.
(12) A report of the review under subsection (9) must be laid before the House of Commons within two months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to report on any consultation undertaken on the provisions in Clause 45.
Anneliese Dodds
I am grateful to be serving on this Committee with you in the Chair, Ms Dorries; I do not think I have said that before, and I apologise for that.
This clause reduces the time limit that purchasers have to file an SDLT return and pay the tax due from 30 days after the effective date of the transaction to 14 days. It applies to transactions to purchase land in England and Northern Ireland with an effective date on or after 1 March 2019. Of course, since 2015 there has been a separate land and buildings transaction tax in Scotland, and since earlier this year there has also been a different regime in Wales, where the relevant tax is the land transaction tax.
SDLT was introduced—we were just referring to the relevant Act—in 2003, replacing stamp duty on land transactions. Data from SDLT returns are used by a variety of actors, after being submitted to the Valuation Office Agency, to carry out activities such as valuations for the purposes of council tax and business rates.
This clause obviously has some similarities with clause 14, to the extent that it requires a faster turnaround for the payment of a tax, but clearly in this case it is payment of SDLT rather than capital gains tax. Many of the concerns expressed in relation to that change also apply in this case. They include the question whether taxpayers and, above all, their agents are likely to be sufficiently aware of the new deadline. As a result, with amendment 95, we are asking the Chancellor of the Exchequer to
“lay before the House of Commons a report on any consultation undertaken on the provisions in this section.”
It appears that many taxpayers—some 85% of them, according to HMRC’s figures—already submit their return in line with the proposed new timetable. However, the remaining 15% may have reasons for failing to submit so quickly and those surely should be examined before we embark on this halving of the deadline. Indeed, there appeared to be significant concern among respondents to the consultation about the proposed reduction to the filing and payment window. The consultation response stated:
“Many felt it would be manageable for straightforward transactions—for example most purchases of residential property. Many envisaged difficulties for more complex transactions where the property purchased is subject to leases. Although only a small proportion of reportable transactions are likely to be affected, they amount to approximately 50,000 transactions every year.”
That is clearly a very large number, and those transactions may be particularly concentrated in their effects among certain segments of the population. It is for that reason that new clause 13 would require a full impact assessment of the measure to be undertaken and to consider its impact on people with protected characteristics, people with different incomes and people living in different regions.
I note in the consultation document that, at least at the time of the consultation, there was no HMRC facility for filing and paying SDLT simultaneously. It would be helpful to understand from the Minister whether that facility is coming, as it would surely make the system more efficient.
I was also surprised to see in the consultation document that more than 40% of the returns submitted on paper included errors. That is an incredibly high rate. It would be helpful to know what has been done to deal with that problem, as that system clearly cannot be helping either the taxpayer who has—presumably inadvertently, most of the time—made the error or the HMRC officer who has to try to rectify it. The very high usage of cheques, which need to be accompanied by the correct 11-figure unique taxpayer reference number, also seems almost designed to create an inefficient and error-ridden system.
It was stated in the consultation document that the shorter timescale would be accompanied by a number of other measures to improve the effectiveness of SDLT filing, but it is unclear to me whether and when those new measures are coming into place. One such measure would be requiring all agents to file online, which does seem sensible, but I was intrigued to see in the consultation document the claim that online filing may not be
“reasonably practicable…because of remoteness of location, or on grounds such as religious beliefs.”
It would be helpful if there were more joined-up thinking across Government. For example, it is very difficult for claimants of universal credit to receive it without using the online system. Surely more of them are likely to be affected by living remotely than professional agents involved in property transactions. It would also be useful if the Minister could clarify why religious faith might impact on an individual’s ability to use the internet and why that might be the case for those filing returns for stamp duty and not for those attempting, for example, to claim universal credit.
It was stated in the Government’s response to the consultation that they would look to potentially introduce electronic payment at the same time as the reduction of the reporting period to 14 days, so can the Minister please inform us whether electronic payment will indeed be available when this measure comes into play?
Mel Stride
Clause 45 makes changes to improve the SDLT filing and payment process. In answer to the hon. Lady’s question about whether we will provide facilities on the site to pay simultaneously, we do not have plans to do so. That is because the online service cannot be combined with Bacs and CHAPS services at present.
The hon. Lady made a more general point about the mistakes that are made in filing. As she knows, we consulted on the information being sought as part of the process, and we will be applying various simplifications as a consequence, most notably around complex commercial lease arrangements. The information that we have hitherto sought in that respect will now no longer be sought. That simplification, and others, should be beneficial in cutting down the mistakes that the hon. Lady referred to.
Currently, the purchaser of land, or the purchaser’s agent, must make a stamp duty land tax return and pay tax due within 30 days of the effective date of the transaction—usually the completion date. The changes made by clause 45 will reduce the time allowed to make an SDLT return and pay the tax due from 30 days after the effective date of transaction to 14 days. That is in line with other initiatives in recent years that bring tax reporting and payment closer to the date of the transaction. The hon. Lady referred, I think, to clause 14 on capital gains tax, where a similar approach has been taken. This is in line with these other initiatives.
The measure will not change liabilities for the purchaser, but will lead to tax being paid earlier. The change applies to purchases of land situated in England and Northern Ireland where the effective date of the transaction is on or after 1 March 2019. This change will directly affect approximately 20,000 businesses, mainly agents, such as licensed conveyancers and solicitors. Each year, this will directly affect fewer than 500 individuals who file their own SDLT returns without using an agent. However, the impact on administrative burdens for businesses is expected to be negligible.
The Government announced the change at autumn statement 2015 and consulted on it, as the hon. Lady described, in 2016. The Government confirmed at autumn Budget 2017 that it would come into effect on 1 March. To help purchasers and agents to comply with the new time limit, HMRC has worked with key representative bodies to agree simplifications to the SDLT return, for example, by reducing the amount of information required. These improvements will be in place when the new time limit begins. The measure will result in a yield of £60 million in 2018-19—the year of implementation—and a small ongoing yield in future years.
Amendment 95 would require a report on any consultation undertaken on the provisions in this section.
Bambos Charalambous (Enfield, Southgate) (Lab)
What steps has HMRC put in place to make sure that the 20,000 businesses that are going to be affected are properly informed of the change, and know that it is coming?
Mel Stride
HMRC will, as a matter of course, issue guidance on all major tax changes, and that will be available online. As part of the consultation, as I have outlined, a number of these organisations were consulted in detail, not just about the measures but to make sure that those businesses are ready and appropriately informed.
The amendment is not necessary. I can give the Committee the information it requires now, because it is already in the public domain. The Government published a document on 20 March 2017 in response to the consultation that we published in the autumn of 2016, and we published draft legislation in July 2018 for technical consultation. HMRC also held meetings with stakeholders, which included representative bodies from the property and conveyancing industries. Their views on the information required in the return are reflected in the changes being made to make compliance with the new time limit easier.
New clause 13 would require a review of the equality impact of clause 45. The new clause is not necessary either, because the Government set out in the tax information and impact note published on this change in July 2018. It is not anticipated that there will be any impact on groups with protected characteristics. Clause 45 does not change anyone’s SDLT liability; it just brings a requirement to file a return and pay the tax closer to the date of the transaction. For that reason, direct impacts on different types of households will be negligible, and the type of analysis required by the amendment would not be meaningful.
Regarding other regions of the UK, Land and Property Services in Northern Ireland—an agency of the Department of Finance of the Northern Ireland Executive—was consulted and is content with the measures. The changes will improve the SDLT filing and payment process, and I commend the clause to the Committee.
Anneliese Dodds
I am grateful to the Minister for his comments. However, I am sure the whole Committee is looking to the Government to ensure that the payment and reporting systems can be calibrated as soon as possible. Surely, the very high rate of error is a terrible waste of taxpayers’ and, indeed, HMRC’s time. I hope he prioritises sorting that out and having the relevant discussions with the Bacs and CHAPS systems so it can be dealt with.
Anneliese Dodds
The clause makes a minor change to ensure that existing stamp duty relief continues to apply to both non-approved and approved share incentive plans. Our amendment 91 calls for a review of the revenue effects of that measure compared with the status quo, under which only approved plans are covered. The amendment is intended to give us a better handle on the overall cost of SIPs and how that relates to their benefits.
As I am sure Committee members know, SIPs have been tax advantaged since 2001, when stamp duty and what was then stamp duty reserve tax—it is now SDLT—were removed from the transfer of shares in a SIP from trustees to an employee. The requirement for approval was removed in 2014, but the appropriate corrections to legislation were not made. I note that the changes in the clause are required purely because of errors of omission back then, which perhaps highlights some of the issues the Committee has discussed.
SIPs avoid many of the problems with other share incentive plans, not least by being provided to all employees rather than only to a subset. We have seen how share plans have been manipulated when they have been provided only to the top management of companies. SIPs avoid that. Although so-called free shares can be linked to the achievement of performance targets, they cannot be allocated individually. They can be provided only to a particular business unit or to the whole company, so they cannot be manipulated by, for example, very top management.
Some categories of shares can be removed from employees who leave the firm through either voluntary resignation or dismissal within three years of their joining the SIP. That and the stake that SIPs create for employees in their company are viewed by some commentators as positive aspects of the plans. In addition, there is a considerable cost saving for firms of up to £138 for every £1,000 invested in SIPs by their employees. We must acknowledge, however, that the people who gain most from such schemes are those who are already in a higher-rate tax band, who by my calculation gain around an additional third of the tax they would otherwise pay, compared with a basic rate taxpayer.
In addition, SIPs have complex interactions with the social security system. I want to ask the Minister for clarification in that respect. Information provided to SIP holders states clearly that a small number of people may be affected by the fact that, because of their salary sacrifice—I suppose in practical terms that is what this is—for their SIP, they will not have paid enough national insurance contributions to qualify for particular benefits. However, it is unclear whether contributions to a SIP are treated differently for tax and social security purposes.
Some claimants of tax credits have received mixed messages about whether contributions to SIPs should be added back on to their gross pay for the purpose of informing the Department for Work and Pensions about their income. Individuals do not have to declare their SIP contributions for the purpose of income tax, or at least those contributions generally are not chargeable to income tax. There is a peculiar and potentially unfair difference there.
That is compounded by the fact that tax becomes payable on some of the different types of shares within a SIP if an individual sells them within five years—for example, if they have to switch jobs. Some individuals have said that that is almost a form of double taxation for people who claim social security. They suggest it is a bit of an anomaly, and I can see why. For people affected in this way, they would be better off buying their firm’s shares at market prices rather than taking part in a SIP in the first place. That is the situation with tax credits, but I cannot find any information anywhere about the treatment of these schemes for those claiming universal credit.
I looked at the IR177 document “share incentive plans and your entitlement to benefits” but that was produced in January 2011, and there seems to have been no amendment of it since then. There does not seem to have been any amendment to the SIP manual relating to universal credit either, or at least not since November 2015. Having gone through all the iterations of the manual, I did not wish to waste any more time searching for a potentially non-existent needle in a haystack.
Will the Minister clarify whether contributions to SIPs are counted as income for the purposes of calculating working tax credit or universal credit? If so, will the Department be looking at this issue? Might it be trying to devise a different approach, given that individuals will be affected by the counting of those shares as income if they leave a SIP scheme early? People on low incomes may well have to switch jobs more regularly than others do, so it would be helpful if he looked into that. Perhaps he knows the answer already. If not, will he write to us? Some people would find that enormously helpful.
Mel Stride
On the hon. Lady’s specific question about the interaction of SIP contributions and the reporting of income, and the further interaction with working tax credits and universal credit, I do not know the answer, and I do not think my officials can immediately answer it. I will have a closer look at that and write to her, as she requests.
Clause 49 makes a minor correcting amendment to section 95 of the Finance Act 2001 concerning stamp duty and stamp duty reserve tax exemptions for SIPs. Stamp duty and stamp duty reserve tax exemptions for SIPs were introduced in the Finance Act 2001. Until 2014, share incentive plans had to be approved by HMRC before an employer could operate them. These were referred to as approved share incentive plans. The Finance Act 2014 removed the requirement for HMRC to approve share incentive plans and replaced it with a self-certification process. All references to approved share incentive plans should have been removed from legislation, but a change to section 95 of the Finance Act 2001 was omitted. The clause changes the wording of section 95 of the Finance Act 2001 to ensure that it is consistent with other provisions of the share incentive plans code. No taxpayers should have incurred stamp duty on self-certified SIPs since the rule changed in 2014, and this provision confirms and clarifies the position. No changes are made to the existing exemptions available for share incentive plans.
Amendment 91 would require a review of the revenue effects if the stamp duty exemptions for SIPs had not applied to self-certified share incentive plans from 2014. This provision is a minor technical change that brings the wording of the legislation back in line with its application. There will be no revenue impact as a result of the correction. SIPs offer a combination of tax incentives to employers, and estimates for the cost of the stamp duty exemptions for SIPs are not available. The clause makes a minor correcting amendment to exemptions for share incentive plans, and I commend it to the Committee.
Anneliese Dodds
I am willing to withdraw amendment 91, given the Minister’s clarification, and I am grateful for his willingness to write to me about the issue that I raised. I make the general point that it is important that we consider these interactions between the social security system and the taxation system. It is particularly important for people on low incomes that we always bear that in mind. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 49 ordered to stand part of the Bill.
Clause 50
Duty of customers to account for tax on supplies
Kirsty Blackman (Aberdeen North) (SNP)
First, the hon. Member for Aberdeen South (Ross Thomson) and I are two very different people. He is a lot taller, has dark hair and is a Conservative Member of Parliament. Lots of people have made this mistake over time. He also has very different views from mine on Brexit.
To follow up on some of the issues raised, I am comfortable supporting the Opposition amendment; it makes sense to ask for this information. A couple of matters were raised during the debate. It is important that reasonable VAT guidance is given to organisations. As we have previously discussed in Committee, people can only pay the correct tax if they understand how the tax system works. If they do not have the appropriate guidance, it is difficult for them to ensure that they pay the right VAT.
It is clear that the Government and HMRC are falling short in the information that they communicate to the companies and organisations that are expected to jump through these hoops. It would be useful if the Government looked at that and ensured that they improve the information they are providing to companies and organisations, so that they can better understand their liabilities and how to comply with them.
Lastly, in relation to discussions around the Taxation (Cross-border Trade) Act 2018, the hon. Member for Stalybridge and Hyde mentioned the changes from making tax digital and the impact of that on companies that are finding it more difficult to navigate the system. Another possible impact, depending on what happens with any withdrawal agreement, is that move from acquisition VAT to import VAT, which would also have a significant impact on companies, because they would have to pay significantly more money to allow them to do things differently.
I was pleased that the Government moved on that point after sustained pressure on them through the passage of the Taxation (Cross-border Trade) Bill. I appreciate that they agreed to put in place a deferment scheme in the event of no deal; that is positive. However, we do not yet know what the deal will look like. Could we have more commitment from the Government about smoothing that path, if there is to be change from acquisition to import VAT?
Obviously I would rather there was no change and we all stayed in a customs and VAT union, with common VAT as the preferred option. If there is to be any change, will the Government reassure us that companies that will be provided with as much support as they can, in order to make that change without the cash-flow impact suggested by organisations such as the British Retail Consortium?
Mel Stride
Before I get into more general points on the clause, I will turn to some specific issues raised by Members, starting with the hon. Member for Aberdeen North. I entirely take her points about the distinction between her and my hon. Friend the Member for Aberdeen South. The differences are quite stark in all respects, though I am not sure to whose benefit that is.
The hon. Lady is entirely right to suggest that we need good guidance on these issues. I should point out that a primary focus of the proposed change is to ensure that we do not, under the existing arrangements, have a number of construction companies falling due to VAT and going over the threshold. That does bring unwanted complexity for those who would not otherwise be in that situation. It is worth bearing in mind that the reason behind the measure is trying to avoid drawing ever more businesses in that sector into the VAT regime.
The hon. Lady also reminded us of the discussions that we had at length on the Taxation (Cross-border Trade) Bill, when most of us were all together.
Mel Stride
Happy days. I thank the hon. Member for Aberdeen North for her positive comments about the position that the Government have taken on acquisition VAT as opposed to import VAT, and extending that—at great cost to the Exchequer, of course—to all external trading arrangements, whether with the EU27, as they will become, or the rest of the world.
It is worth making a general comment on the VAT gap, which featured prominently in the contribution from the hon. Member for Stalybridge and Hyde. That gap has fallen from 12.5% under his party in 2005-06 to 8.9% on the latest figures. That is a pretty significant drop in relative terms across that period. Clause 50 amends the anti-avoidance provisions in section 55A(3) of the Value Added Tax Act 1994, which will enable effective implementation in October 2019 of the VAT reverse charge to combat missing trader fraud in construction sector supply chains. As announced at autumn Budget 2017, the Government are introducing a VAT reverse charge for specified construction services, which is due to come into effect from 1 October 2019.
This measure will help to tackle the problem of organised criminal gangs fraudulently creating or taking over companies in the sector to steal VAT and income tax, known as missing trader fraud. Under reverse charge accounting treatment, the customer, if VAT registered, is responsible for settling VAT with HMRC. As a result, suppliers cannot get the tax due and hence cannot steal it. However, there is currently an anti-avoidance provision in the primary legislation for VAT reverse charges, which requires businesses that purchase supplies subject to a VAT reverse charge to include those purchases as part of their turnover for VAT registration purposes.
Reverse charges apply only to supplies to other VAT-registered businesses. Therefore, this provision was designed to prevent fraudsters from avoiding reverse charges, especially on mobile phones, by instead charging VAT to small unregistered businesses before going missing. The current anti-avoidance provision has the effect of making unregistered businesses purchasing supplies covered by the reverse charge registrable for VAT sooner.
The construction sector has many businesses legitimately trading close to, but below, the VAT threshold. The current anti-avoidance provision could therefore push some legitimate small businesses over the VAT threshold and increase the burdens placed upon them. Clause 50 will amend the VAT Act to allow future VAT reverse charge statutory instruments, including one for the construction sector, to waive this anti-avoidance provision. That means that unregistered businesses will not have to add purchases of construction supplies subject to the reverse charge to their turnover for the purposes of VAT registration, thereby limiting the impact of the reverse charge on small businesses.
Disabling this provision in the construction sector will not have an impact on the effectiveness of the reverse charge, because builders are unlikely to be involved in the sort of supply chains that feature in large-scale missing trader fraud in construction. However, the Government do not wish to remove the provision in its entirety, as it may be beneficial for other sectors subject to missing trader fraud.
Amendment 92 would require that, whenever the Treasury makes use of the Government’s proposed new power to disapply the anti-avoidance provisions in section 55A(3) of the VAT Act, it would also publish a statement setting out the number of traders expected to benefit from being relieved of the burden to register for VAT as a result, and the impact of the VAT reverse charge and the disapplication of the anti-avoidance provisions on the supply chain in the sector that they target. The Government have closely considered the amendment, but ultimately deem it unnecessary. Whenever a Treasury order is made to require the use of a VAT reverse charge in a particular sector, HMRC publishes a tax information and impact note as a matter of course. This note will highlight the scale of the reverse charge’s expected impact in terms of numbers of traders who will be affected and whether the anti-avoidance provisions will apply, and outline how the changes will help to disrupt fraudulent supply chains operating in that sector. This publication is more than sufficient for the purposes sought by amendment 92. I urge the Committee to reject the amendment, and I commend clause 50 to the Committee.
Question put, That the amendment be made.
Mel Stride
Clause 51 and schedule 16 make changes to ensure that we can properly collect VAT when purchases are made using vouchers. It amends the Value Added Tax Act 1994, introducing new section 51B, 51C and 51D and new schedule 10B. These clarify the VAT rules for postage stamps and set out new rules for the VAT treatment of vouchers issued after 1 January 2019.
Members of the Committee will be familiar with tokens—for example, those used in the purchase of books—but the world of vouchers has expanded significantly in recent years. The UK vouchers market is now estimated to be worth about £6 billion a year. As well as the traditional use of vouchers as Christmas presents, vouchers now play a large part in business promotion programmes and staff incentive schemes, which rely heavily on complex distribution systems using electronic, plastic and internet-based products, as well as the traditional paper voucher. Some businesses issue and redeem their own vouchers, whereas others issue vouchers to be redeemed by others. VAT law has been slow to adapt to these changes. This new law modernises the rules and introduces a simpler system.
Anneliese Dodds
The Minister is extolling the virtues of vouchers and noting how innovative many of the company schemes that use them are, but why are the Government still committed to removing individuals’ capacity to benefit from childcare vouchers?
Mel Stride
I think that issue may be outside the scope of the clause, tempted though I am to be drawn into the issue of childcare and vouchers. The hon. Lady will have noted the delay that we implemented in that respect, to make the transition that little bit easier for some of those who might have been impacted.
The clause transposes new EU law, which we pressed the European Commission to introduce, to help combat tax avoidance. The new law has to be in place by 1 January 2019 and the Provisional Collection of Taxes Act 1968 will give the measure effect until Royal Assent of this Finance Bill.
From a VAT perspective, vouchers are unexpectedly complex. That is because, for one payment, a buyer gets two things: a voucher and an underlying good or service. Without special rules, we risk taxing twice: once for the voucher and a second time for the underlying supply. Gift vouchers could be used to buy products with different VAT rates. It is therefore often difficult to apply VAT at the time the gift voucher is bought. Furthermore, gift vouchers are now often sold at a discount to the face value, via distributors to businesses, which give them away for free in business promotion or staff incentive schemes. It is then not always clear to the shop accepting the voucher exactly what has been paid.
Finally, trading vouchers across borders resulted in problems of double and non-taxation, as different countries have different rules. The changes made by clause 51 and new schedule 16 will standardise these rules. First, the legislation specifies the type of voucher covered. Quite a few things nowadays look similar to vouchers, but are not recognised as vouchers under the VAT system—for example, the type of card many of us store money on to go on holiday or give to our children. We are not talking about vouchers that are totally free from when they are issued to when they are used to buy something, such as discount vouchers found in magazines or toothpaste money-off tokens.
The legislation identifies two distinct types of voucher and sets out specific VAT treatments for each. If we know what the voucher can buy and where, that can be charged at the point of issue and at any subsequent transfer of a voucher through its distribution network. If these details are not known at the time of issue, because it is a general gift voucher, we must wait until it is used to be able to apply the correct VAT. Therefore, the law identifies single-purpose vouchers, such as a traditional CD token that can be used only to buy CDs, which are limited to specific products, and multi-purpose vouchers, such as a WHSmith gift voucher, which can be used to buy many things,.
To avoid charging VAT twice, single-purpose vouchers are subject to VAT throughout distribution, but no VAT is charged on redemption. In contrast, multi-purpose vouchers are VAT-free through distribution, but are subject to VAT at redemption. For the multi-purpose voucher, the redeemer—the shop—must account for VAT. If they know the amount paid for the voucher, they should account for the VAT on that value. If they do not know the amount paid, they should account for VAT on the face value of the voucher.
Because the activities of any distributor of multi-purpose vouchers are disregarded for VAT purposes, there will be certain restrictions on the extent to which they can reclaim VAT incurred on related costs. I hope that the Committee is following this very closely, because it is an extremely important series of elaborations on how these vouchers work. HM Treasury and HMRC have consulted with the relevant businesses represented, and HMRC will be clear in guidance on how the rules will work.
The two new clauses would require two reviews by the Government within three months of the passing of the Act. New clause 8 concerns the impact of the provisions on the circulation and distribution of vouchers in the UK and the EU. New clause 9 concerns potential revenue and other impacts that could arise if UK law were to diverge from EU law.
Collecting VAT when vouchers are used is always complex, and it will inevitably take some time for the new rules to bed in. Throughout the negotiations about the changes in the underlying EU law, the Government were in regular contact with the UK businesses affected by the changes, and it was generally felt that this option was the best of the various options identified. Officials have worked hard with businesses to ensure as smooth a transition as possible, and HMRC has offered to be pragmatic as businesses get to grips with the new system.
I can reassure the Committee that the Government will continue to monitor the effects of the change and other developments in this area, including impacts on revenues. With regard to divergence from EU law, it is far too early to consider such impacts, given that we do not yet know the future agreement with the EU and what it will look like in respect of the VAT system more generally. However, I stress to the Committee that a key advantage of this measure is to ensure a level playing field across the EU, so that UK businesses are not disadvantaged by different rules in other EU member states, which they would need to understand and which could result in double taxation or—in terms of Exchequer impact—no taxation at all. I therefore ask the Committee to reject the new clauses, and I commend the clause and schedule 16.
Jonathan Reynolds
I begin with a word of apology to the hon. Member for Aberdeen North for mixing up my Aberdeen constituencies. I can only say to her that in a former Parliament a former Member for Aberdeen South and I were both shadow Energy Ministers, and that at some level I must be missing him and I cannot bring him back. However, that is no excuse for mixing up the two parts of Aberdeen.
Clause 51 relates to gift vouchers and the transposition of an EU Council directive clarifying the consistency of treatment of vouchers. I thought that this was more interesting than it sounded in the explanatory notes; the Minister has done a very good job on that. As he said, this Christmas, when people are out shopping, not many of our fellow citizens will understand that vouchers pose a challenge to HM Treasury in charging VAT, because when a customer buys a voucher, should we charge the VAT on that, or should we charge it when they spend the voucher?
As the Minister said, the discrepancy is further complicated because there will be some stores that sell gift vouchers that then offer zero-rated VAT items, such as children’s clothes. I understand that there have been mismatches in the way that different member states have approached these questions, and that this situation has potentially led to double taxation or no taxation at all across borders. That is the background to the introduction of the EU vouchers directive agreed in June 2017.
The Minister outlined the new regime of single-purpose vouchers and multi-purpose vouchers; I do not think that anyone wants me to repeat that. However, it makes sense that there is clarity on vouchers, finally, and that the risk of there being either double taxation or intra-EU taxation is avoided.
However, professional bodies have raised a number of issues, which I would appreciate some further detail from the Minister on. It is my understanding that there is still no new guidance available from HMRC on this measure, even though implementation is from 1 January 2019. As I mentioned in relation to the previous clause, VAT is a complex and time-consuming area for businesses, so they need as much advice and notice about it as possible. The timing of this implementation, in January, will also coincide with one of the peak times of the year for voucher redemption—hopefully, all of us will get a voucher for Christmas—and that could create a further burden. Gift vouchers are an important part of revenue for UK businesses.
This is a very challenging time for the high street, so the Opposition are mindful that we do not want to create any additional administrative barriers for smaller shops as they develop their businesses. As the Chartered Institute of Taxation has highlighted, shops will need to be able to identify the date of purchase for vouchers, to assess whether they need to declare VAT, given that the rules will be changing. It is surely important, therefore, that they receive as much support as possible from HMRC through the process and receive as much guidance as they can. Those technical details are a concern, and I would appreciate further context from the Minister on how they might be mitigated.
Clause 51 also raises a wider issue, given that it relates to the transposing of EU laws into the UK and our future compliance with EU VAT regulations. Historically, it has not been possible for the UK to fully diverge from the EU on setting rates for VAT. VAT revenues to the Exchequer are a crucial part of the UK’s tax landscape, and we need to know how crashing out without a deal or abruptly pulling out of the customs union will affect how we set VAT rates in future. That is why Labour has tabled new clauses 8 and 9, in relation to schedule 16, which is associated with this clause. New clause 8 would oblige the Government to
“commission a review of the expected impact of the provisions of Schedule 16 on the circulation and distribution of vouchers in—
(a) the United Kingdom, and
(b) the European Union.”
Vouchers are an important part of business for UK retailers. As we leave the EU, questions should be raised about whether this decision on compliance will still work best for both sides, as it has been drafted on the basis that the UK is a member of the customs union. Given that circumstances will change quite dramatically in future, we must be mindful of how this will impact on ongoing changes.
Subsequently, new clause 9 mandates the Government to produce a review of the potential divergence from EU policy of the VAT treatment of gift vouchers, so that we can properly assess its implications. Supporting our high street in today’s challenging environment is a priority for all of us. I therefore urge Members to vote for our new clauses, to make sure that we create the best possible taxation framework for vouchers and help our retailers to succeed.
Mel Stride
I will be brief, but will hopefully answer the questions that the hon. Member for Stalybridge and Hyde has posed. First, as regards guidance, these measures were consulted on widely with UK businesses and stakeholders, and HMRC has recently shared draft guidance with stakeholders for comment. HMRC’s guidance was published yesterday, so that is now in the public domain. Of course, if the hon. Gentleman has any particular observations on that, I would be happy to take representations from him. The Government have also given businesses advance notice of the changes. A consultation document was published last December, HM Treasury and HMRC have been in constant discussion with businesses, and we published the draft legislation last July on L-day, with an impact assessment last month.
My final point relates to the hon. Gentleman’s comments about future VAT arrangements in the context of our departure from the EU. Of course, at this stage, we do not know exactly what those will look like. However, the Government have made a general statement that we are seeking to have arrangements that are broadly in line, so that we do not have very dramatic changes when we depart from the European Union.
Question put and agreed to.
Clause 51 accordingly ordered to stand part of the Bill.
Schedule 16 agreed to.
Clause 52
Groups: eligibility
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 93, in schedule 17, page 305, line 28, at end insert—
“Part 3
Review
“16 (1) The Chancellor of the Exchequer shall commission a review on the impact of the provisions in this Schedule on the number of individuals and businesses entering into VAT groups.
(2) A report of the review under sub-paragraph (1) must be laid before the House of Commons before 1 April 2020.”
This amendment requires a review of the impact of this measure on the number of individuals and businesses entering into VAT groupings for the purpose of tax planning, and for that review to report by the end of the tax year 2019-20.
Amendment 94, in schedule 17, page 305, line 28, at end insert—
“Part 3
Review
“16 (1) The Chancellor of the Exchequer shall commission a review on the potential revenue changes if domestic law were to diverge from European Union law in relation to VAT groups.
(2) A report of the review under sub-paragraph (1) must be laid before the House of Commons within 3 months of the passing of this Act.”
This amendment requires a review on the potential revenue changes if domestic law were to diverge from European Union law in relation to VAT groups.
That schedule 17 be the Seventeenth schedule to the Bill.
Mel Stride
Clause 52 makes changes to the Value Added Tax Act 1994 to allow certain non-corporate entities such as partnerships and individuals to join a VAT group. VAT grouping is an important VAT accounting simplification for UK businesses. It allows companies within the same corporate group to operate under one VAT registration and submit a single VAT return. Members of a VAT group can share goods and services with each other without the need to account for VAT. This helps businesses operate effectively and saves time and resource, for both businesses and HMRC.
Clause 52 will simplify VAT accounting arrangements for many UK businesses and ensure that the UK’s VAT grouping rules operate effectively. It is up to the UK Government to determine how VAT grouping rules operate, to ensure that they work effectively for UK businesses. They must adhere to EU VAT principles when doing so. Following a judgment of the Court of Justice of the European Union in 2016, HMRC held a consultation to determine which entities should be eligible to join VAT groups. HMRC listened carefully to the representations made during this consultation and held detailed discussions with VAT expert stakeholder groups to ensure that the changes to VAT grouping rules work for businesses and HMRC, including publishing draft legislation in July this year.
The changes made by the clause will help reduce VAT accounting burdens for many businesses. Under current rules, only corporate bodies can join a VAT group. We will amend the Value Added Tax Act 1994 to allow non-corporate entities such as partnerships or sole traders to join a VAT group, where those entities control all other members of the VAT group. Although these changes will bring administrative benefits for businesses, it is important that the rules are not misused, so we will update existing anti-avoidance rules via a statutory instrument to ensure that no taxpayers use VAT grouping to avoid VAT. The changes made by the clause are expected to have a negligible impact on the Exchequer.
Amendments 93 and 94 would require the Chancellor to commission a review on the impact of these changes to individuals and businesses and a further review on the UK tax revenue impact of any future divergence from EU VAT grouping rules. The Government do not intend to accept these amendments. The VAT grouping changes have been made following extensive consultations by HMRC. HMRC’s response to the consultation was published in December 2017.
With respect to a review of the UK tax revenue impact of any future divergence from EU VAT grouping rules, it is worth noting that although the UK must follow EU VAT law principles, the UK Government already have the ability to tailor UK VAT grouping rules to our own specifications. If any future changes are made to UK VAT grouping rules, they will of course receive parliamentary scrutiny at that time. I do not consider, therefore, that either of the proposed reviews is required.
Jonathan Reynolds
I am extremely grateful for the hon. Lady’s intervention and entirely agree with it.
On the access of financial services to the single market once we leave the EU, under the terms of what the Government have negotiated—that single market access will almost certainly be denied unless the equivalence provisions prove adequate, although most people expect them not to be—the Government’s advice to firms in the UK is to set up subsidiaries in the EU. It was reported to me in meetings yesterday in the City that there is concern that when those subsidiaries are created, the connected UK entities will not be able to enter VAT groups in the UK, which would therefore trigger a substantial tax liability in order for firms to comply with the Government’s own advice on market access to the EU. The Minister may not be able to answer that now, but I want to put it on the record.
I call on all Committee members to support both amendments today so that we can get a clear and full picture of the wider impact of the measures on the future VAT policy approach outside the EU and on closing our own VAT gap here in the UK.
Mel Stride
The hon. Gentleman raised a large number of questions, most of them very specific and quite technical, not least around the treatment of UK resident individuals in the context of VAT grouping, as opposed to non-residents in a similar situation, where perhaps a business has—my terminology—a permanent establishment here, but is run by non-residents. He also made various points about the administration of VAT groups. I will write to him about those issues and the other points he raised in that part of his contribution. He asked a specific question about whether we are updating joint and several liability rules for these changes. The answer is that we are not. HMRC will continue to monitor the rules, of course, to ensure that they work effectively for UK businesses.
The final point that the hon. Gentleman raised related to our future relationship with the European Union. His specific question, as I understand it, was about compliance with the financial services arrangements that might be in place once we have left the European Union: if, as a consequence of that, a UK financial services business had a subsidiary or another operation within the EU27 as opposed to here, would that prohibit that particular operation from participating in a VAT group with the UK domicile concern? I have absolutely no idea what the answer to that is, but I did at least understand his question and I am happy to look into it and get back to him.
Question put and agreed to.
Clause 52 accordingly ordered to stand part of the Bill.
Schedule 17
VAT groups: eligibility
Amendment proposed: 93, page 305, line 28, at end insert—
Part 3
Review
16 (1) The Chancellor of the Exchequer shall commission a review on the impact of the provisions in this Schedule on the number of individuals and businesses entering into VAT groups.
(2) A report of the review under sub-paragraph (1) must be laid before the House of Commons before 1 April 2020”. —(Jonathan Reynolds.)
This amendment requires a review of the impact of this measure on the number of individuals and businesses entering into VAT groupings for the purpose of tax planning, and for that review to report by the end of the tax year 2019-20.
Peter Dowd
As long as that? Ten minutes? My word.
I should point out that, under a more active Government—one not simply going through the motions—these measures would already have been taken into account, acted upon and been on offer for proper scrutiny during this debate. Nevertheless, I hope the Minister will see the benefits of the review as set out in our amendment and agree that it is worth while—or that Members will choose to support amendment 98 to see that it is implemented. That brings our amendment on this particular matter to a close. Cheers.
Treasury
Mel Stride Excerpts(7 years, 4 months ago)
Ministerial CorrectionsRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mel Stride
The hon. Lady makes an entirely reasonable request for that information. As I indicated, I am happy to provide it to her. In fact, divine inspiration has just arrived—I have an answer; I knew it was lost somewhere in my mind. There have, in fact, been 12 opinions, all of which have been supportive of HMRC. If she would care for any further information, I am happy to provide it outside the Committee.
[Official Report, Finance (No. 3) Public Bill Committee, 27 November 2018, c. 28.]
Mel Stride
If it is in order, Ms Dorries, I will give the hon. Member for Oxford East an additional piece of information on the issue of referrals to the panel. There were nine cases rather than 12; there were 12 opinions on those nine cases, all of which supported HMRC. That might explain how I had a figure of nine while the hon. Lady was focused on 12.
[Official Report, Finance (No. 3) Public Bill Committee, 27 November 2018, c. 29.]
Letter of correction from the Financial Secretary to the Treasury:
Errors have been identified in my responses to questions raised during the debate on clause 2, Corporation tax charge for financial year 2020.
The correct responses should have been:
Mel Stride
The hon. Lady makes an entirely reasonable request for that information. As I indicated, I am happy to provide it to her. In fact, divine inspiration has just arrived—I have an answer; I knew it was lost somewhere in my mind. There have, in fact, been 16 opinions, all of which have been supportive of HMRC. If she would care for any further information, I am happy to provide it outside the Committee.
Mel Stride
If it is in order, Ms Dorries, I will give the hon. Member for Oxford East an additional piece of information on the issue of referrals to the panel. There were nine cases rather than 12; there were 16 opinions on those nine cases, all of which supported HMRC. That might explain how I had a figure of nine while the hon. Lady was focused on 12.
Finance (No. 3) Bill (Third sitting)
Mel Stride Excerpts(7 years, 4 months ago)
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The Chair
With this it will be convenient to discuss the following:
Amendment 31, in schedule 2, page 171, line 18, at end insert—
‘(4) The provisions in this paragraph may not come into effect until the Treasury has published the results of any consultation conducted by the Commissioners with representative bodies concerning awareness of the provisions among those who will be covered by them.’
This amendment would delay the commencement of the paragraph in Schedule 2 relating to the obligation to make a return in respect of a disposal to which the Schedule applies, until the Treasury has released details of HMRC‘s consultation with representative bodies concerning awareness of the provisions amongst those who may be covered by them.
Amendment 32, in schedule 2, page 176, line 21, at end insert—
‘Part 1A
Review of effects on public finances
17A The Chancellor of the Exchequer must review the revenue effects if the provisions in Schedule 2 were introduced from 6 April 2019, and lay a report of that review before the House of Commons within six months of the passing of this Act.’
This amendment would require the Chancellor of the Exchequer to review the revenue effects of the provisions of Schedule 2 if they were introduced in 2019/20.
Amendment 33, in schedule 2, page 176, line 21, at end insert—
‘Part 1A
Review of effects on public finances
17A The Chancellor of the Exchequer must review the expected revenue effects of the changes made to capital gains tax returns and payments on account in this in this Schedule, along with an estimate of the difference between the amount of tax required to be paid to the Commissioners under those provisions and the amount paid, and lay a report of that review before the House of Commons within six months of the passing of this Act.’
This amendment would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of the changes made to capital gains tax in Schedule 2.
That schedule 2 be the Second schedule to the Bill.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve under your chairmanship, Mr Howarth. I wonder whether it should be the Opposition speaking to their amendments, as opposed to me proceeding, though I am happy to do so.
The Chair
The lead question is clause stand part. I assumed that the Minister would want to speak. If he prefers to wait, that is fine; the debate is open to those who want to speak to amendments.
Mel Stride
I am happy to proceed as you suggest, Mr Howarth, and to respond briefly to the Opposition speeches later.
The clause and schedule 2 introduce a requirement on UK residents to pay capital gains tax through payments on account when disposing of residential property. They also amend a similar requirement for non-residents. Parts 1 and 2 of the schedule bring all the main rules together in one place.
For income tax, employees are taxed throughout the tax year as part of the pay-as-you-earn system. Self-employed people pay their income tax liabilities in instalments known as payments on account throughout the tax year, making a balancing payment following the end of the tax year through the self-assessment system.
In contrast, capital gains tax, which also forms part of the self-assessment system, has traditionally been available only after the tax year has ended. That means that the taxpayer may pay their capital gains tax liability up to 22 months after making the gain. As gains on residential property can be significant, we think it right that any capital gains tax due is paid soon after the property is disposed of, to ensure that any liability is paid when the taxpayer is most likely to have the funds to do so.
The changes made under schedule 2 introduce new requirements on UK residents when they dispose of UK residential property on which capital gains tax is due, such as a second home or a buy-to-let property. The first requirement is that they must make a payment on account of their capital gains tax liabilities. In most cases, that will be payable within 30 days of the contract for the sale or disposal being completed.
The second requirement ensures that the payment is properly accounted for by Her Majesty’s Revenue and Customs. Taxpayers must submit a simple tax return within the same 30-day window advising HMRC of the disposal and how much they are paying on account. How much tax is paid will be calculated according to the gain made and any unused losses and allowances that the taxpayer may offset at that time. It will work in much the same way as completing a self-assessment return. If at the end of the tax year a person has no further income tax or capital gains tax liabilities due, they will not then need to complete a full self-assessment return.
We have listened to representations made during consultation and therefore made changes to the legislation. Reasonable estimates of valuations and apportionments will be permitted without penalty when the correct amounts are unavailable in time. The changes will come into effect for disposals from 6 April 2020.
The schedule also makes two changes to an existing reporting and payment-on-account scheme that applies to non-UK residents disposing of UK property. First, it amends the scope of the scheme from 6 April 2019 to include the new interests chargeable to tax that we debated under clause 13.
Sir Robert Syms (Poole) (Con)
I declare an interest: I have paid capital gains tax—a horrible tax—in the past. At the moment, there is an allowance for capital gains tax, so when the form goes in, the allowance is taken off. Will the full allowance be taken off the first-stage payment, or will the allowance taken off the payment be split? Let us say that I have a £30,000 capital gain; I might well take up all my allowance in the first-stage payment and pay a slightly larger second payment, or I could simply split the whole amount. There is also a cash-flow issue.
Mel Stride
My understanding is that the capital allowance will be applicable when the first payment is made in full, subject to the capital gain being equal to or exceeding the allowance. If there is any adjustment on a subsequent return, I imagine—I look to my colleagues—that if the gain has been less than the capital allowance initially, or in other words there is some excess available, that might be available to any balancing payment made subsequently. The officials seem to confirm that to be the case.
Sir Robert Syms
The capital gain might be split between two people. This is a slightly separate, tangential question, but let us say a husband and wife sell something and the capital gain is split between them. I presume that will be two allowances and two split payments. Is there a minimum amount for someone to have to fill in a form to put in? For a small capital gain—a few hundred pounds—is there a de minimis amount or will more bureaucracy be created for rather minor payments?
Mel Stride
I wonder whether my hon. Friend is about to sell a house and is simply after some discounted tax advice. He is right that there will be an allowance for each taxpayer under those circumstances. The sale of the property—let us say it is a property—will occur and, to the extent that there are capital gains at or below the allowance for each of the two parties, that may be offset at that particular point.
The context of the clause is not so much the way the relief of the capital allowance works—it remains as before—but the timing of the payment of the capital gains tax should there be any. It moves from what might be a 22-month delay, given the capital gain might have been assumed at the beginning of a particular tax year but payment will not be required until completion of the self-assessment in the January following, so this is about timing rather than the mechanics of how the capital gains allowance works.
Sir Robert Syms
I understand that, but quite often when people sell a property, they have an amount of money they have to pay, and they put it in a bank account and sit on the money for a few months in order to sort out their tax return. Currently, they do not get much interest on the money anyway, but I wonder whether, rather than have a split payment, someone will be given a small discount for paying the whole sum in the year rather than splitting it until they do their tax return. It seems to me that people will be happy to pay, but that if there is a little incentive they might pay the whole amount.
Mel Stride
The provisions of the clause change the regime such that they will be required to account for the capital gains within 30 days. In a sense, this has been done by changing the rules rather than providing an incentive, I am afraid. I thank my hon. Friend for his interesting interventions.
Amendment 31 proposes that the changes come into effect only once we can guarantee awareness of them. HMRC has engaged with stakeholders on the details of the change and the draft legislation. The Members who tabled the amendment will be pleased to know that the Government published a summary of responses to their consultation on 6 July.
Amendments 32 and 33 request a review of the revenue impact of the changes, including the impact on the tax gap. The latest estimates for the revenue impact of the measure, both with the original 2019 start date and the delay to April 2020, were published at the Budget 2018.
Alex Sobel (Leeds North West) (Lab/Co-op)
The transition from diesel and petrol to electric cars is vital for us to meet our carbon budgets. Has the Treasury assessed the impact of the measure on the electric vehicle market, as well as the wider automotive sector?
Mel Stride
I assure the hon. Gentleman that in these tax matters—as with all tax matters—given our firm commitment to honour our climate change commitments, we are in regular contact with car manufacturers and those producing electric vehicles, through my hon. Friend the Exchequer Secretary.
As with all policy changes, the fiscal impact of the measure will be monitored by HMRC, and the Office for Budget Responsibility may request for it to be reviewed as the new out-turned data becomes available. The fiscal impact on taxpayer compliance has been considered and is included in the overall costing of the measure. HMRC publishes annual updates to its tax gap analysis, which will reflect the effect of capital gains tax policy changes. I therefore urge the Committee to resist the amendments and I commend the clause and schedule to the Committee.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve on this Committee with you in the Chair, Mr Howarth. I am grateful to the Minister for his introductory comments and for his comments on our amendments.
As the Minister explained, the clause and schedule extend, from 6 April next year, the existing capital gains tax requirements in relation to reporting and payment for non-UK residents who are disposing of UK property, in order to include new interest that will henceforth be taxed. They also introduce, on the same date the following year, reporting and payment-on-account obligations for residential property gains for UK residents and UK branches and agencies of non-UK resident people.
The measure has been quite a long time coming. Back in 2015, the Government signalled their intention to introduce from April 2019 the requirement that capital gains tax on gains from selling or disposing of residential property be paid within 30 days of the disposal being completed. As the Minister intimated, that will be a payment on account towards the person’s tax liability for the tax year in which the disposal is made. However, the measure was deferred until 2020, and the consultation on it undertaken earlier this year, as the Minister mentioned. As I understand it, there is already a payment-on-account scheme for non-UK residents, so these measures will just extend that approach to UK residents, as well as expanding the range of taxable interest for non-UK residents.
We have tabled two amendments. Amendment 31 would delay commencement of the provisions in paragraph 3 of schedule 2 until the Government have released further details of HMRC’s consultation with representative bodies concerning awareness of those provisions among those who may be covered by them. The rationale for the amendment is that the proposed measures, as we have just discussed, introduce a new payment-on-account scheme for capital gains tax on residential property that requires filing of a return far earlier than is currently required, and far earlier than the potential 22 months to which the Minister referred, right down to 30 days after the disposal of that property.
During the consultation on the proposals, some respondents expressed their concern that taxpayers, not expecting that they needed to make such a return until the end of the tax year, might fail to inform their accountant and thus miss the deadline. Of course, in doing so they would incur interest on non-payment. Our amendments would enable details of HMRC’s discussions with representative bodies to be asked for in order to ensure that potentially affected taxpayers were forewarned of the new measures and therefore did not fall foul of them and incur that interest on non-payment.
I understand why respondents to the consultation might have been concerned by that. Their responses were summarised in the consultation response document as concerning the fact that
“taxpayers may not be aware of the new rules until after the end of the tax year when they tell their accountants about their disposals, resulting in late filing penalties.”
Some of those making that argument pointed out that HMRC charges interest for those filing late, set at 3%. That, of course, contrasts with the repayment interest of 0.5%. I completely understand why there is a difference in rates, but that difference surely adds some grist to the mill of needing to ensure that all potential taxpayers are definitely made aware of the change. After all, 30 days is not that long a period within which to act.
The Government’s response to the consultation maintains that where information needed to be obtained from third parties for the purposes of calculating the capital gains tax that should be accommodated within the periods required for marketing and conveying any such property, and that estimated declarations could be corrected later, as the Minister mentioned. I am a little concerned by some of the ambiguity in the language used in the consultation response about what will happen if a taxpayer cannot make the payment on time. This is a question not of the amount of tax owed, but of the calibration of when it will be paid.
Mhairi Black (Paisley and Renfrewshire South) (SNP)
It is a pleasure to follow the hon. Member for Oxford East; we are also happy to support the Labour party’s very sensible amendments.
Our amendment would require the Chancellor of the Exchequer to review the effect on public finances and on reducing the tax gap of the changes made to capital gains tax in schedule 2. In 2016-17 the income tax, national insurance contributions and capital gains tax gap was 4.2%, or £13.5 billion—quite a significant amount of money for a Government to be short-changed on. It seems only sensible, then, that the Chancellor informs us of how he expects these changes to impact that tax gap. That would enable us to have a record of what the intentions are and what he expects to be the conclusion.
Only then can we coherently and clearly assess whether the measure is working or not. Especially given how unpredictable the current future is with Brexit and things, it surely only makes sense to put this stuff down in writing—“Here’s what we think is going to happen”—so that we can then assess it. Ultimately, it cannot hurt to be more transparent, so I urge the Government to accept the amendment.
Mel Stride
I thank the hon. Members for Oxford East and for Paisley and Renfrewshire South for their contributions; I will just pick up on the points that have been raised.
On the question of timing, both in terms of bringing the measure before the Committee and the fact that it is coming in in 2020, I should say that we clearly consulted very carefully. The hon. Member for Oxford East mentioned consultation: we had an eight-week technical consultation, held between 11 April and 6 June 2018, and there were a number of responses to that.
On the issue of the date when the change will come in, it is important to mention that this is a significant change to the way the timing arrangements of this tax operate. The hon. Member for Oxford East drew on my observation that it is possible under the existing regime to have a 22-month delay between the sale of the asset concerned and payment of the tax. Of course, that is the maximum delay, which would occur in the event that the asset was disposed of at the very beginning of a tax year. In reality, the delay is likely to be shorter than that—as much as 12 months shorter if the asset is sold at the end of the tax year in question.
Vicky Ford (Chelmsford) (Con)
I want to raise an issue about capital gains tax that was brought up by one of my constituents, who has taken the opportunity in retirement to travel overseas for a few years. They let their property using letting relief. I understand a consultation has been started to review letting relief. They are concerned that the loss of letting relief may make them liable for capital gains tax, which may mean they have to sell their family home despite the fact that they want to return to the UK. I will write to the Minister about that case, and I wonder whether he will look into it and write back to me.
Mel Stride
If my hon. Friend writes to me about that consultation, I will of course be very happy to respond to her.
The hon. Member for Oxford East also raised the possibility of someone not filing the information as a consequence of the shortening of the time period. Part of the purpose of the change is to concentrate the requirement to file the paperwork at the time the asset is sold, rather than leaving it in the distance. Where that requirement gets pushed into the distance, there is a possibility of people forgetting about it.
One should also bear in mind that, in the case of a property, a number of professional advisers—particularly solicitors—will be involved in the transaction. One would expect them, in the natural course of events, to discuss the tax implications of the transaction with the individual concerned.
Sir Robert Syms
If someone has a number of properties, it is important that HMRC knows which they elect as their main home. If, as in the case my hon. Friend the Member for Chelmsford mentioned, that has not always been their main home—if it started off as a second home or they rented it out, for example—the normal approach is to apportion certain years in the property for which they are liable for capital gains tax. I am still a little concerned about the 30 days. I have on occasions gone back through all my files to see when I told HMRC or my accountant, and it is possible to get into a long, involved thing about what percentage of a property is liable for capital gains tax.
I am just a bit concerned that the window of opportunity is too small. There are examples of people having multiple capital gains tax liabilities because they bought themselves more than one home in a year. Getting all the information and the bills together sometimes takes a little time—it can be easier to do that during the year-end process. I can understand the Treasury’s wanting to get income in quickly, and many people would welcome that, but 30 days is pretty short if someone has to go through their strong boxes at home or contact their accountant or solicitor, who are often repositories of information. I hope the Minister thinks about this issue a little more.
Mel Stride
Thank you, Mr Howarth; I am sure the Committee has taken note of your guidance. I say to my hon. Friend the Member for Poole that there is another aspect to that, and while 30 days is 30 days—not a year or more as has been the case under current arrangements—there are two points that I will make.
One is that, clearly, there is typically a moment of exchange before property transfer completes, which is an additional period of time in which paperwork is brought together. The second point is that, to the extent that it is not possible to immediately complete the information with absolute certainty within the 30 days—perhaps because of third-party valuation issues, for example—it is possible, as I said earlier, to have a balancing arrangement further on down the line in the future. That could work either way: the Revenue might owe the individual money or vice versa. That is facilitated within the arrangements.
I point my hon. Friend to the HMRC website where, should he have any more specific questions about how CGT operates, there is a user-friendly interface. He can put in all the numbers and variables, and the website will provide him with the answers.
The hon. Member for Oxford East raised the time-to-pay arrangements. Clearly, where tax is due, the Revenue takes a measured and responsible approach towards those who find it difficult to pay any tax, perhaps for reasons of personal financial difficulty or otherwise. I know from conversations that those at a senior level at HMRC have always been very keen to ensure that it operates in a sympathetic and responsible manner to negotiate the very difficult line between being sympathetic, responsible and helpful, where appropriate, and equally, making sure that we are all treated the same and that, where tax is due, individuals and companies actually pay it.
Another point that has been raised is HMRC capacity. The premise of those concerns is the assumption that, to a significant degree, the changes might generate lots of additional work for HMRC. I suspect the contrary, for the reasons that I have given. If, when the capital gain is crystallised, there is a shorter period for people to hand in the paperwork as required, it means that they will get on and do it, rather than delaying and discovering that, as a consequence, they have to contact HMRC to get involved in negotiations and discussions.
On the overarching point about HMRC and capacity, as the hon. Lady will know, we have of course invested an additional £2 billion in HMRC since 2010. We have 24,000 individuals or full-time equivalents in HMRC who are focused on tax collection. The total head count of HMRC, which stands at around 70,000, is the highest that it has been for some years. I commend the clause and the schedule to the Committee.
Anneliese Dodds
I am grateful to the Minister for his comments. We on this side do not oppose the measures and are willing not to press our two amendments to a Division. I will, however, make two points. It would help if the Minister provided some information on the criteria that would be used by HMRC for adopting deferred arrangements with individual taxpayers. Such criteria exist for time-to-pay arrangements, but none has been set out in relation to this clause, so it would be helpful to know what they are. I agree with him that there needs to be a balance between sympathy and responsiveness, to enable people to pay the tax that is due. On the other hand, there is the matter of equal treatment.
Mhairi Black
I appreciate everything that the Minister said. However, I think that our amendment is as sensible as it is transparent and therefore I still insist that it be part of the Bill.
Mel Stride
May I say to the hon. Member for Oxford East that I will, of course, be very happy to write to her on the criteria in relation to time-to-pay arrangements?
Question put and agreed to.
Clause 14 accordingly ordered to stand part of the Bill.
Schedule 2
Returns for disposals of UK land etc
Amendment proposed: 33, in schedule 2, page 176, line 21, at end insert—
“Part 1A
Review of effects on public finances
17A The Chancellor of the Exchequer must review the expected revenue effects of the changes made to capital gains tax returns and payments on account in this in this Schedule, along with an estimate of the difference between the amount of tax required to be paid to the Commissioners under those provisions and the amount paid, and lay a report of that review before the House of Commons within six months of the passing of this Act.”—(Mhairi Black.)
This amendment would require the Chancellor of the Exchequer to review the effect on public finances, and on reducing the tax gap, of the changes made to capital gains tax in Schedule 2.
Question put, That the amendment be made.
The Chair
With this it will be convenient to discuss the following:
Amendment 39, in schedule 5, page 204, line 29, at end insert—
“Part 1A
Annual report of non-uk resident companies
5A (1) The Chancellor of the Exchequer must publish details of non-UK resident companies to which corporation tax is chargeable due to the provisions of this Schedule.
(2) The details published under sub-paragraph (1) must list the name of each such non-UK resident company.
(3) The publication under sub-paragraph (1) must be published—
(a) in respect of the first such publication, within six months of this Schedule coming into force, and
(b) in respect of each subsequent publication, within 12 months of the date of the previous publication.”
This amendment requires an annual report on companies to which corporation tax is chargeable due to the provisions of this Schedule.
Amendment 35, in schedule 5, page 210, line 45, at end insert—
“Part 2A
Review of effects on public finances
34A (1) The Chancellor of the Exchequer must review the revenue effects of this Schedule and lay a report of that review before the House of Commons within six months of the passing of this Act.
(2) The review under sub-paragraph (1) must consider—
(a) the expected change in corporation tax paid attributable to the provisions in this Schedule, and
(b) an estimate of any change, attributable to the provisions in this Schedule, in the difference between the amount of tax required to be paid to the Commissioners and the amount paid.”
This amendment requires a review of the effects of this Schedule on the public finances.
Amendment 38, in schedule 5, page 210, line 45, at end insert—
“Part 2A
Annual review of effects of this schedule
34A (1) The Chancellor of the Exchequer must undertake an annual review of the effects of the provisions of this Schedule on corporation tax receipts.
(2) The report of the review under sub-paragraph (1) must be laid before the House of Commons before—
(a) in respect of the first review, within 12 months of this Schedule coming into force, and
(b) in respect of each subsequent review, within 12 months of the date on which the report of the previous review was laid before the House of Commons.”
This amendment requires an annual review of the revenue effects of this Schedule, in each year following the Schedule coming into force.
That schedule 5 be the Fifth schedule to the Bill.
New Clause 4
Comparative review of the expected effects of Schedule 5
“(1) The Chancellor of the Exchequer must a review of the expected effects of the provisions of Schedule 5 on payments to the Commissioners, and lay a report of that review before the House of Commons within 6 months of the passing of the Act.
(2) The review under subsection (1) must in particular consider—
(a) the expected change in corporation tax receipts attributable to those provisions, and
(b) the expected change in corporation tax receipts if—
(i) the provisions in Schedule 5 were not brought into force, and
(ii) the rate of corporation tax were to be changed to 26%.”
This requires a review of the effects of Schedule 5, and a comparison of the effects of that Schedule to an increase of the rate of corporation tax to 26%.
Mel Stride
Clause 17 and schedule 5 provide that a non-UK resident company that carries on a UK property business will be charged corporation tax, rather than income tax as at present. The provisions will deliver equal tax treatment for UK and non-UK resident companies that carry on UK property businesses. They will prevent persons from using the existing difference in treatment to reduce their tax bill on UK rental property or land through offshore ownership.
Until 1965 all companies were subject to income tax on their profits. When corporation tax was introduced in that year for UK resident companies and for non-resident companies trading in the UK through a UK permanent establishment, other non-resident companies remained chargeable under the income tax rules. From July 2016, non-resident companies that deal in or develop UK land were brought within the UK tax net under corporation tax, but for UK property businesses, two companies, one domestic and one offshore, currently have different rules for calculating tax from a UK property income, even if their property businesses are otherwise identical.
The clause provides for a more coherent and fair tax regime by bringing the UK property business income of non-resident companies into the corporation tax regime from 6 April 2020. The transition will mean that those companies will be subject to the recently implemented policies to combat tax avoidance, including the corporate interest restriction, hybrid mismatch rules, carried-forward income loss restriction and the carried-forward capital loss restriction announced at Budget 2018. The businesses will now be taxed at the corporation tax rate and, in combination with clause 24, they will be eligible for the loss relief rules available to companies and groups. The latest estimate by the Office for Budget Responsibility is that the changes will raise £365 million over the next five years.
Amendment 39 would require the publication of a register of named individual non-UK resident companies who are charged corporation tax rather than income tax as a result of the measure. The Government do not identify specific individuals or companies that are brought within the scope of particular tax charges, and it would be inappropriate to do so. Amendments 35 and 38 would require a review of the impact of schedule 5 on corporation tax receipts. The OBR certified impact of the measure on tax receipts is set out in table 2.2 of Budget 2018. It will be updated in table 2.2 of Budget 2019 before the schedule comes into effect on 6 April 2020, so the amendments are unnecessary.
New clause 4 would require the Government to undertake a review of the effects of schedule 5, specifically to consider the effect of not bringing schedule 5 into effect and increasing the corporation tax rate to 26%. If schedule 5 was not brought into effect, non-UK resident companies with income from UK property would remain chargeable to income tax. In that situation, raising the corporation tax to 26% would create a clearly enhanced incentive for companies with a UK property business to set up offshore in order to benefit from paying the basic rate of income tax.
I urge the Committee to reject the new clause, along with the amendments, and I commend clause 17 and schedule 5 to the Committee.
Anneliese Dodds
I am grateful to the Minister for that explanation of the clause and schedule. As he explained, they set out new arrangements for non-UK resident companies that carry on a UK property business or that have other UK property income. The clause and schedule will shift those companies from the income tax regime into the corporation tax regime. The Government appear to intend the measure to deliver more equal treatment for UK and non-UK resident companies in receipt of similar income, and to prevent those that use the difference to reduce their tax bill on UK property through offshore ownership.
The measures were subject to consultation from March last year and the Government released their response in autumn 2017. In that Budget the Government announced they would make the change in two years’ time, in 2020. I anticipate that in our discussion we will return to some of the themes that characterised our discussion on clauses 13 and 14. The measure seeks to align the treatment of non-UK investors with that of UK investors in the field of real estate. On Tuesday we discussed some of the limitations that the Opposition believes there are with the Government’s approach.
Mel Stride
I thank colleagues for their contributions. The hon. Member for Aberdeen North asked about the rationale for making this change, and whether it was simply to treat everybody equally—there is clearly a point to that, but is it sufficient to justify the change? Equality of treatment has its merits, but, as I explained in my opening remarks, there is the issue of bringing into the corporation tax regime those who hitherto have been engaged in activities that fall due to income tax rather than corporation tax. With that come all the anti-avoidance measures, including the corporate interest restriction, the hybrid mismatch regime, the carried-forward income loss restrictions and the capital gains and loss restrictions that were set out in the recent Budget. That is quite an important point.
Kirsty Blackman
I thank the Minister for attempting to explain. Pulling those people into all those anti-avoidance measures still results in a negative impact on the Exchequer. I contend that there may be no point in pulling them into these different measures if there is no positive benefit to be had from doing so.
Mel Stride
The latest OBR estimate is that the changes will raise £365 million across the forecast period, although I will come to the issue raised by the hon. Member for Oxford East about the timing of the figures. She referred to the consultation that we carried out between March and June 2017; we came back with our report on 1 December 2017. Draft legislation for the UK property income measure was published on L-day on 6 July, and the technical consultation was run until 31 August 2018. Responses were received from representative bodies from the property retail sector and accountancy firms. The measure was consulted on pretty thoroughly.
On the timing issues raised by the hon. Lady, the way in which the Office for National Statistics tax accounting treatment works means that increased corporation tax receipts are scored in the year of implementation, but the corresponding reduction in income tax receipts is scored in a subsequent year. There is a mismatch between the moneys coming in under the CT arrangements and the moneys that have been transferred into that regime, which do not go into the scorecard until a year later. That would largely explain the profile to which she referred.
Anneliese Dodds
The Minister is trying to suggest that it would be a great cost, but I made it clear that HMRC would have to compile a list of these individuals anyhow in order to inform them of their tax liabilities. There would not be a collation cost. There may be a cost from other aspects of it, but not from the collation.
Mel Stride
The hon. Lady is right that HMRC will be privy to the information, but there is a difference between being privy to the information and treating with individuals and companies in terms of their tax return. Collating all that information and presenting it in the form that she envisages is a distinct activity.
I undertake to write to the hon. Member for Aberdeen North about the online number that she discovered and the numbers that were provided in the policy document. I wish I was so good that I just knew all the answers and was over the detail to that degree, but I will certainly write to her on that, and on the cost of making the changes to the system. I am happy to have a look at the £160,000 figure that she raised and see how it breaks down.
Kirsty Blackman
If possible, it would also be useful to know before we come back on Report whether the Government expect the revenue impact for the Exchequer to be negative in future years, beyond the four-year timescale that is predicted. That makes a difference in terms of whether it is, as the Minister says, a good measure across the four years or a really bad measure across 10 or 12 years.
Mel Stride
I think I am right in saying that over the longer term, in revenue terms the measure is likely to be broadly neutral. The OBR, of course, will only cast out across the scorecard period. It will not analyse the fiscal impacts beyond that, but if the hon. Lady would care to write to me with any questions on that, to the extent that I can answer them of course I will do so.
I commend the clause and the schedule to the Committee.
Anneliese Dodds
I am grateful to the Minister for his comments, but we will press amendment 38 to a vote. Although I took on board his responses, I am concerned that we have a lack of clarity about the revenue impact of a measure, which means that as a Committee it is difficult for us to make a judgment on it. When he tried to explain why there might be a negative amount on some projections of the impact in subsequent years, he stated that that was due to the different timing of reporting of corporation tax revenue and income tax revenue. That would explain a difference for one year, but not for subsequent years, so I am still concerned about why there might have been a negative suggested figure into subsequent years.
In addition, it is not clear to me whether the figures that have been set out, whether that is one set or another, take into account the impact of coming within the scope of anti-avoidance measures and so on. That would obviously just be a projection in any case, but we surely need to have more information before we can take an informed view.
The Chair
With this it will be convenient to discuss the following:
Amendment 46, in schedule 6, page 220, line 2, leave out paragraph 11.
This amendment removes the proposed extension of the review period to 15 months.
Amendment 37, in schedule 6, page 220, line 26, at end insert—
“13 The Chancellor of the Exchequer must review the expected change to payments of diverted profits tax and any associated changes to overall payments made to the Commissioners arising from the provisions of this Schedule, and lay a report of that review before the House of Commons within 6 months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the effect on public finances of the diverted profits tax provisions in this Bill.
Amendment 40, in schedule 6, page 220, line 26, at end insert—
“13 The Chancellor of the Exchequer must review the expected revenue effects of the changes made to diverted profits tax in this Schedule and lay a report of that review before the House of Commons within six months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the effect on public finances on the provisions in Schedule 6.
Amendment 41, in schedule 6, page 220, line 26, at end insert—
“13 The Chancellor of the Exchequer must review diverted profits tax against its policy objectives and lay a report of that review before the House of Commons within six months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review DPT against its policy objectives.
Amendment 42, in schedule 6, page 220, line 26, at end insert—
“13 The Chancellor of the Exchequer must commission a review comparing diverted profits tax against a Digital Services Tax and lay a report of that review before the House of Commons within six months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review DPT against the Government’s proposed Digital Services tax.
Amendment 43, in schedule 6, page 220, line 26, at end insert—
“13 (1) The Chancellor of the Exchequer must commission a review on the matter specified in subsection (2).
(2) That matter is the effects on the public finances of the the provisions in this Schedule coming into effect in the tax year 2019-20 compared to previous or subsequent tax years.
(3) The Chancellor of the Exchequer must lay a report of the review under subsection (1) before the House of Commons within six months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the impact of introducing this measure in 2019-20.
Amendment 45, in schedule 6, page 220, line 26, at end insert—
“13 After section 105 insert—
105A Public register of diverted profits tax payments
(1) The Commissioners must provide information to the Treasury listing those companies that have made payments pursuant to a charge of diverted profits tax, and the amounts of those payments.
(2) The Treasury shall publish a register of companies paying diverted profits tax based on the information provided by the Commissioners under subsection (1), and shall make that register available to the general public.”
This amendment requires the publication of a public register of those companies that pay diverted profits tax.
That schedule 6 be the Sixth schedule to the Bill.
Mel Stride
Clause 18 makes changes that will ensure that the diverted profits tax continues to prevent multinationals from diverting profits from the UK to artificially and unfairly lower their tax bill. The Government have created a tax system that rewards entrepreneurship, drives growth and is based on low corporation taxes, but does not tolerate any company or person exploiting the rules to avoid paying their fair share. In 2015 we therefore introduced DPT, which counters aggressive tax planning by multinationals. It is targeted at particular behaviours and arrangements, not at particular taxpayers or sectors.
DPT has been a success. Every year, HMRC publishes statistics on the revenue that it has raised, and every year they show that it has raised more than originally forecast. Last year alone, it raised £388 million—40% more than in 2016-17. Clause 18 will ensure that DPT continues to prevent multinationals from exploiting our tax system and continues to raise money for our vital public services.
When Parliament introduced DPT, it was intended that diverted profits would be subject either to DPT or to corporation tax, but not both. Concerns have been raised by some commentators that the current legislation does not make that clear. Clause 18 will put it beyond doubt by clarifying that diverted profits subject to DPT are not also liable to CT.
When DPT is charged, companies are required to pay up front before they can lodge a dispute with HMRC during the DPT review period. DPT incentivises companies to agree adjustments to their CT return during the DPT review period and thus pay the correct amount of corporation tax on their diverted profits, thereby removing such profits from the DPT charged. That reduces the likelihood of costly and time-consuming litigation, while ensuring that companies pay the right amount of corporation tax in the UK. Clause 18 will reinforce that incentive by allowing taxpayers to formally amend their tax return to bring diverted profits under corporation tax during the first 12 months of the review period.
The arrangements to which DPT applies are often complex, and in some cases the current 12-month review period is insufficient to reach a resolution. At present, taxpayers are able at any point during the 12-month period to provide HMRC with information that it must take into account in determining the final tax charged. Clause 18 will extend the DPT review period by three months, ensuring that HMRC has enough time to tackle even the most contrived and complex arrangements. The final three months will be reserved for HMRC alone to consider the arrangements and determine the right amount of tax to be paid.
Amendment 46 would remove the proposed extension of the review period. Because companies pay DPT up front, it is in their interest to resolve cases quickly during the DPT review period. Furthermore, the time available to a company to amend its tax return will remain at 12 months. The extension of the review period is necessary to ensure that HMRC has enough time to tackle complex tax-driven arrangements used by businesses in an attempt to unfairly reduce their UK tax bill. This modest extension provides no new power or relief for taxpayers.
Finance (No. 3) Bill (Fourth sitting)
Mel Stride Excerpts(7 years, 4 months ago)
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Sir Robert Syms (Poole) (Con)
I would have intervened, Mr Howarth, but you have provoked me into making a brief speech instead.
Corporate tax structures are very complex. Even things like the movement of exchange rates or where products are produced can make a substantial difference to a company’s profit and loss account. As I understand it, the diverted profits tax is a backstop—I use the word lightly—in the tax system. The reality is that the Government are trying to protect corporation tax revenue.
Periodically, HMRC will challenge corporation tax computations to see whether companies are paying the right amount of tax. DPT gives the Revenue a little more ammunition to get answers out of those companies and to ensure that the tax paid is correct. I suppose that HMRC would randomly pick several companies, or more, and simply challenge some of the computations. Where they found that an accurate tax statement had not been put in, perhaps they would go back a number of months and issue a notice for payment.
As the Minister pointed out, the companies could still elect to pay via the corporation tax structure rather than this tax. I do not think that having a report on this specific tax would draw very much information, because it will vary widely. There will be some years where quite a lot of back tax will be caught and captured, and a back payment might be picked up from a big company. In other years, all the tax computations will be fairly accurate and it will not pick up very much. My guess is that, instead of a straight line going up, as there is for most taxes, such as VAT, there will be variation each year depending on which companies are challenged, and whether HMRC hits the jackpot or finds that the companies’ accountants know what they are doing.
When looking at this backstop, we really have to look at overall corporation tax revenue, which, notwithstanding the fact that the rate has been cut, has actually gone up. I therefore hope that the Government reject these reports—the Government have been far too reasonable in this Committee anyway—stick to their guns, and reject whatever the Opposition want.
The Financial Secretary to the Treasury (Mel Stride)
I will be brief, as I am conscious that the Committee is moving fairly slowly through the clauses, and we have quite a lot of the Bill still to cover.
The hon. Member for Oxford East mentioned the diverted profits tax and the digital services tax. Earlier on in her speech, in a different context, she used the expression “comparing apples with pears”. I think that is what we are doing here, and that lies at the heart of the objection to her amendment.
Anneliese Dodds (Oxford East) (Lab/Co-op)
The Minister knows that I have a lot of respect for him. However, that was exactly my point: the two taxes are based on a fundamentally different view of what should be taxed. Obviously, a digital services tax would be revenue based, whereas DPT is still profit based, and based on the arm’s length principle. Surely one should therefore compare them in terms of their efficacy at generating tax revenue, preventing avoidance, and so on. The fact that they are different does not mean that it is not legitimate to compare them.
Mel Stride
I understand what the hon. Lady says, but the expression “preventing avoidance”, which she has just used, lies at the heart of the meaningful distinction. DPT is about avoidance, as eloquently expressed by my hon. Friend the Member for Poole, whereas the digital services tax is not about avoidance at all; it is about reflecting the fact that the international tax regime is no longer fit for purpose when it comes to taxing certain types of digital businesses—those that operate through digital platforms, and that have a relationship with UK users and generate value as a consequence. She mentioned Google specifically, but it covers search engines in general, certain online marketplaces and social media platforms.
The two taxes are so distinct. It is important to place on the record that the digital services tax is not an anti-avoidance measure; it is about redefining the way in which those businesses pay their fair share of tax.
Kirsty Blackman
To probe further the point made by the hon. Member for Oxford East, does the Minister not agree that it would be valuable for the Committee to consider the two different types of taxation, and their efficacy, so that in future when decisions are made on tax matters we can work out which would be the best type of tax measure in any given situation?
Mel Stride
It is important to review or consider all taxes in relation to other taxes as a matter of course, because they all have their own positive aspects, distortionary effects, negative aspects, impacts on the economy that might not be desirable, and so forth. It is important that we do that for all taxes. I say to the hon. Lady that, in the case of the digital services tax, we are now consulting on the detail of how that might operate should we introduce it in 2020, in the event that there is not a multilateral movement across the OECD or the European Union that allows us to work in conjunction with other tax jurisdictions. In the case of the specific tax that we are considering in Committee, there will be ample opportunity to look at it in the kind of detail that I know she will be keen on.
The hon. Member for Oxford East raised the issue of the split, as I understood it, between the impact of DPT as directly revenue raising through the additional corporation tax that is paid, and the deterrent effect that protects revenues that otherwise would have been avoided. We publish annual statistics that show how much tax DPT raises directly and how much it raises indirectly through corporation tax. This year, we published a detailed note setting out the methodology that was used to calculate the revenue raised by DPT, and I am happy to provide the hon. Lady with either that information or a signpost to where it can be found.
The hon. Lady raised the specific issue of the three-month extension that we have been considering in Committee. She made the point well: rather than extending the period by three months, why do we not stick to 12 months and expect the corporation in question to speed up their process? I think we would still be left with the problem that there would have to be a moment in time when that company could still provide information—HMRC would be required to take it into account—which might be of a very complex nature. It would be very difficult for HMRC to make an immediate and reasonable judgment at the last minute. I think that is what drives the importance of separating the time available to the corporation in those circumstances from the additional time that is available solely to HMRC to conduct its final review without additional information suddenly appearing at extremely short notice. I should also point out that the 12-month process is already an accelerated process, and typically we are—in circumstances where the additional three-month time period becomes pertinent—looking at very complex situations, which take time to consider fully.
On the basis of the extract that the hon. Member for Aberdeen North presented to the Committee, it seems to me that more information could have been given in the explanatory notes to make it absolutely clear what it refers to. I will have a closer look at that outside the Committee.
Anneliese Dodds
I am grateful to the Minister for his clarifications. I would like to accept his kind offer to share with me and the Committee—I am sure other Members will be interested as well—the information that he referred to, which sets out the different components of DPT. I think that would be enormously helpful.
The hon. Member for Poole seemed to suggest that there would be two reasons for fluctuation across years. I think he used the word “random” to describe HMRC’s choice of which companies to investigate—they could be large or small. I would hope that it would not be a random process, although I am not suggesting he was intimating that. I would hope that it was based on intelligence and that HMRC—I would like it to undertake more of this than it does at the moment—used some of the data sources available to it to drive the process of determining which companies to look at. Hopefully that would not be a source of too much variation.
The hon. Gentleman also suggested that there might be variation because it would be, in some way, a reflection of the compliance-mindedness of tax practitioners in different corporations at any one point. Surely that should improve over time, rather than fluctuate. There may be other reasons for the variation, but I feel we still need to have a clear understanding of it.
Anneliese Dodds
I am grateful for that clarification of the hon. Gentleman’s comments. I suppose on that basis one would assume that the take would go down, if there was truly a deterrent action. It is not clear to me that that has occurred, but it would be interesting to have the analysis and review, so that we could see whether it is so. That is what our amendments aim to do.
I took on board what the Minister said about the review period, but I am a little confused. As I understand it, the additional time provided for the review period in the Bill is not of a different character from the rest of the review period. It is not a question of the additional three months being just for HMRC to deliberate. It is also a period during which the company can provide additional information—so, potentially, they can now do that right up to the end of 15 rather than 12 months. Therefore it is unclear to me that HMRC will necessarily be helped—unless I am missing something, which I may well be.
Mel Stride
To clarify, briefly, it is not as the hon. Lady views it: the additional three months would be solely for HMRC to carry out its deliberations, albeit that up to the 11th hour within the 12-month period further information could be provided by the company.
Anneliese Dodds
I am grateful to the Minister for clarifying that. It was not completely clear to me from the material provided to us. I underline the points that have been made by the SNP in that regard: it would have helped us to understand the impact of some of the measures if the explanatory notes had included a bit more of the thinking behind them.
In view of what the Minister has said, we are willing to drop some of our amendments. However, we shall want to vote on amendment 40, which is quite similar to the SNP’s amendment 37, and amendments 43 and 46.
Question put and agreed to.
Clause 18 accordingly ordered to stand part of the Bill.
Schedule 6
Diverted profits tax
Amendment proposed: 46, in schedule 6, page 220, line 2, leave out paragraph 11.—(Anneliese Dodds.)
This amendment removes the proposed extension of the review period to 15 months.
Question put, That the amendment be made.
Mel Stride
The clause makes changes to ensure that foreign businesses operating in the UK cannot avoid creating a taxable presence by splitting up their activities between different locations and companies. A non-resident company is liable to UK corporation tax only if it has a permanent establishment here—I shall use the abbreviation PE for permanent establishment. A PE may be a fixed place of business, also referred to as a branch, or the activity of an agent. We are mostly concerned here with branches.
As the hon. Member for Oxford East has outlined, certain preparatory or auxiliary activities, which are normally low value, such as storing the company’s own products, purchasing goods or collecting information for the non-resident company, are classed as exempt activities and do not create a permanent establishment. Some foreign businesses could artificially split their operations among different group companies or between different locations to take advantage of those exemptions and so avoid being liable to corporation tax.
To counter that, the OECD and G20 recommended modifying the definition of permanent establishment. The UK has adopted that change in its tax treaties, the bilateral tax arrangements that divide up taxing rights between countries, with which the hon. Lady and I are most familiar, having taken a series of pieces of secondary legislation through this House on those matters. It has given effect to that change through the BEPS multilateral instrument, as she pointed out, which entered into force for the UK on 1 October 2018.
Clause 21 replicates that treaty change in UK domestic law to make the change to tax treaties effective. It is most likely to affect non-resident manufacturing and distribution businesses that might try to structure their UK operations in order to minimise their UK tax footprint. The measure sends a signal that the UK Government are determined to tackle tax avoidance by foreign multinationals.
Turning to the two amendments tabled by the Opposition, amendment 47 would require the Chancellor of the Exchequer to review the revenue effects of the changes made by this clause within six months of the Bill becoming law. I cannot support this amendment. Information on revenue effects will not be available six months after the passing of the Act, given that the first accounting periods likely to be affected are those ending on 31 March 2019, for which the filing date of company tax returns will be 31 March 2020.
The Government also cannot support amendment 48, which would require publication three months after the passing of the Act of a list of all additional PEs created as a result of this measure. HMRC would not know, as a company is not required to disclose, whether a declared PE has occurred as a result of this measure or for some other reason. The information would be available to HMRC only if it opened an inquiry into every non-resident company that newly declared a permanent establishment. That, as I hope the Committee would agree, is impractical. It would not be an appropriate use of inquiry powers and it would impose a significant burden on HMRC and the taxpayer for little revenue benefit. The Exchequer impact assessment has scored this measure as likely to have negligible yield. I therefore commend the clause to the Committee and invite Members to reject the amendments.
Anneliese Dodds
I am grateful to the Minister for his clarifications and comments. I think we would be willing to withdraw the amendment, but I note that he did not refer to the critique that I mentioned by the BEPS monitoring group on whether the definition of fragmentation coming within the OECD process was sufficient. I do not want to detain the Committee on that point any longer, but I ask him to bear that critique in mind as we go through any additional tax treaties; I am sure we will come to some in the future with developing countries, because arguably this is a significant problem for them. It can be difficult for them to apply even the conventions in the model tax treaty to capture economic activity within their boundaries when they need to build up their tax base. Of course, we give many of those countries development aid.
As I said, I am willing to withdraw the amendment, but I would be grateful if the Minister kept those points in mind. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 21 ordered to stand part of the Bill.
Clause 24
Group relief etc: meaning of “UK related” company
Anneliese Dodds
The clause extends the definition of “UK-related company” for the purposes of group relief to include non-UK resident companies that are within the charge to corporation tax. That change follows previous announcements concerning the tax treatment of non-resident companies carrying out property-related business.
I think it will be helpful to indicate exactly what group relief relates to and why it is relevant. As I am sure the Committee is aware, group relief relates to the process whereby a so-called surrendering company that makes a corporate tax loss can pass certain kinds of losses to another company in its group. The benefiting company—the “claimant company”—can use the loss passed on to it to reduce its corporation tax liability. Apparently, the claimant company often then pays the surrendering company for the loss it received, up to the value of the tax that was saved. That payment is not counted for tax purposes. The surrendering company benefits from that arrangement, as it has access to those funds from the claimant company rather than having to hang on to the loss for subsequent years. There is no change to the circumstances of the claimant company—it cancels out some of its corporation tax and just passes that saving on to its fellow group member.
That regime was partially liberalised in 2016, albeit that it was then counteracted by the introduction for large companies of a limit, which means that only 50% of profits can be offset against losses carried forward. That ceiling applies across the group, not to individual firms. There are a number of stipulations concerning the extent of common share ownership, which are intended to prevent the false creation of groups in relation to group relief. It is necessary for one company to be the owner of three quarters or more of the other company’s share capital, or for a third company to own three quarters or more of the share capital of both companies involved, in order for them to be counted as part of a group for this purpose.
Other tests attempt to ensure that a genuine rather than a spurious group is involved. In addition, only certain types of income loss qualify, including trading losses, excess interest charges and management expenses. Until now, both the surrendering company and the claimant company had to be resident in the UK or carrying on a trade through a permanent establishment in the UK, although in some circumstances European economic area-based companies have been able to act as surrendering companies.
The Opposition have tabled four amendments to the clause. Amendments 51 and 53 would require a review of the impact on payments of corporation tax of the different elements of these proposals. Amendments 52 and 54 would require an examination of the proposals’ impact on property markets.
As I said, amendments 51 and 53 would require a review of the revenue effects of the clause, particularly on corporation tax. The measures in the clause appear to be part of a group of measures in the Bill that attempt to equalise the treatment of non-UK and UK-resident property companies when it comes to taxation. We have already discussed the fact that such companies will be transferred into corporation tax and standard capital gains tax. In many cases, although the measures concerned might be viewed as levelling the playing field, they might also be viewed as causing risks to revenue, not least due to the reduced rate of corporation tax, which we discussed before lunch.
Clearly, this change would benefit non-resident firms by enabling them more easily to plan when to pay corporation tax with the group of which they are a member. It would therefore to be helpful to have a clearer indication than has already been provided of the likely revenue effects of the clause. I am not saying that that ease and greater facility, in terms of planning corporation tax incidence, is necessarily a problem, but it will potentially have a revenue impact.
On a related note, we surely need a review of the impact of the clause on the UK property market, as would be required by our amendments 52 and 54. It will be particularly helpful if that review examines whether or not more non-EEA companies will be brought into the scope of this kind of intra-group transfer. It seems that that may well be the case. Currently, aside from UK-resident companies, only EEA-based companies, under certain circumstances, benefit from the ability to transfer loss, and thus tax incidence, across the group of which they are a member.
It would also be helpful to understand whether the new measures could help to incentivise more complex group structures that stretch beyond the UK and both into and outwith the EEA. There may be merits in the resultant diversification of risk, given the national specificities and risk profiles of different property markets in different countries and so on, but equally there could be a risk of contagion from poorly regulated property markets in some non-EEA countries. Those countries are not currently within the scope of these measures but will potentially be brought in by the Bill.
It would be helpful to be provided with a better understanding of the broader implications of the proposals in the clause than is currently set out in the explanatory notes. That is why we tabled amendments 52 and 54.
Mel Stride
The clause extends the definition of UK-related companies for the purposes of group relief to include non-UK resident companies within the charge to corporation tax. Non-UK resident companies are not simply those within the EEA but any company anywhere in the world.
Mel Stride
Yes. As the hon. Lady pointed out, clause 17 provides that a non-UK resident company that carries on a UK property business will be charged to corporation tax, rather than income tax, as we discussed earlier. This will deliver equal tax treatment for UK-resident and non-UK resident companies that carry on UK property businesses, including the application of anti-avoidance measures within the corporation tax regime, as I pointed out.
However, under the current rules, non-UK resident companies within the charge to corporation tax are not able to make use of group relief, which, as the hon. Lady described extremely well, is the mechanism by which a company is able to surrender its tax losses to another member of the group to relieve their taxable profits. Group relief is available to UK-resident companies and helps to ensure that the tax charged reflects the economic reality of the entire group.
The clause will extend the definition of a UK-related company for the purposes of group relief to include non-UK resident companies that are within the charge to corporation tax. This change will also apply to non-UK resident companies developing UK land that were brought within the charge to corporation tax from July 2016. The clause will ensure that the UK tax regime does not discriminate against non-UK resident companies. These changes come at a negligible cost to the Exchequer.
Amendments 51 and 53 would require a review of the impact of the clause on corporation tax receipts. The Office for Budget Responsibility’s certified assessment of the impact of the clause on corporation tax receipts has been estimated together with clause 17 and schedule 5, which we debated earlier. That is set out in table 2.2 of the 2018 Budget and will be updated in table 2.2 of the 2019 Budget.
Amendments 52 and 54 would require an analysis of the effects of the clause on the UK property market. The impact on the UK property market was considered in the design of the policy, but it is not expected to have any notable effect. The OBR did not consider that the clause, nor clause 17 and schedule 5, would have any impact on its UK property market forecast.
The clause is a necessary element of levelling the playing field between UK-resident companies and companies not resident in the UK. It provides for equal tax treatment so that companies in receipt of similar types of UK property income will face the same tax rules. I commend the clause to the Committee.
Anneliese Dodds
I am grateful to the Minister for that explanation and for the clarifications. It is important for the Committee to be aware that while this is part of a suite of measures to equalise tax treatment in terms of tax responsibilities, obviously the measure also provides some of the benefits of the UK tax system to non-EEA firms. Doing so could potentially increase the attractiveness of the UK property market for those non-EEA firms, which might be a good thing, but might also have other consequences. That is all I wish to say in response. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 24 ordered to stand part of the Bill.
Clause 25
Intangible fixed assets: exceptions to degrouping charges etc
Question proposed, That the clause stand part of the Bill.
Mel Stride
The clause amends the corporate intangible fixed assets regime, which I will refer to as the IFA regime, to align the degrouping adjustment rules more closely with the equivalent rules in the chargeable gains code. The clause responds to concerns expressed during the Government’s consultation on the IFA regime, and in previous consultations, that the IFA degrouping adjustment is distorting how genuine commercial transactions are structured. The main criticism is that there are two different tax treatments for intangible assets, depending on whether the chargeable gains code or the IFA regime operates in respect of such assets.
The IFA regime provides corporation tax relief to companies on the cost of their intangible assets, such as patents or trademarks. The IFA regime, like the chargeable gains regime, allows groups to transfer assets between companies within the same group on a tax-neutral basis. That prevents gains or losses arising on transactions between companies within the same corporate group and reflects the fact that the group can constitute a single economic entity. Instead of recognising the market value of the asset on transfer, the company acquiring the asset inherits the tax history and costs of the transferor.
The rules contain an anti-avoidance provision which applies when an asset leaves the group. That is often referred to as a degrouping adjustment or charge. The degrouping adjustment effectively removes the benefit of a previous tax-neutral transfer to ensure the full economic gain or loss made by the group is taxed.
The chargeable gains tax code includes a similar set of rules, which were, however, amended in 2011 to refine the degrouping anti-avoidance rules where the sale of the shares in the degrouping company is exempt from a tax charge under the substantial shareholding exemption rules.
The clause seeks to address concerns commonly expressed by stakeholders during the recent IFA regime consultation and those raised during the 2016 review of the substantial shareholding exemption. Part 8 of the corporation tax code is amended so that the degrouping adjustment will not apply when a company leaves a group as a result of a share disposal that qualifies for the substantial shareholding exemption. That exemption applies only to disposals of trading companies, or parent companies of trading groups. In doing so, it aligns the clause with the treatment in the chargeable gains regime.
In summary, the clause makes a sensible change to the degrouping rules in the IFA regime to align them with the treatment elsewhere in the tax system. The clause responds to legitimate business concerns that existing legislation is distorting how genuine commercial transactions are structured. I therefore commend the clause to the Committee.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is, as ever, a pleasure to serve under your chairmanship, Mr Howarth, and to follow the many valuable contributions of other members of the Committee.
The clause that the Financial Secretary has just introduced forms part of a rather technical but important pack of items in the miscellaneous corporation tax section of the Bill. The provisions mark the latest change in a long history of reforms to the intangible fixed asset tax regime, which I will also refer to as the IFA, which began in 2002. Intangible fixed assets refer to items such as patents, copyright, brand recognition, goodwill and other items of intellectual property. It is clear that those types of assets, as opposed to tangible assets, have become increasingly important to modern businesses and are likely to continue to do so, especially for the tech industry.
Typically, such assets could be moved within companies that all belonged to the same UK group without incurring any new tax liability, by simply taking their existing tax history with them. If one of the companies that received the assets was subsequently sold within six years, that incurred the so-called degrouping charge. The clause will stop that charge being triggered if the company leaves as a result of a share disposal that would qualify for the substantial shareholding exemption.
In principle, the Opposition have no objection to the measure, which clarifies the intent of the legislation and prevents assets from being drawn into the regime unintentionally. The changes remove an artificial barrier in the tax system that could have been acting as a deterrent to merger and acquisition activity, given the disparity in treatment between chargeable gains assets and those within the IFA regime, as the Minister explained.
However, we would like to raise some wider concerns about the intangible fixed asset regime and how the new provisions will operate. Intangible assets will only grow in importance, so it is vital we get the system right. We must also consider the potential impact on foreign direct investment, especially at a time when our international competitiveness is under pressure as a result of us leaving the EU.
My questions to the Minister relate to what the impact of the changes might be on foreign direct investment and on merger and acquisition activity. I also want to ask about the impact on the UK intellectual property market, for two reasons. First, although we all want to see the best in Britain’s companies, we know that, unfortunately, certain operators seek to game the system, including by artificially shifting assets internally among subsidiaries, which is a time-worn tactic for unscrupulous actors seeking to avoid their true obligations. The long history of transfer pricing shows us that, as do the pitifully low corporation tax returns of some of the most profitable multinationals operating in the UK. By its very nature, transfer pricing—when companies make charges within a group for goods, services or indeed intangible assets—can be more easily exploited for that purpose, as can be seen from the role of brand loyalties in the transfer pricing arrangements of some famous tax minimisation schemes.
Tax rules have fallen short, and still fall short, of always recognising such arrangements for what they really are. We know that we suffer from a significant—and, some argue, underestimated—tax gap in the UK. As we often refer to in debates with the Government Front Bench, the tax gap has consistently fallen under Labour, coalition and now Conservative Governments, but we all know that the assessment does not truly cover such practices. Therefore, it is imperative that we do not put any loopholes into the statute book that could be exploited. Can the Minister explain what action the Government have taken to ensure that the measures cannot be undermined by tax avoidance?
Secondly, the measure is important in relation to the consultation published alongside this year’s Budget to look again at so-called goodwill taxation. Goodwill is the sum paid for a business over and above its paper value, which often has a strong connection to intangible assets such as brand value, reputation and other items of intellectual property. Stakeholders have expressed concern about the treatment of goodwill, which we ask the Government to consider as part of the overall IFA tax regime.
Although we supported the restriction of that relief for anti-avoidance purposes in 2015, it has been reported to us that some people believe that some aspects of the changes have had a dampening effect on commercial transactions and the overall attractiveness of the UK as a business location. Therefore, some further context around the proposal in the 2018 Budget to reverse part of those restrictions would be welcome.
I seek some reassurance from the Minister as to his future plans for the treatment of goodwill and how precisely this relief will be used as a tool to attract further business activity to the UK. Is an estimate available of the costs to the Exchequer at this stage? How has this been assessed, in terms of wider value for money, against perhaps extending other types of relief available? How will the connection between intellectual property and goodwill be properly established? In particular, how will the valuation of intangibles be achieved for tax purposes? What action is being undertaken with regard to anti-avoidance measures?
Continuing to attract business to the UK, as well as strong inward investment, is critical as we contemplate our departure from the EU. Therefore, we would appreciate some clarity from the Government on these provisions. We must assess their cost against the value of incubating the type of intellectual property-rich businesses that we would all like to see more of in the UK. Equally, we must do everything that we can to protect the statute book from any loopholes that may be exploited by unscrupulous companies seeking to avoid paying their fair share.
Mel Stride
I thank the hon. Gentleman for his contribution. He asked specifically what impact these measures may have on foreign direct investment. I would argue that they are relieving, in that they are facilitating the ability of companies in these circumstances to gain value from the transfer of their losses where they genuinely fall under the substantial share exemption, so the answer to that question is that this is a positive move in that respect.
The hon. Gentleman asked, more specifically, a series of questions relating to how we would ensure that avoidance was not entered into in a number of scenarios. I think that he referred specifically to transfer pricing, for example, and one thinks of intangible asset elements such as royalty payments. He will be aware that we have already clamped down on the making of royalty payments through to low and no-tax jurisdictions. There is a lot of activity in that space, albeit that in the context of this clause, that is probably out of the scope of the measure that we are considering.
The hon. Gentleman asked whether we were introducing a loophole, as he termed it. I think I can reassure him that we are not. We are simply, as I think he said when he summarised the clause at the start of his remarks, ensuring that intangible assets are treated in the right way when it comes to their transfer within and outside corporate groups.
The hon. Gentleman made several points surrounding our intentions in respect of goodwill and its treatment. To support UK investment in intangibles, the Government are introducing a targeted relief for goodwill in acquisitions of businesses with eligible intellectual property. We will legislate for that change through an amendment on Report, to allow for a further brief consultation on the detailed design of the policy. The consultation will seek to ensure that the proposed policy design achieves the Government’s objective to provide targeted relief for goodwill in the acquisition of IP-intensive businesses, and mitigates any unintended consequences.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Clause 26
Corporation tax relief for carried-forward losses
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 9 be the Ninth schedule to the Bill.
Mel Stride
Clause 26 makes technical amendments to the corporate loss relief rules introduced in 2017: they ensure that the rules function as originally intended and protect revenue by preventing companies from claiming excessive relief. When a company makes a loss, it can carry forward that loss and use it to offset its taxable profits in future years. The Finance (No. 2) Act 2017 reformed the UK’s loss relief regime. The main effects of that reform were as follows. First, the amount of profit that can be relieved by carried-forward losses is restricted to 50%, subject to a £5 million allowance. Secondly, losses arising after 1 April 2017 can be carried forward and set against different types of income and against profit of other members of the same group. The loss restriction ensures that companies cannot use carried-forward losses to reduce their tax bill to nothing in an accounting period in which they make substantial profits. Legislation for the new loss relief rules needed to be sufficiently detailed to ensure that they were robust for the complex arrangements of large companies operating across a diverse set of activities. The Government have since identified limited circumstances in which the rules are not functioning as intended.
The clause amends the way that companies calculate their relevant profits for the purposes of loss relief restriction. Specifically, the clause changes the way basic life assurance and general annuity businesses, or BLAGAB, calculate relevant profits. That will ensure that BLAGAB insurers use profits that are chargeable to corporation tax for calculating the amount of loss relief they can claim.
Jonathan Reynolds
Yes, a classic. At the time, the Chartered Institute of Taxation warned that the legislation had not been given proper due consideration. As it said in its briefing:
“From the time the proposals were announced at Budget 2016 it was clear that the legislation would be voluminous and highly complex. As we highlighted in our response to the consultation (in August 2016) the timetable proposed was not sufficient to properly consider all of the issues and to produce clear and workable legislation.
The unsatisfactory draft legislation published as part of Finance (No. 2) Bill 2017 was then removed from the pre-election Finance Bill, which caused more uncertainty for taxpayers. Although the delay in enacting the legislation has allowed a period of further informal consultation, which has improved the legislation, it inevitably led to a degree of uncertainty among those affected and has also resulted in taxpayers having to consider draft legislation which is not yet in force,”
but which will be retrospective once enacted.
“With regard to the short timetable, it is also worth noting that these provisions are not anti-avoidance provisions”,
which is when we tend to use a shorter timeframe for introduction.
“Rather, the changes were proposed as part of a package intended to ‘simplify and modernise the tax regime’, although in our view there are aspects of the changes which are very complicated and, in many cases, will involve a large number of detailed calculations, meaning that simplification will not be achieved.”
That is probably true of much of what the Treasury does, to be honest. The briefing also said:
“Legislation for these new rules has, in our view, been ‘rushed’…and, in this case, the Government has not balanced its desires to raise some modest revenue with its duty to produce legislation that can be followed with predictability and certainty.”
Unfortunately, the Chartered Institute of Taxation’s assessment that the timeframe was too short turned out to be exactly correct, and that is why we are obliged to revisit this legislation today. Continuous tweaks to matters such as these do not help to instil confidence among businesses that rely on this framework. They need certainty in their long-term operation, and endless rounds of changes are not helpful, especially in an environment where Brexit is clearly causing significant wider uncertainty.
I should also be grateful to learn from the Minister what preventive measures have been put in place to ensure that we will not go through the same legislative process in another year’s time, with further nips, tucks and fixes to defects. Finally, I would just like to know whether an estimate is available of the cost up to now of businesses having claimed this relief, which the Minister himself has said may have been excessive, and which we are today removing.
Mel Stride
It is a perfectly fair question for the hon. Gentleman to ask why we are now having to revisit this, having consulted on it. He himself raised the issue of the large volume and the highly complex nature of the original legislation. I think therein probably lies the answer. While we did consult extensively, this was a large volume and a highly complex area, and we have subsequently discovered a deficiency with it, which we are now putting right, in a responsible way.
It is important to briefly enlighten the Committee as to the extent of the consultation that did occur, lest it be imagined that we rushed this or did not properly look into matters. The Government’s consultation ran for 12 weeks, from 26 May to 18 August 2016. The Government received 79 responses from stakeholders, and from a broad range of professions and industries. There was also a technical consultation on the draft legislation itself. It is obviously right that we put these deficiencies right at the earliest opportunity. In answer to the hon. Gentleman’s question about how much revenue may already have been impacted by the original issue, I do not have a precise answer. I am happy to look into it. I know that the Treasury sees this clause as something that is there to protect revenues in the future, rather than one that is about rectifying problems that may have arisen in the past.
Question put and agreed to.
Clause 26 accordingly ordered to stand part of the Bill.
Schedule 9 agreed to.
Clause 27
Corporate interest restriction
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 10 be the Tenth schedule to the Bill.
Mel Stride
Clause 27 and schedule 10 make changes to ensure that the corporate interest restriction rules will continue to operate as intended, limiting the amount of interest expense and similar financing costs that a corporate group can deduct against its taxable income. The UK’s corporate interest restriction rules were announced at Autumn Statement 2016 and took effect from 1 April 2017. These rules prevent groups from using financing expenses to erode their UK tax base, where these expenses are not aligned with the group’s UK taxable activities. These rules are complex because they operate at both the worldwide group and individual entity levels. As businesses have begun to apply them, HMRC has identified some technical amendments that are needed to ensure that the rules operate as intended and to address practical compliance issues.
Clause 27 and schedule 10 make a number of technical amendments to the interest restriction rules. To ensure the rules are applied as intended, the schedule will clarify that real estate investment trusts are in scope of the interest restriction rules, but that they do not suffer a double restriction of financing costs where they are highly leveraged. It will confirm that where a company holds a significant pension fund asset or a deferred tax asset, or where the company is reimbursed for certain variable operating costs, it is not prevented from applying the alternative rules for public infrastructure. It will provide confirmation of how the rules deal with capitalised interest.
To ease the practical operation of the rules, the schedule will extend certain timings, in particular for appointing a reporting company and for submitting an interest restriction return, following an acquisition. The schedule will allow unused amounts and debt cap to be carried forward for a new holding company that is inserted into the group structure, but the shareholders of the group remain substantially unchanged. To align the rules more closely with the normal UK tax rules the schedule will require, where appropriate, employee remuneration that is not paid within nine months to be disregarded in the calculation of a group’s earnings, until it is paid. It will also amend the calculation of the group’s financing costs to ensure that it is not distorted when a debt is released by a company that is connected to the group but not in it.
Finally, this schedule will allow HMRC to specify information that is reasonably required for risk assessment purposes, which is to be included in the interest restriction return. This clause and the accompanying schedule make amendments to ensure that the interest restriction rule continues to operate as originally intended. I commend this clause and schedule to the Committee.
Jonathan Reynolds
We have before us in clause 27 another tweak to the 2017 legislation, which originally brought about this change. The clause is designed to bring about technical amendments to the corporate interest restriction rules. Again, the Opposition are supportive of any measure that aims to correct the tax situation, which could potentially be exploited. These rules restrict the ability of large businesses to reduce their taxable profits through excessive UK interest.
The explanatory notes tell us that this is part of the Government’s policy to align the location of taxable profits with the location of economic activity—not before time, many people in the country would argue. We are very much looking forward to seeing the Government rigorously apply this approach to the multinational companies in the UK, which mysteriously report profits quite unrelated to their tax bills. As my right hon. Friend the Member for Barking (Dame Margaret Hodge) recently calculated, Facebook’s corporation tax bill represents just 0.62% of its revenue here, as it pays £7.4 million in corporation tax on sales of £1.3 billion.
We are pleased that the Government have found the time to tidy up the statute book by implementing the measure before us today. Surely, the Minister must agree that there still appears to be one rule for big companies, such as Facebook, and another for everybody else. Rather than arguments about things such as the tax gap, which addresses things such as how much cash-in-hand has been paid for trade in services, this imbalance is what the public really want to see addressed. If there is one thing that the whole Committee might agree on, it is that we all welcome innovation and technology, and all the benefits they bring. However, part of what makes this country so lucrative for these big companies is our infrastructure, our legal system, our transport connections and our businesses, which want to be able to advertise on these platforms. It is not unreasonable for the likes of Facebook to contribute to that, just as every other business does.
The clause is clearly more modest than that, being, as I said, just a tweak to the 2017 legislation. It would have been infinitely preferable to get this right first time. The explanatory note sets out in detail the consultation process that was undertaken in relation to this legislation between 2015 and 2016. That seems to have discussed issues related to domestic implementation and, we must remember, will have been carried out at a cost to Her Majesty’s Treasury and, therefore, the taxpayer. Again I have to ask, what fell short in that process, so that we are discovering these defects in the Bill only one year later? Could the Minister provide some further insight on the further engagement with affected businesses that is mentioned in the explanatory notes?
Mel Stride
The answer to the hon. Gentleman’s understandable question as to why we have to revisit this matter in this Finance Bill is similar to that which I gave in the context of the last clause—the complexity and the volume of the legislation. We published the draft legislation originally, so that it could be considered. I think it is right that we are now coming forward to make the necessary changes at this time. The hon. Gentleman mentioned his aspirations that the corporate interest restriction would bite and be effective. For that, I am sure he has looked at the amount that is scored for this particular measure—it is one of the more significant anti-avoidance measures that we have come forward with in recent times.
The hon. Gentleman also commented on the tax gap and sought, perhaps, to characterise the tax gap as being all about—I think he used the expression—cash-in-hand dealings, so as to suggest that it was not also about ensuring that large companies pay their fair share of tax. I assure him that we are constantly looking at larger businesses. The tax gap is disaggregated in a way that shows that. I reassure him that of the largest roughly 200 or 210 companies in the United Kingdom, about 50% are under active investigation at any one time. That does not mean in any way that any of them have done anything wrong, but that we do look at larger companies very carefully.
Jonathan Reynolds
I was simply trying to make the point that the tax gap is a series of estimates by HMRC as to avoidance in different areas—yes, for large companies as well as small. Surely, what the public really want action on—the Chancellor himself referenced this in his Budget speech—is the impact of very large technology companies internally charging vast amounts for intellectual property transactions within their groups and not reflecting their economic activity in a country the size of the UK.
Mel Stride
The hon. Gentleman makes an important point. I thank him for clarifying his comments on the tax gap. He asserts that the public expect us to take tax avoidance by large companies seriously. I assure him that that is exactly what the Government are doing. We have introduced more than 100 measures relating to avoidance, evasion and non-compliance since 2010. We have brought in and protected around £200 billion in that period. Of course, in this Committee we have debated at length both the diverted profits tax, which is bringing in more than originally anticipated and is aimed at exactly the businesses to which he refers, and the digital services tax. We are even changing the way in which the tax regime operates in order to ensure that we get a fair level of tax from those companies, whether they are the smallest businesses in the land or the largest.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Schedule 10 agreed to.
Clause 28
Debtor relationships of company where money lent to connected companies
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 11 be the Eleventh schedule to the Bill.
Mel Stride
Clause 28 is part of a package of changes that the Government are making to the tax rules for hybrid capital instruments, which are issued by some companies to raise funds. Further changes are made by clause 88. Together, those changes ensure that hybrid capital instruments are taxed in line with their economic substance and take into account forthcoming changes in financial sector regulation. The new rules cover issuances by companies in any sector and replace rules covering regulatory capital instruments issued by banks and insurers with effect from 1 January 2019.
Some companies raise funds by issuing instruments, referred to as hybrid capital, that sit close to the border between debt and equity. Hybrid capital instruments have features, such as provisions for write-down or conversion to shares in certain circumstances, that may affect their accounting and tax treatment. As a result, instruments that a company uses to raise funds externally may be taxed on a different basis from instruments used to distribute those funds internally to other group companies. Recent changes to financial regulation have highlighted that issue.
In June 2018, the Bank of England finalised its approach to setting a minimum requirement for own funds and eligible liabilities—MREL. The Bank set out how it would use its powers to require firms to hold a minimum amount of equity and debt with loss-absorbing capacity from 1 January 2019. That will allow the Bank to ensure that shareholders and creditors absorb losses in times of financial stress, allowing banks to keep operating without recourse to public funds.
For banking groups, funding that counts towards MREL is usually raised from the capital markets by a holding company. The holding company passes on most or all of the funds raised to operating companies within the group. The Bank of England requires those intra-group loans to include terms that allow them to be written off or converted into shares at times of severe financial stress. That can result in the external and internal loans being treated differently for tax, leading to unintended tax volatility unrelated to the economic substance of the loans.
In the changes made by clause 28 and schedule 11, our overall aim is to eliminate that unintended tax volatility by ensuring that external and intra-group loans are taxed on the same basis if they have a qualifying link. A qualifying link arises when funds raised externally by a group are wholly or mainly lent within the group. Clause 28 and schedule 11 will ensure that external financial instruments are taxed on the same basis as intra-group loans to which they have a qualifying link. That will eliminate the tax volatility that can arise if the terms of the intra-group instrument contain hybrid features. That is expected to affect a small number of companies, mostly in the banking sector, that raise funds externally and lend them intra-group in circumstances that would otherwise give rise to a tax mismatch between those instruments.
These changes will ensure that our tax rules eliminate unintended and unnecessary tax volatility from financial instruments issued by any company. I therefore commend this clause and schedule to the Committee.
Jonathan Reynolds
This clause changes the treatment of linked loan relationships in company groups. Put simply, that means that where one company borrows funds externally and lends on to another company in the group, no tax liability will be triggered by fluctuations in the value of the internal component of the loan. It stands to reason that companies should be protected from what might end up being double taxation. In reality, there is no economic exposure on the internal loan, whereas that does apply to the external arrangement, which remains within the scope of taxation.
Although this appears to be a relatively straightforward measure, will the Minister elaborate on what has prompted its inclusion in the Bill? Is there an assessment of its impact on the Exchequer? An example has been provided in the explanatory notes of the issuance of debt instruments by banking or insurance companies to meet regulatory capital requirements. Are there companies outside the financial sector that could be affected by these regulations? I think he said most but not all.
What engagement has taken place with the business community on these measures? We have seen from the two preceding clauses that unintended consequences can sometimes arise. If we are not vigilant of those first time round, legislation will have to be revisited, with endless amendments in subsequent Finance Bills.
The Opposition strongly believe that one of the best ways to make the UK an attractive place to do business is to create a robust, consistent, transparent and well-enforced corporation tax regime. Business prizes certainty—something that no one has been able to offer of late. We want to ensure that measures have been taken with the proper consultation and with proper justification, so that we do not endlessly increase the compliance burden of companies doing business in the UK.
Finally, and perhaps most critically, I refer to my earlier comments on transfer pricing in our discussions on clause 25. We all want to believe that this is a simple measure that tidies up the statute book. However, we must all be mindful that the shifting of assets and loans between UK subsidiaries has historically been abused by companies seeking to avoid tax. Have the Government done all due diligence possible to ensure that this clause is not open to such exploitation? Given the consequences of getting it wrong, we all share a duty to ensure that no loophole is left anywhere on the statute book.
Mel Stride
The hon. Gentleman asks whether banks are solely affected by the changes; they go beyond banks but are most relevant to banks, driven as they have been by the changing requirements of the Bank of England and others on the operation of our financial service marketplaces. They are also driven by the importance of hybrid capital debt and how it is valued as it comes into the holding company, and the way debt might be valued as it is passed down in the companies beneath the holding company at the top.
The hon. Gentleman asked about consultation and the importance of getting the proposals right; there has been no public consultation on this clause due to time constraints—one has to bear it in mind that the Bank of England finalised the requirements for internal loss-absorbing instruments only in June. That has not given us much time to consult. We have informally consulted with a small number of trusted advisers ahead of the Budget announcement. HMRC and HMT have worked closely with the Bank of England and the Prudential Regulation Authority to ensure that alignment between the tax and regulatory rules is as close as possible.
Question put and agreed to.
Clause 28 accordingly ordered to stand part of the Bill.
Schedule 11 agreed to.
Clause 29
Construction expenditure on buildings and structures
Jonathan Reynolds
I beg to move amendment 57, in clause 29, page 17, line 8, at end insert—
“(14) No later than two months after the passing of this Act, the Chancellor of the Exchequer must lay before the House of Commons a report on the consultation undertaken on the provisions in this section.”
This amendment would require the Chancellor of the Exchequer to report on the consultation undertaken on Clause 29.
Kirsty Blackman
I rise to speak very briefly on this clause. The questions that have been asked by the Opposition are incredibly useful and interesting ones; they have gone into this matter in some detail. Given the amendments that they have put forward, the SNP will be happy to support any of them that are pressed to a vote.
Mel Stride
May I address very directly the question that the hon. Member for Stalybridge and Hyde has posed regarding consultation and the level of consultation before the announcement, which of course he recognises is in part at least due to the fact that on announcing this measure we do not want to have forestalling in terms of businesses taking investment decisions?
Indeed, with matters or measures of this kind, we have a number of things that we need to balance. As I say, we need to ensure that businesses do not delay investment; we also have to give businesses the certainty they need that the measures will actually be implemented; and we are of course consulting on the technical details, including the very pertinent issue of the qualifying use that he referred to. And we will of course consult on the draft legislation when it is brought forward.
The hon. Gentleman asked about the figures and the cost of this measure, and how that cost has been established. The OBR will score these measures in the normal manner. He also made the specific point about the desirability of these reliefs being available to construction projects and other qualifying activities overseas. Of course one should make the point that that would occur only where it was on the part of a company that fell due to the UK corporation tax charge, and would reflect exactly the same situation in reverse, were it to be, say, a French business constructing something in the United Kingdom and in turn receiving reliefs from the French tax authorities. So it is a kind of equality of treatment in those particular respects.
The UK was previously the only G7 economy that gave no capital relief on structures and buildings. The CBI’s recent report, “Catching the peloton”, asked the Government to explore how the incentive regime could support investment in commercial buildings. [Laughter.] I am assuming that this is some kind of sub-atomic particle that requires a Large Hadron Collider, or whatever these things are, to be built, with huge tax reliefs associated with it.
The Government recognise the importance of providing tax reliefs for genuine business costs, supporting investment and growth, and driving our future prosperity. Therefore, this relief will reduce the cost of doing business in the UK, alongside our corporation tax reductions.
The changes made by clause 29 will give the Government the power to introduce secondary legislation, as we have discussed, to provide capital allowance on the costs of non-residential structures and buildings. Key features of the policy are outlined in the technical note published on Budget day, which invites businesses to express views on detailed aspects of this policy.
This legislative process will provide taxpayers with certainty that the allowance will come into force as soon as possible, while allowing the Government to consult on important policy decisions. The new relief will provide businesses with an additional £1.9 billion of tax relief in the next six years, growing to £2 billion annually by year 50. The allowance will be available to any unincorporated or incorporated business that builds a new structure or a building, or that acquires one directly from a developer. The allowance will apply across all sectors and sizes of UK trade, improving our collective economic position as we go into 2019 and beyond.
Amendments 57 and 60 seek to commit the Government to carry out and lay before the House a report on the consultation with stakeholders on arrangements for the allowance. The Government, however, have already invited stakeholders’ views on the detailed aspects of the allowance, and have made it clear to the public that a further technical consultation will be issued on the draft secondary legislation. That is set out in the technical note, published alongside the 2018 Budget.
Amendments 58 and 59 seek a Government review of the revenue effects and the uptake of the relief among different-sized businesses. The estimated revenue effects have been published in the Budget 2018 document. The relief is expected to provide £1.9 billion of additional support over the next six years to businesses of all sizes. That figure has been subject to detailed challenge and to the scrutiny of the independent Office for Budget Responsibility.
Amendment 58 requests that the Government lay a report on the revenue effects before the House within six months of the enactment of the Bill. That would not be technically possible, due to the time needed for businesses to make new claims and for the Government to carry out the necessary analysis. However, HMRC publishes annually the cost of capital allowances claimed and the capital allowances available, split by asset type and by industry, in the “Estimated costs of the principal tax reliefs” and “Corporation Tax Statistics” documents. Those publications will include the new allowance costs as soon as sufficient data are available. I therefore urge hon. Members to withdraw their amendments, and I commend the clause to the Committee.
Jonathan Reynolds
To make an appropriate level of progress, with the leave of the Committee, I will not press all amendments save for amendment 59. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Amendment proposed: 59, in clause 29, page 17, line 8, at end insert—
‘(14) The Chancellor of the Exchequer must review the uptake of the relief that will be created as a result of the powers in this section by the groups set out in subsection 15.
(15) The groups that must be considered under the review in subsection 14 are—
(a) companies with between zero and nine employees,
(b) companies with between 10 and 250 employees, and
(c) companies with more than 250 employees.
(16) A report of the review under subsection (14) must be laid before the House of Commons no later than 12 months after the first exercise of the powers under this section.’—(Jonathan Reynolds.)
This amendment would require the Chancellor of the Exchequer to review the uptake of this relief among micro-businesses, SMEs and large companies.
Question put, That the amendment be made.
Jonathan Reynolds
The clause proposes reducing the special rate for qualifying plant and machinery assets from 8% to 6%. It is reassuring to see something in this package of measures that raises some revenue, but it represents another small change to the way businesses are asked to operate. It is more change, more complexity and less certainty, all at a very difficult time for British business. I understand that this measure, as the Chancellor said in his Budget speech, has been introduced in part to fund the buildings allowance outlined in clause 29, which we have just discussed.
One of the problems with a change like this is that businesses make their plans on the basis of what tax rates are when they make those decisions. As the Chartered Institute of Taxation has warned, this gives the rate
“an element of retroaction, as investment decisions may have been taken on the basis of an 8% rate of allowance”
that is now being shifted to 6%. In its words:
“Tinkering with rates and allowances in this way undermines the principles of stability and certainty and as a result reduces the international competitiveness of the UK’s tax system.”
The Chartered Institute of Taxation also highlights the potential flaw in the logic that people will be able to balance off one cut against another:
“The impact of this change in rate will be different for different businesses.”
Any business that is unable to take advantage of the new structure and buildings allowance will find that it is simply worse off. It is therefore concerning that no prior consultation took place regarding these measures, so we simply do not know the different ways in which businesses might be impacted, or what they will make of these various allowances.
For that reason, the Opposition have tabled a package of amendments to dig deeper into what the impact of those changes will be. Amendment 65 prompts the Government to present to the House a report on any consultation that was undertaken with regards to this measure. As I have just stated, we have significant concerns about how little consultation was carried out regarding any of these measures, and the potential problems that might arise in implementation, given the scope of what is being proposed. We need to know what opinions were sought from the companies this will impact upon, and how those opinions were taken into account, if at all. Further to that, amendments 62 and 63 call for specific reviews of how the special rates will impact on both the use of household insulation—which would be included as an integral feature—and the automotive industry. Higher-emission vehicles would attract the lower rate of relief, rather than the full relief of 100% for lower-emission vehicles.
That brings me to the huge missed opportunity in this clause to promote business investment in green technologies. If the Government are going to endlessly tinker with this regime, why not do it to benefit green investment? Amendment 61, connected to this, would oblige the Government to publish a review of the CO2 emissions that result from investment in plant and machinery at the special rate. I urge Members to support this amendment, which is critical to showing us the potential environmental impact of this change, and will allow us to assess what we can achieve by promoting relief through investment in cleaner technology.
According to the Government’s own statistics, published in March 2018, carbon dioxide emissions from the business sector accounted for 18% of all emissions in 2017. While there has been a laudable 41% drop in carbon dioxide emissions from the business sector since 1990, we all know that we have to do more, as quickly as possible, to achieve the change that is so urgently needed to avert climate catastrophe. I therefore urge all Members to vote in favour of these amendments, to give us the information we need to get a clear picture of the impact this will have on business, industry and the environment.
Mel Stride
Clause 30 makes changes to ensure that the capital allowances special rate is reduced from 8% to 6% from April 2019. The change will improve the alignment between the rate at which the special rate pool assets were written down for tax purposes and depreciation in business accounts, which is part of the rejoinder to the hon. Gentleman’s charge that we are introducing greater complexity. We are actually aligning those rates in a way that will inject some further simplification.
The change made by clause 30 will provide businesses with the same amount of relief overall, but over a longer period. Under the new rate, businesses will receive relief on 50% of the cost of special pool assets within 11 years, compared with eight previously. The vast majority of businesses will be unaffected by the rate reduction, because expenditure on new special pool assets qualifies for the annual investment allowance every year. The temporary increase of the annual investment allowance to £1 million for the next two years will further help businesses to bring forward their investment, and write it off in full in the first year. The change is expected to raise £1.6 billion in revenue over the next six years.
The capital allowances package announced in the 2018 Budget will provide around £1 billion of additional support to businesses over the next six years. That change, combined with the new structures and buildings allowance, will make our capital allowances system more balanced by moving the relief from an area in which the rate was relatively generous to an area in which no relief was previously available.
Amendments 61, 62 and 63 would commit the Government to reviewing the impact of the rate reduction on CO2 emissions from plant and machinery, the prices of insulation material, household heating and electricity, and the automotive market. The Government have already published a tax information and impact note for the reduction. I assure hon. Members that the careful consideration of impacts is a standard process for all tax policy changes.
The Government’s commitment to meet the emissions reductions target has never been stronger. The Climate Change Act 2008 provides a world-leading governance framework, which already ensures that our overall progress is robustly monitored and reported to Parliament. As the hon. Member for Stalybridge and Hyde pointed out, benchmarked against 1990, there has already been significant progress. The Committee on Climate Change provides regular advice to the Government on how best to achieve our targets, and on the impact of existing policies.
Jonathan Reynolds
I am pleased that we have got on to this clause, which is one of the most substantial in the Bill. As it stands, it will increase the annual investment allowance from a one-off £200,000 to a substantial £1 million for two years.
To be frank, it feels like the limit has been increased to try to lessen some of the damage that has been inflicted on the country by the Government’s Brexit negotiating approach, but the constant chopping and changing of such an allowance risks mitigating the benefits of the allowance entirely, because it presents a regime that is impossible for companies to plan around as it is constantly shifting. By my count, the allowance has now changed five times in the 10 years since it was introduced.
The measure is not cheap; it carries a significant up-front cost. The Red Book that accompanied the 2018 Budget estimates that the cost of the allowance will be up to £1.24 billion. Some of that is projected to be recouped in the three years after it is introduced, but there is still £760 million of lost revenue after six years.
The structure of the allowance favours bigger businesses to such an extent that it could penalise small businesses by making it impossible for them to spend even the lower £200,000 allowance. These businesses are unlikely to ever get near to the full £1 million allowance, but they face the ludicrous situation whereby their capacity to use even the pre-existing lower £200,000 allowance will be restricted. This is a complicated point, but I will try to properly explain it.
The legislation has been quite poorly drafted, with a disregard for small companies. The Opposition believe that, with just a simple change via an amendment, it could be easily fixed. However, because of the Government’s undemocratic approach, which we have talked about and which has prevented us from tabling substantive amendments, it is actually not possible for us to propose anything other than a review. I will therefore use this speech to urge the Minister to consult the Treasury on implementing a quite simple change to the legislation to prevent it from having the opposite effect to that which was intended.
The annual investment allowance has been subject to numerous tweaks, which is often unhelpful in promoting a regime of certainty and stability. One particular problem posed here is that the allowance has been designated for a very specific period—1 January 2019 to 31 December 2020. However, many companies operate a different accounting period, typically in line with the tax year but in some cases with particular dates suited to their specific activities.
The problem that this poses is that the allowance period will not match up with the accounting period. If a company’s tax year does not match the fixed timescales of this allowance, there needs to be what is called a straddling calculation for the way the allowance is split over both timescales, because it will change. It will go from being an annual calculation to a daily one. The legislation makes specific provision for this straddling period.
I might need a whiteboard to explain this to the Committee, but I will try my best without one. I have kindly been supplied with a real-world example by a professional body. Imagine if a company with a tax year that ended in March had spent £60,000 just after the allowance period had ended. Owing to the straddling calculation, it would be entitled to relief on only £49,315 of that expenditure, even though the expenditure was well below the existing £200,000 allowance and clearly lower than the new higher limit. Had the company incurred that expenditure evenly throughout the year, or indeed before 1 January 2021, the full expenditure would have been relieved. I may have to put this in writing to the Minister to make it clear.
The simplest way to fix this issue would be to give small businesses the chance, if they wished, to opt out of the new limit, so that they did not get caught between the two periods. We know from HMRC’s own statistics that small businesses rarely ever get close to using the full allowance as it stands, let alone needing the new £1 million threshold. It makes no sense to penalise them with a higher rate that they will never be able to utilise.
What consultation was undertaken regarding this measure? This issue should surely have been caught at an earlier stage, or even pre-empted, given that it occurs every time the allowance threshold and periods shift. Given that the regime has been subject to many changes already, the Opposition have tabled amendments requesting a package of reviews that would oblige the Government to disclose the impact on businesses eligible to claim the allowance.
Our amendment 66 requests a review of the estimated impact of the provisions on the level to which businesses are claiming the allowance, assessing the take-up in the different periods to see whether the increase in the allowance is really worth while. Amendment 68 drills down further into the costs and benefits directly, which is essential given the substantial amount of revenue involved in this change. Amendment 69 asks the Government to put before the House a consultation on the provisions within two months of the Bill’s passage. This is essential so that we can hear directly from small businesses that will be affected by the point I just raised.
We need to understand, from a distribution perspective, who is taking up this relief and why. We need to know the details of who will use it and how it will benefit them, so that we can properly assess its impact. We also need to correct the change to the thresholds, which seems reasonable, given that businesses have been affected by previous changes and will certainly be affected by this one. I therefore urge all Members to vote for our package of amendments, which will give the Committee the information it needs to make the right call on this substantial and significant change.
Mel Stride
I will deal with two points raised by the hon. Gentleman before I speak more broadly to the amendments under consideration and the clause itself. On the issue of consultation, where we have an additional relieving measure coming in, where one would consult on it well in advance, one would expect the market to see the change coming and, therefore, forestall on activity as a consequence, in order to ensure that it benefited from the reliefs being brought in. For that reason, these kind of measures in general, and this one specifically, would not be appropriate to the kind of consultation that the hon. Gentleman has in mind.
The hon. Gentleman raised the specific issue of the way the straddling arrangements operate. Even in the absence of a whiteboard, he did a pretty good job of explaining the conundrum that he referred to. His example is well made: one could end up in a situation with a relatively limited relief available, because of straddling. However, the answer to that is that one would know about it in advance and, therefore, adjust the arrangement of one’s affairs accordingly.
Clause 31 and schedule 12 will temporarily increase, as we know, the AIA limit to £1 million from its current level of £200,000 from 1 January 2019 for two years. The AIA allows businesses to deduct the full cost of qualifying expenditure up to a specified annual limit or cap, where anything above this will be relieved at 18% in successive years. Where businesses spend more than the annual limit, any additional qualifying expenditure will attract relief under the normal capital allowances regime, entering either the main rate or the special rate pool, where it will attract writing-down allowances at the main rate or special rate respectively. This change responds to a consistent ask from business groups such as the Confederation of British Industry, Institute of Directors and the British Chambers of Commerce. The increase will provide a timing benefit, giving businesses 100% first-year relief on qualifying plant and machinery investments up to the value of £1 million.
The changes made by schedule 12 will increase the current AIA amount for two years. It is expected to cost £685 million over the scorecard, with positive returns to the Exchequer from 2021-24. This will provide an incentive for those businesses already spending up to the £200,000 threshold to increase or bring forward their capital expenditure on plant and machinery, by providing a cash flow benefit.
Amendments 66 to 68 and 71 seek a review of the impact of this temporary increase. These reviews would concern the number of businesses affected, the distributional impact, and the cost and impact of extending the increase to three years. By definition, this clause has a positive impact on businesses and business investment, enabling more firms with qualifying plant and machinery expenditure to claim 100% first-year relief. This also makes tax simpler for businesses making qualifying investments up to £1 million, which will not have to account for individual assets.
Much of that information is also available in the tax information and impact note, and policy costings note, published at Budget 2018. These notes include details on business impacts, including for companies of different sizes, and projected costs of the temporary increase. The change has been limited to two years given our continued need to consider the right balance between our fiscal, tax and spending objectives in order best to support the economy, while keeping debt falling and increasing fiscal resilience. This means maintaining fiscal discipline, which involves decisions such as keeping this higher level of AIA temporary rather than permanent. I therefore urge Opposition Members not to press the amendments.
Amendment 69 would commit the Government to publishing a report on consultation undertaken for this provision. No consultation was undertaken for this temporary change. It is important that this increase begins promptly following any announcement or engagement, in the way that I suggested in my earlier remarks.
Amendment 70 seeks a statement on the evidence base for the economic impact of this change. Prior to the Budget, the Government received representations from a range of businesses and business groups calling for this measure and outlining the positive impact an increase in the AIA amount would have on investment behaviour. Through this increase, the Government are giving even more businesses access to 100% first-year relief. I commend the clause and schedule to the Committee.
Question put, That the amendment be made.
Leaving the EU: Economic Analysis
Mel Stride Excerpts(7 years, 4 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Urgent Questions are proposed each morning by backbench MPs, and up to two may be selected each day by the Speaker. Chosen Urgent Questions are announced 30 minutes before Parliament sits each day.
Each Urgent Question requires a Government Minister to give a response on the debate topic.
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John McDonnell (Hayes and Harlington) (Lab)
(Urgent Question): To ask the Chancellor of the Exchequer if he will make a statement on the Government’s publication of the economic and fiscal analysis of various Brexit scenarios.
The Financial Secretary to the Treasury (Mel Stride)
Today the Government published the analysis of the economic and fiscal effects of leaving the European Union, honouring the commitment we made to the House. It is important to recognise that the analysis is not an economic forecast for the UK economy; it only considers potential economic impacts specific to EU exit, and it does not prejudge all future policy or wider economic developments. The analysis sets out how different scenarios affect GDP and the sectors and regions of the economy against today’s arrangements with the European Union. Four different scenarios have been considered: a scenario based upon the July White Paper; a no-deal scenario; an average free trade area scenario; and a European economic area-type scenario. Given the spectrum of different outcomes, and ahead of the detailed negotiations on the legal text of the deal, the analysis builds in sensitivity with effectively the White Paper at one end and a hypothetical FTA at the other.
The analysis shows that the outcomes for the proposed future UK-EU relationship would deliver significantly higher economic output, about seven percentage points higher, than the no-deal scenario. The analysis shows that a no-deal scenario would result in lower economic activity in all sector groups of the economy compared to the White Paper scenario. The analysis also shows that in the no-deal scenario all nations and regions of the United Kingdom would have lower economic activity in the long run compared to the White Paper scenario, with Northern Ireland, Wales and Scotland all being subject to a significant economic impact.
What the Government have published today shows that the deal on the table is the best deal. It honours the referendum and realises the opportunities of Brexit. [Interruption.] It is a deal that takes back control of our borders, our laws and our money. [Interruption.] Let me be very clear to the House and to those who say that the economic benefits of staying in the EU mean that we should overturn the result of the referendum: to do so would open up the country to even further division and turbulence, and undermine the trust placed by the British people in our democracy. What this House and our country face today is the opportunity presented by the deal: a deal that honours the result of the referendum and safeguards our economic future; or the alternative, the risk of no deal or indeed of no Brexit at all. [Interruption.]
Mr Speaker
Order. Somebody said something about “dishonest”. No Member should accuse another Member of being dishonest in this Chamber. I am not quite sure who I heard, but that must not be repeated. This is a disagreement between right hon. and hon. Members, and colleagues must remember that.
John McDonnell
The Chancellor promised us that the House would have a detailed economic analysis of the options ahead of the meaningful vote on Brexit. The least we could expect is that, instead of touring the broadcast studios, the Chancellor would be here himself to present an oral statement on the information.
Let us be clear. We are now in the ludicrous position of seeing an analysis produced today on the economic implications of Brexit, which is in fact largely an assessment of the Chequers proposals abandoned months ago. What the analysis produced by the Treasury today shows us is that if a no-deal scenario with no net EEA migration comes to pass—something the Government have recklessly, if incredibly, been threatening—we could see GDP almost 11% lower compared to today’s arrangements. Under the hard Brexit some Government Back Benchers have been promoting, it would be 7% smaller. Only a Chancellor who talks about “little extras” for schools would talk about this kind of effect as being “a little smaller”.
Can the Minister confirm that no deal is not an option the Government will allow to happen? Does the Minister agree that the one thing this document shows is that the deal on the table is even worse than the abandoned Chequers deal? Have the Government done any analysis whatsoever of the actual proposed backstop arrangements and will they be published in advance of the vote in a few days’ time? What fiscal assumptions is the Department making about extending the transition period, given that there may be no limit to what the European Union could ask for in return for such an extension? To be frank, if the Minister’s Government are not prepared to put jobs and the economy first in their Brexit negotiations, is it not time that they stepped aside and allowed Labour to negotiate that deal?
Mel Stride
Let me deal first with the point the right hon. Gentleman made about the Chancellor. The Chancellor is of course accountable to this House. He will be appearing before the Treasury Committee on Wednesday to give full account of the arrangements we are discussing today. Indeed, the Prime Minister herself will be appearing before the Liaison Committee.
The right hon. Gentleman raised the Chequers deal and the fact that analysis is being based around that in this paperwork. That is entirely appropriate given that, as he will know, the political declaration suggests a spectrum of possible outcomes for the arrangements. That is why we not only analyse the Chequers proposal, but have a sensitivity analysis around that proposal as well.
The right hon. Gentleman raises the issue of a no-deal scenario. It is the Labour party that is pushing us more in the direction of a potential no-deal scenario by—I have to say it—deciding for its own political reasons to object to the deal we have put forward. To be clear, that deal is good for safeguarding the economic future of our country and it delivers on the 2016 referendum, giving us control of our borders, our money, our laws and ensuring we protect the integrity of the United Kingdom, while allowing us to go out and make future trade deals. This Government are totally committed to achieving that.
Mr Kenneth Clarke (Rushcliffe) (Con)
Does my right hon. Friend accept that it is not possible to leave a free trade area with our largest and most important wealthy customers and introduce tariff barriers, custom delays, regulatory divergences and delays at borders without making this country poorer than it otherwise would be? It is difficult to see how anybody who follows economic policy can argue the contrary while keeping a straight face. Can he reassure me that the withdrawal agreement that is being put before the House enables no change at all to be made to our economic and trading arrangements through March next year until we go into a transition period that can be extended as long as is necessary to introduce practically any economic arrangement for the future that we want? It is obvious to me that we should stay in the single market and the customs union. Can he reassure me that that is still a perfectly reasonable possibility?
Mel Stride
My right hon. and learned Friend raises a number of points. The paper does not duck the question of the economic impact of the proposed deal compared to the status quo—the relationship with the European Union as it persists today. It makes it very clear that it will be detrimental in the economic sense. That is extremely clear. But I would put it to him that the deal is the best for the economy going forward as part of a deal that also delivers on several other things, some of which are entirely non-economic, such as control of our borders and free movement.
Kirsty Blackman (Aberdeen North) (SNP)
Before and after the EU referendum, the Scottish National party said that leaving the EU would damage our economy. In December 2016, almost two years ago, the Scottish Government produced “Scotland’s Place in Europe”, our compromise position that makes it clear that, second only to staying in the EU, remaining in the single market and the customs union would be the best thing for Scotland’s economy and for the economy of the UK as a whole. The Prime Minister’s deal will cost every person in Scotland £1,600 compared to staying in the EU. The economy will grow more slowly. The agri-food sector will be particularly affected across all scenarios. Trade deals that we might strike will only increase GDP by a potential 0.2%. Public sector net borrowing will be higher. In what alternative reality is this a good deal?
Mel Stride
The hon. Lady is arguing to remain in the European Union. That would not respect the will of the British people as expressed in the referendum, the largest turnout in any electoral event in this country’s history. She talks about the imposition of trade barriers and the impact on the economy. There would be few impacts worse, I suggest, than Scotland becoming independent and having a customs barrier between ourselves and Scotland.
John Redwood (Wokingham) (Con)
Will the Treasury publish the average 25-year growth rate in the last 25 years before we joined the European Economic Community and the average 25-year growth rate since 1992, when we have been in the full single market? In Treasury terms, this will show a massive loss of income and output as a result of belonging to those things, so the sooner we get out, the better.
Mel Stride
My right hon. Friend seems to have already availed himself of precisely that information to make his point. What I can assure him is that Stephen Nickell, formerly of the independent Office for Budget Responsibility, will, at the behest of the Treasury Committee, be looking at all the facts and figures and the model that we have employed in this respect. He will be given access to officials across all Departments to assist him in doing just that.
Several hon. Members rose—
Hilary Benn (Leeds Central) (Lab)
Thank you very much, Mr Speaker. There was nowhere I would rather have spent my birthday than in the House of Commons questioning the Prime Minister on the Brexit deal, and I am sure that the same is true of the Prime Minister. On today’s urgent question, the Government are of course unable to analyse the political declaration because no one has the faintest idea about what kind of economic relationship will result from it, so instead, they have chosen to model the Chequers plan—the facilitated customs arrangements and the common rulebook—which has already been explicitly rejected by the European Union, which is why we have ended up with a vague political declaration. What is the purpose of trying to rest the Government’s case about minimising economic damage to the country on an option that the EU has already told us that it will not agree to?
Mel Stride
I echo your congratulations, Mr Speaker, to the right hon. Gentleman on his very special day. In the case of the political declaration, the right hon. Gentleman will know that it does not give a specific outcome because that is to be negotiated as we go forward, as was always going to be the case. However, while the analysis that we are presenting today is anchored on the Chequers arrangements and the July White Paper, it of course provides a sensitivity analysis around that to reflect the fact that there is a spectrum of potential outcomes.
Mr David Davis (Haltemprice and Howden) (Con)
The Treasury, the OBR and the Bank of England between them produce numerous forecasts every year. When was the last time that any of them got one right?
Mel Stride
I suspect that in the history of highly detailed, complicated economic forecasts with myriad variables, there is probably not one in the entire history of the planet that has been entirely right in every respect. However, that is not an argument that my right hon. Friend can deploy not to go out and do an honest, sensible appraisal of what the likely outcomes are going to mean, both fiscally and in terms of GDP, as we go forward.
Sir Vince Cable (Twickenham) (LD)
The Government have confirmed this morning what the independent National Institute for Economic and Social Research set out yesterday: relative to continued membership of the European Union, the country will be substantially poorer, with no Brexit dividend for the budget relative to the position now. Is it not also the case that the Government’s relatively optimistic forecasts are based on the assumption of a smooth and rapid transition to a trade deal, or an indefinite period in a transitional arrangement, and that the likely outcomes and scenarios are potentially a great deal worse?
Mel Stride
No. The right hon. Gentleman raised specifically the issue of a Brexit dividend, and the Chancellor has rightly always been very clear on that. There is uncertainty in the economy at the moment and this is one of the key reasons why, if we can agree a deal, get that deal to stick and get rid of that uncertainty, a huge level of investment will come to our shores and this will be a huge shot in the arm to the British economy.
Nicky Morgan (Loughborough) (Con)
Let me start by saying that this economic analysis has been published at the behest of the Treasury Committee, but none of the three men called before me so far from the Government side is on that Select Committee. I say to the Minister that I was very clear in the letter that I wrote to the Chancellor of the Exchequer on 27 June, which is available on the parliament.uk website for any interested parties. I said:
“The long-term analysis should consider the economic and fiscal impact of… implementing the Withdrawal Agreement and the terms of the future framework”.
It is clear, sadly, that that is not what has been published today. It may be the case that it is not possible, as we have heard, to model particularly those agreements and the future framework, but that should then be explained to the House out of respect for the House. This is only the first part of the economic analysis to be published. We will have the Bank of England’s economic analysis at 4.30 pm and that of the Financial Conduct Authority, and then there will be various relevant witnesses, including the Chancellor, giving evidence to my Committee in the course of next week. So I say to hon. Members that, rather than leaping to conclusions about what is on the printed page today, we should all take the time to read it in detail—all 90 pages, and the technical amendment of over 70 pages—and the Bank of England’s analysis, and we should listen to the evidence given next week, then listen to the debate, and then we will make our judgments on 11 December.
Mr Speaker
Order. Before the Financial Secretary responds, and I note what the right hon. Lady said, I just say to the House that by contrast with the experience of earlier periods, during and indeed throughout my tenure, it has been my overwhelming and almost invariable practice—[Interruption.]—as the sedentary nod of the hon. Member for Wellingborough (Mr Bone) testifies, to call everybody in urgent questions and statements. That did not use to happen. It almost always happens with me, so if people would just be a little bit patient, rather than everybody thinking, “I am more important than the other person,” everybody will get in. I called the Father of the House and two Secretaries of State of some standing. [Interruption.] And the right hon. Member for Loughborough (Nicky Morgan) was a Secretary of State, but the Chair decides who to call and when, and I will always ensure that everybody gets a fair opportunity. It has to be that way. I have always treated the right hon. Lady with the very greatest of respect and I will always do so. I will also try to equalise the gender balance, but I hope that people will understand when I say that there are limits to what the Chair can do. The Chair also depends on who is present and who is standing. I am doing my best and I always will.
Mel Stride
I think my right hon. Friend the Member for Loughborough (Nicky Morgan) is entirely right in her exhortation to the House about the importance of making sure that we fully digest the two documents that are being brought forward—and indeed, as she suggests, the announcement that will be made by the Bank of England at 4.30 this afternoon—and that we in turn review very closely the evidence that the Chancellor and others give to the Treasury Committee. We do not want to make the kind of mistake that the Leader of the Opposition made when he dismissed our deal without even having read a word of it.
Alison McGovern (Wirral South) (Lab)
I cannot help feeling sorry for Government economists today, because not only have they had people in the House disparaging their work, but what is more, they seem to have been asked by the Government to do what appears to be a spin job. May I ask the Minister whether the Chancellor of the Exchequer even asked the Government Economic Service what model could appropriately be produced based on the political declaration about the future that we are going to have to vote on?
Mel Stride
What I can tell the hon. Lady is that this analysis has been carried out, for example, not solely by the Chancellor or the Treasury, but right across Whitehall. Every Government Department has been involved in that. No direction as to the detail or what the outcome of the analysis should be has been made by Ministers, and it is important that I go on the record in this urgent question to defend those officials who are not able to speak for themselves in these circumstances and say that the Government have absolute confidence in them and their integrity.
Mr Jacob Rees-Mogg (North East Somerset) (Con)
I am sure that my right hon. Friend recalls the wild inaccuracy of the Treasury’s forecasts before the referendum—of a punishment Brexit and an increase in unemployment of 800,000—but is there not a major flaw in the document we have before us? Global trends have not been modelled, yet it is thought that 90% of future global economic growth will come from outside the European Union. Without thinking about that, this forecast is worthless.
Mel Stride
I would make two points to my hon. Friend. First, this is not a Treasury report, as such, but as I have just outlined, it has involved discussions right across the whole of the Government. Secondly, on future trade deals, he will find buried within the detail that in fact assumptions have been made about future trade deals with countries such as the United States, China and India.
Catherine McKinnell (Newcastle upon Tyne North) (Lab)
The analysis published by the Government today, while not entirely clear in its picture, does highlight the specific impact that a bad Brexit would have on the north-east region. Today’s figures provide the modelling for the north-east against a Chequers deal and an average free trade arrangement, but uses no deal as a base for that analysis. Can the Minister confirm today the impact on the economy of the north-east of a no deal and the Government’s intended deal as compared with the status quo—remaining in the EU?
Mel Stride
As I identified earlier, a no deal, as compared to the Chequers deal and the sensitivity analysis around that, would see every region, country and sector of the UK economy disadvantaged as a consequence. As the hon. Lady will see from the analysis presented, the impact of a no deal would be particularly felt in the north-east. That is the case also with the west midlands and the east midlands, where manufacturing is particularly prevalent. The model also showed potential impacts on agriculture, with a strong impact in areas such as Wales, Northern Ireland and Scotland.
Anna Soubry (Broxtowe) (Con)
As you know, Mr Speaker, the hon. Member for Streatham (Chuka Umunna) and I tabled an amendment to the Finance Bill calling for the publication of precise modelling based on the status quo but to include the Government’s political declaration. The Exchequer Secretary to the Treasury, my hon. Friend the Member for Newark (Robert Jenrick)—he is my friend, and I am not by any means saying he has done anything dishonest—gave the following assurance at the Dispatch Box to this House, and as a result, the amendment was not pushed to the vote. Had it been, it would have been passed. Hansard records that my hon. Friend gave the following assurance to the House:
“The analysis will consider a modelled no-deal scenario, or World Trade Organisation terms; a modelled analysis of an FTA scenario; and a modelled analysis of the Government’s proposed deal.”—[Official Report, 19 November 2018; Vol. 649, c. 661.]
At that time, it was the “proposed” deal, because it was before last weekend, when it became the political declaration. It is not the fault of my right hon. Friend the Financial Secretary to the Treasury, but it is somebody’s fault, because a promise was made at the Dispatch Box and in private that led to a course of action that meant that an amendment was not put to the vote that would have been put to the vote and agreed. I would like to know, please, why that solemn promise has been broken.
Mel Stride
I have huge respect for my right hon. Friend, whom I count as a friend, but I gently say to her that I do not believe that any promises have been broken. We have come forward with an analysis of the deal, and that analysis, of necessity, is a spectrum of possible outcomes. The political declaration very clearly does not identify a specific end point, so the choice we are left with is taking a position on a particular set of circumstances—in this case, the Chequers deal, as set out in the July White Paper—and then doing a sensitivity analysis so that we capture the different scenarios in which the final deal could land, although that, as we know, is currently unknown because it is subject to detailed negotiation.
Yvette Cooper (Normanton, Pontefract and Castleford) (Lab)
The Minister has blown apart the Prime Minister’s entire claim by admitting that he cannot do any kind of assessment of the political declaration of the deal because, as he said and as it says in paragraph 28 of the political declaration, there is a spectrum of outcomes and controls. The trouble is that his assessment of that spectrum includes a huge range of possible outcomes for the growth of the economy, ranging from a 1% drop to a 7% drop. That is a substantial range. He is asking us to vote for this deal blindfolded, with no idea, and undermining our negotiating strategy in the process. Will he confirm that that is what he has just done?
Mel Stride
I am sorry to disappoint the right hon. Lady, but I will not confirm that, because, as I said in my last answer, the deal, as set out and elaborated upon in the political declaration, does indeed set out a spectrum of potential outcomes, so it is logical that it is that spectrum of potential outcomes that we should be modelling, and that is precisely what we have done.
Mr David Jones (Clwyd West) (Con)
A few minutes ago, the Prime Minister twice regaled the House with a catalogue of the economic successes that this country is currently enjoying. That success is all the more remarkable when one recalls that prior to the referendum the Treasury solemnly warned that in the event of a leave vote the country would immediately enter recession. Given the historical shakiness of Treasury forecasting, is my right hon. Friend prepared to make not only the modelling but the working assumptions applied by the Treasury available to responsible third parties, such as economists of free trade, so that they may review them and see whether they agree?
Mel Stride
I can reassure my right hon. Friend that, as I outlined earlier, Stephen Nickell, formerly of the OBR—an independent body—will at the behest of the Treasury Select Committee have full access to all the information, data and methodology used to produce these impact estimates, and I can assure him that officials will co-operate fully.
Meg Hillier (Hackney South and Shoreditch) (Lab/Co-op)
In 13 days, we in this House will vote on the future of our country, and yet the Government rushed into triggering article 50 and went recklessly into a general election without any timetabled plan for getting to 29 March, which is now the date. Will any information be made properly available to the House in the next 13 days to enable us to make a decision without being blindsided?
Mel Stride
I am slightly surprised by the hon. Lady’s question, because that is the very purpose of the information we are discussing. That information has been set out in great detail. As my right hon. Friend the Chair of the Treasury Select Committee has exhorted, it is incumbent on us all, given the magnitude and importance of the decisions we are about to take, to go away and digest that information in great detail.
Neil O'Brien (Harborough) (Con)
The recession under the last Labour Government was the worst since the second world war and saw GDP fall by 7% and unemployment increase by 1 million. How would the effect of moving from a deal-based Brexit to a no-deal Brexit compare with that terrible outcome under the last Labour Government? Does my right hon. Friend agree that, because modelling future differences in regulation are involved, the process of modelling Brexit is a fundamentally uncertain one and that we should be very cautious and understand that there will be inevitable uncertainty in any forecast?
Mel Stride
My hon. Friend is absolutely right in his latter point about uncertainty. Of course, this is simply a set of estimated outcomes, and everybody in the House will look at it closely and form their own opinion upon it. The impacts of a no-deal Brexit are estimated within the papers, but he is absolutely right that what we inherited in 2010—the largest peacetime deficit in our history—is a very frightening comparison to contend with.
Ms Angela Eagle (Wallasey) (Lab)
The Government, like a third-rate conjurer, hope that if they produce a range of examples for scenarios that are not going to happen, such as no deal or Chequers, somehow we will be taken in by it. Is it not about time the Government do what the House asks them to do, whether on legal advice publication or giving us the facts to make the decision, so that this House can take back control on behalf of the British people?
Mel Stride
We have done precisely what the House required us to do in setting out the estimated impacts of the deal, of an average free trade agreement, of an EEA-style scenario and, indeed, of a no deal. As for the hon. Lady’s point about the legal advice, I know that the Attorney General will be making a statement to the House in due course.
Alec Shelbrooke (Elmet and Rothwell) (Con)
Is not the truth that the range of economic forecasts published today show the importance of trying to secure the withdrawal agreement? When I look at my constituents, I see the small to medium-sized enterprise manufacturing base that employs so many people who feed into the supply chain to the big companies that export frictionlessly into the European Union. It is important that we honour the result of the referendum, but that we also do everything possible to ensure that we do not fall off the cliff edge. The figures published today show that that would be catastrophic. We can argue about the size of those figures, but one thing is clear: if we do not allow a proper withdrawal agreement to take place, there will be a catastrophic economic impact, and it is the responsibility of us in the House to make sure we do everything possible to avoid that.
Mel Stride
My hon. Friend’s assertions lie at the heart of what we are all considering: the future of our country and the expressed will of the British people at the time of the referendum. What this deal—as opposed to no deal—will do is safeguard our economy and the jobs that we have created as a Government, ensure that we deliver on our pledge to take control of our borders, our money and our laws in order to protect the integrity of the United Kingdom, and enable us to go out as a globally facing nation and do deals with other countries around the world.
Caroline Lucas (Brighton, Pavilion) (Green)
The Government are treating both Parliament and the people with contempt. The economic analysis published today is essentially worthless, because it does not model the Prime Minister’s blindfold Brexit. We have just heard why that is: because there are not enough facts in there, and it is just a leap into the dark. Does the Minister accept that the British public deserve better than this? Does he accept that they deserve facts, and that they also deserve a say on those facts?
Mel Stride
I assume that the hon. Lady is referring to the suggested second referendum. As I said in my opening remarks, I think that that would be entirely the wrong route. The British people took a decision in 2016. At that time the hon. Lady and I were on the same side of the argument, but the difference between us is that I respect that democratic decision. It would not be appropriate to go back with what would be a politician’s vote to seek a different outcome.
James Heappey (Wells) (Con)
There is no point in sugar-coating it: there is clearly a cost to Brexit. However, there would also be a democratic cost were we to ignore the will of the people as expressed in the referendum. Does my right hon. Friend agree that if the House were to turn its back on a deal that minimises that cost and respects the will of the British people, we would plunge our economy into a period of great uncertainty, which would have huge costs and at the end of which the options would still be exactly the same?
Mel Stride
My hon. Friend is absolutely right. The choice before the House is to go for a deal that will safeguard our economy for the future and deliver on the aspirations and the messages that we saw at the time of the referendum. To go into uncharted territory beyond this deal—which could potentially end in a no deal—would not, I suggest, be in the best interests of any of our constituents.
Mr Ben Bradshaw (Exeter) (Lab)
The Chancellor said, very sensibly, on the radio this morning that if, or rather when, the Government’s proposals were voted down by the House, the Government would have to consider all other options. If one of those options is the so-called pivot to Norway, may I say to the Minister, as someone who has voted for that in the past, that the ship has sailed? The only option left available to get us out of this mess is a people’s vote.
Mel Stride
The right hon. Gentleman will have heard my response to the hon. Member for Brighton, Pavilion (Caroline Lucas) in respect of a people’s vote. As for the so-called Norway option, that of course comes with single market membership, and would require us not to relinquish and absolve ourselves from free movement, which I believe is one of the essential things on which the electorate voted in 2016.
Luke Graham (Ochil and South Perthshire) (Con)
When taking part in the debate on Scottish independence, I often saw how economic forecasts could be used to muddle the debate, and also to confuse constituents. Although I welcome the analysis—[Interruption.] Hang on; will Members just let me finish? I welcome the analysis that has been released today, but may I ask my right hon. Friend to release, as the tool in the analysis prescribes, further sensitivities that would allow us not only to see the difference between the assumptions in the Chequers deal and those in the political declaration—as assumptions can be clearly stated—but to see, in the context of what is said by many on the leave side of the argument, what potential upside, if any, we could gain from other trade deals with the United States, Australia or indeed China? That would help to inform our decision making.
Mel Stride
My hon. Friend has invited me to go into some of the technical detail of what has been put before the House this afternoon. Let me direct him to my earlier remarks about the work that Stephen Nickell will be doing. It will be very detailed and very forensic, and will deal with all the assumptions, including the trading assumptions to which my hon. Friend has referred. Of course, that information will in time—in a short time—be available to the House.
Rachel Reeves (Leeds West) (Lab)
However people vote, they expect the Government to put our national interest first. The deal on which we will vote in 13 days’ time clearly does not do that, and we are now confronted with circumstances in which the Prime Minister and the Chancellor are expecting us to vote for a deal that they know—and we all know—means that our economy will grow more slowly, and we will have a smaller economy with fewer jobs and less investment. No one voted for that in the referendum in June 2016, so can the Minister understand why so few MPs are going to vote for this deal in 13 days’ time?
Mel Stride
What the British people voted for in 2016 was this. They voted for a responsible Government to enter into robust negotiations with the European Union on behalf of the British people and secure a deal which safeguards our economy, the jobs and the economic future of all our constituents, but which also—critically— delivers on several other issues including an end to free movement, an end to the common fisheries policy and the common agricultural policy, control of our borders, not sending vast sums of money to the European Union, maintaining the integrity of the United Kingdom, and ensuring that we are able to go out and strike trade deals around the world as a global country. That is what we are delivering on.
Mr Peter Bone (Wellingborough) (Con)
I spluttered over my cornflakes this morning when I heard the Chancellor spinning away on television and radio about something that had not yet been announced to the House. May I gently say to the Minister that it would have been proper for the Chancellor to make a statement to the House, rather than the Minister’s being dragged here by an urgent question?
The Government’s forecasts before the referendum told us that after the referendum there would be massive unemployment, a recession and an emergency Budget. That was proved to be totally wrong, so why should anyone believe a Government forecast for years and years in advance? Is this not just another Project Fear?
Mel Stride
My hon. Friend’s question is predicated on the erroneous assumption that this is a Treasury forecast. It is not actually a forecast. It is a set of impact assessments, and it is not a Treasury document, but one that has been brought together through intensive work across Government.
Several hon. Members rose—
Lucy Powell
Yes!
I suspect that the fairly candid approach today has actually hardened opinion on both sides of the debate. Given that, and given that the only really clear piece of advice that we get from this analysis is the catastrophic impact of a no deal, what action are the Government taking, legally and in terms of parliamentary procedure, to ensure that there will not be a no deal?
Mel Stride
The Government have taken a large number of actions, over thousands of hours of negotiation with the EU, to ensure that we do not have a no deal. The history of these negotiations is clear. We were told many months ago that we could not possibly arrive at a point at which we agreed the phase 1 issues, and we did just that. We were told that we were never going to agree an implementation period, and we did just that. We were also told that we would never agree a deal with the EU that we could bring back to the House, and we have done just that. The mission of this Government is to work tirelessly, day in day out, to ensure that we have the right deal for our people.
Charlie Elphicke (Dover) (Ind)
As a member of the Treasury Committee, may I put on record, Mr Speaker, that you do indeed get in every colleague in an urgent question and statement, and that, in the Chair, you have, in my experience, been more committed to fairness, the rule of law and natural justice than some other Members of this House?
The Treasury Committee will look at the backstop and the risks of entering the backstop, but I cannot see the modelling for the backstop in this document. Can the Financial Secretary tell me where it is, and if it is not in this document, can it be provided before the Chancellor appears before the Treasury Committee so we can fully assess this deal and the risks—and economic risks—of the backstop?
Mel Stride
As my hon. Friend will know, our position on the backstop is extremely clear: we do not envisage requiring the backstop. We anticipate a deal by the end of 2020, which is the end of the implementation period. There are alternatives to the backstop, as he will know, including a short-term extension to the implementation period, and of course in the event of our actually ending up in the backstop there is a mechanism through the Joint Committee and independent arbitration to pursue an exit from it. But we do not anticipate using the backstop.
Several hon. Members rose—
Mr Chris Leslie (Nottingham East) (Lab/Co-op)
Thank you, Mr Speaker—I think.
On reflection, it was probably quite wise of the Chancellor not to come here to give this statement. He definitely owes the junior Minister a stiff drink afterwards, because he is not waving, but drowning, especially as in this dodgy prospectus he has essentially admitted that we will not know on what free trade agreement the country is being asked to vote on 11 December. Does he not realise that the reason so many Members will not buy the dodgy sales pitch he is peddling today is that nobody is convinced about this Brexit lottery and just being told “Have faith, keep your fingers crossed, go with us in this giant leap in the dark”?
Mel Stride
It is not a giant leap in the dark to have a political declaration that makes clear that the deal that both sides will pursue in good faith will have at its heart a deep free trade agreement between ourselves and the EU27 with no tariffs, no quotas, no additional charges and so on, and will give us an end to free movement, end our sending vast sums of money to the EU and see us free to go out and do deals with other countries around the world.
Simon Hoare (North Dorset) (Con)
We can trade predictions until we are either blue or red in the face, but the common-sense folk in the country know that as we leave the EU there are bound to be issues that need to be mitigated. On behalf of my constituents, I just seek this one, hopefully simple, assurance: that the Treasury has the resolve, the agility and the flexibility to address those issues as, when, or if they occur.
Mel Stride
I think I can keep my answer fairly short and say to my hon. Friend that we do indeed have precisely the resolve that he seeks.
Luciana Berger (Liverpool, Wavertree) (Lab/Co-op)
The Chancellor said this morning:
“There will be a cost to leaving the European Union, because it makes our trade less fluid and it cuts us from an important export market. It creates some level of barriers.”
In another interview, the Chancellor agreed with the interviewer’s analysis that every scenario under which we leave will be detrimental to our country’s GDP. Constituents of mine have already been in touch this morning appalled by these admissions from Government. Why does the Minister believe democracy was suspended two and a half years ago, and why will he not ask the country if this is actually what people really want?
Mel Stride
I gave my reasons earlier on the question of the second referendum: the country took a decision in June 2016, in the highest turnout of any electoral event in our history, and they decided that we should leave the EU. It was then incumbent upon us as a responsible Government to deliver on that decision; to us, that has meant that we should safeguard our economy—and this deal does that—but critically also deliver on a number of the other issues, which I have outlined at length in this urgent question, to make sure we deliver all those things for the British people.
Dame Louise Ellman (Liverpool, Riverside) (Lab/Co-op)
The Minister says that the report will draw a comparison between current arrangements and various unspecified alternatives. Current arrangements in Liverpool have turned Liverpool’s fortunes around and the EU has been pivotal in Liverpool’s regeneration. We simply do not know what the Government proposals in the long term actually mean; we do not know what they are as they are merely speculative. So how will the Government make an assessment of the impact of Brexit on Liverpool? How far will this undermine its current success?
Mel Stride
Within the papers we have produced today there are regional impact assessments, including for the hon. Lady’s part of the country, of the various possible outcomes. The direction of travel that this Government are taking is to make sure we have as frictionless arrangements as possible with the EU27 going forward so that just-in-time delivery exports and imports can flow freely; indeed, that was at the heart of the July White Paper model. The hon. Lady will also know that at the heart of the political declaration is a no tariff, no quota, free trade arrangement. All those things will be important to ensuring we protect the jobs of her constituents.
Chuka Umunna (Streatham) (Lab)
This is totally unacceptable. Had amendment 14 to the Finance (No. 3) Bill been put to the vote last week, it would have passed and it would have required the Government to provide a model with remain as the baseline against their proposed withdrawal agreement. On the basis of promises made at the Dispatch Box, we did not press it to a vote. The Minister has denied that those assurances were given, and I do not want to do this but I am going to read what the Exchequer Secretary said to me and the right hon. Member for Broxtowe (Anna Soubry): “I will explain at the Dispatch Box that we will look at three scenarios: WTO, FTA and the Government’s proposed deal.” There is no doubt about the promise that was made to us, in return for which we agreed not to press amendment 14 to a vote. Can the Financial Secretary tell me why I should not think that the right hon. Member for Broxtowe and I have not been misled, and does this analysis not prove the overriding point that the best deal on offer is the one we have now, which is why we need a people’s vote on this issue to settle it?
Mel Stride
What the Exchequer Secretary said at the Dispatch Box was right, and these reports deliver on exactly what he said. [Interruption.] If the hon. Gentleman gives me a moment, I will try to explain the answer to his charge. First, he sought a comparison with the baseline, as he termed it. The baseline comparison is there: it is the status quo—it is our arrangement with the EU27 that we have at the moment as a member of the EU. He then suggests that we did not make a comparison of the deal with that, but many Labour Members have said, “We don’t know exactly what the deal is and we want to know what it is now.” We do not know what the deal is because the political declaration—understandably, given that we have a negotiation now to go through—sets out the parameters and the spectrum of potential outcomes. Therefore, in order to fulfil the obligation the Exchequer Secretary made at this Dispatch Box, we have made just that comparison—a comparison of the Chequers arrangement, with a sensitivity around that, with the base case. That is exactly what the Exchequer Secretary said we would come forward with.
Sammy Wilson (East Antrim) (DUP)
It is probably a gross understatement to say that economic forecasts have a very poor record. Since the referendum, all the forecasts have indicated that we should now be in the midst of a deep economic recession, yet the Government are boasting—and have real-time evidence—that we are riding the crest of the economic wave. In the Minister’s initial response, he said that this document was only about the potential fiscal impacts. He also said that it did not anticipate future policies, that it was based on a hypothetical free trade arrangement, and that some of the effects would be felt only in the long run, which of course is very uncertain. Can he understand why many of us in the House do not believe that it is worth the paper it is written on? This is certainly not the basis on which we should make a judgment on whether to vote for a flawed and deeply damaging deal.
Mel Stride
These papers put forward an honest appraisal of the estimated impacts of the different scenarios that we have been discussing this afternoon. The right hon. Gentleman makes a more general point about the inexactitude of economic forecasting, and he is right. We have a whole slew of variables, and we are looking at casting 15 years beyond the end of the implementation period—in other words, to 2034-35—which is quite a challenge. However, that is not the same as saying that we have not taken an honest and robust approach to this task. We have done that, and we have gone further. At the behest of the Treasury Committee, we have said that we will have an expert to go through all the details of the analysis, with access to all the officials across all the Departments involved, and that that information will in turn be made available.
Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op)
The Government’s conduct in this matter has been appalling. There is only one clear message that the public should hear from this: Brexit makes you poorer. Every scenario, including the European Economic Area scenario that many of us put forward as the least worst option, will make people poorer. Even though the Treasury—or the Government, or whoever the Minister is trying to claim it is—has not modelled this scenario, the National Institute of Economic and Social Research has modelled the Government’s deal, and that modelling also shows that we will be poorer. So why will the Government not simply agree to take this back to the people and let them make the choice in a people’s vote?
Mel Stride
Given that this is about the fifth time that I have been asked that specific question, I hope you will forgive me, Mr Speaker, if I refer the hon. Gentleman to my previous answers.
Tom Brake (Carshalton and Wallington) (LD)
If the Prime Minister will not rule out no deal for sound economic reasons, will the Minister do so for vital health reasons? Is he aware that, according to specialist cancer charities, patients are already scaling back on their doses and stockpiling medicines because of fears over the prospect of no deal? Why will the Government not deal with their concerns and rule out the prospect of no deal now so that those patients can have the reassurance they need?
Mel Stride
It will be for Parliament ultimately to decide whether the Government’s deal prevails. I think that the right hon. Gentleman and I are on the same side here, because I believe that the prospect of a no deal is deeply unattractive—notwithstanding the fact that we are making extensive preparations for no deal—partly for the reasons he has identified. We want a deal. We want this deal. We want a deal that is good for our country, and we want to avoid the very situations that he has elaborated on.
Owen Smith (Pontypridd) (Lab)
I don’t know about you, Mr Speaker, but I remember this Government lecturing Labour Members for years about the problems of saddling future generations with borrowing and debt. The Brexit deal that the Minister proposes is modelled in this bogus paper. Will he confirm that it states on page 76 that we will be borrowing an extra £37.5 billion by 2035 as a result of this deal?
Mel Stride
The hon. Gentleman is right to say that there are figures of that nature in this report, because it is an honest and open report about the implications of all the possible outcomes. However, we have to compare that with no deal, or with the EEA or an average FTA deal. We have negotiated with the European Union and we have to deal with politics not just as perpetual opposition but as the art of the possible and the art of doing a deal that will be good for this country, safeguard our economy and deliver on those things that the referendum result told us in 2016.
Chris Bryant (Rhondda) (Lab)
The trouble with the Government being in denial is that they just keep on denying that they are in denial until they go blue in the face. What we have learned today is that this Minister cannot read the writing on the wall, even when he has written it himself. The truth of the matter, when we boil this all down, is that the country will have to pay a price if Brexit goes ahead, and the people who will have to pay the most are the poorest in the land—my constituents. Should they not have the right to a final say on this?
Mel Stride
This is now the sixth or seventh time that I have been asked whether we should have a second referendum. I shall just reiterate what I have said on each previous occasion. As the hon. Gentleman will know, we had a vote in 2016 and it had the largest turnout of any electoral event in this country’s history—[Interruption.] He rolls his eyes, but I think that fact is significant. It would be a betrayal of the will of the British people to now go out and say, “We didn’t actually like the answer you gave the first time, so how about a different answer this time?”
Emma Reynolds (Wolverhampton North East) (Lab)
The Chancellor said on the radio this morning that the Prime Minister’s deal—he said the Prime Minister’s deal, not Chequers—would lead to a smaller economy than at present. Will the Government therefore commit to publishing the economic analysis behind what the Chancellor said this morning? Does the Minister not think it odd and wrong for the Government to ask us to vote for a deal that will make the economy smaller and people worse off?
Mel Stride
This deal protects the economy over and above the other options and possible outcomes, which is what this House wanted us to assess. We have done that, and this deal is clearly the best option on the table economically. It also delivers on the other elements, including the non-economic ones, that are important to people up and down the country, including intra-EU migration.
Dr Lisa Cameron (East Kilbride, Strathaven and Lesmahagow) (SNP)
It is clear that Brexit makes people poorer. As chair of the all-party parliamentary group for disability, I have been inundated by correspondence from concerned people with disabilities up and down the country. What will the impact be for people with disabilities? Will an equalities impact assessment be undertaken? Given that many of those people are already living on a shoestring and could become poorer, what safeguards will the Government put in place?
Mel Stride
The hon. Lady asks specifically about those with disabilities. This Government have an outstanding record in that respect. We spend £50 billion—[Interruption.] We spend £50 billion on those with disabilities and long-term health conditions. The critical point here is that the only reason we can provide that support is because of our effective, responsible stewardship of the economy. The responsible thing to do for the economy now, in order to protect just the constituents to whom she refers, is to ensure that this deal prevails, that we get economic certainty behind us and that we see the economy safeguarded, improving and growing into the future.
Chi Onwurah (Newcastle upon Tyne Central) (Lab)
The 90-page economic analysis repeatedly cites the importance of trade to the north-east, and the significant negative impact of no deal. Will the Minister confirm that, because of our manufacturing strengths, our exports and our integrated pan-European supply chain—which, regardless of claims by the European Research Group, cannot be replaced by deals with Australia, America or China—the only deal that could possibly work for jobs in the north-east is permanent membership of a European customs union?
Mel Stride
The hon. Lady is absolutely right to identify and characterise the businesses in her constituency in that way. They are deeply connected through supply chains to the European continent. That lies right at the heart of the political declaration and of our commitment to having the most frictionless trade possible and having no barriers, quotas or additional charges involved in that aspect of the relationship. I would say to her, respectfully, that she cannot view this deal in a vacuum. She has to consider it in the context of the alternatives. There is a danger, as she will recognise, that if we end up in no-deal territory, all the very things she fears may come to pass. It is really important for all of us across the House who have manufacturing businesses in our constituencies to stand up for them and support this deal.
Kate Green (Stretford and Urmston) (Lab)
The Minister has been at pains to make it clear that he is speaking to a Government-wide document, so may I ask him about an aspect of Government policy that will be material to the economic outcome of whatever deal the Government bring forward—that is, policy in relation to migration? Despite promises of an immigration White Paper, last year through to this summer, it is still not in front of us. Will the Minister guarantee that we will have that White Paper, clarity about the Government’s immigration policy choices and a proper economic analysis of their impact, in time for the vote on 11 December?
Mel Stride
We will of course come forward with further information about the policies that we intend to pursue in the area that the hon. Lady raises, but I point her to the fact that within the analysis being presented today, there is of course an analysis on both a “no net migration” basis between ourselves and those based in the European economic area, compared with the free movement that we have today. So that is actually factored into the analysis that we are reviewing now.
Phil Wilson (Sedgefield) (Lab)
The Chancellor admitted this morning that any Brexit deal will make the British economy and the British people worse off. Does the Minister agree with him?
Mel Stride
What matters now is that we support this deal, to support the economy. The analysis clearly shows that compared with the other options, particularly no deal, it is by far preferable, in terms of the economics and the impact on the economy, to support this deal.
Hywel Williams (Arfon) (PC)
Every assessment that the Government have published this morning shows Wales being worse off. I will not burden the Minister with yet another question about a people’s vote, but can he confirm from the Dispatch Box that in the entirely hypothetical case that we were to stay in the European Union, Wales would be not worse off but better off?
Mel Stride
I am afraid that the hon. Gentleman’s question is predicated on a train that has left the station, because we are leaving the European Union on 29 March—we are going to honour the will of the British people as expressed in June 2016—but I can reassure him that of the various scenarios that these papers review, this Government’s hard-won deal with the European Union is by far the best of all the alternatives for his constituents.
Jim McMahon (Oldham West and Royton) (Lab/Co-op)
I should say, with a background in local government, that had our cabinet been expected to make such an important decision without any financial information and without the legal advice being made available to the decision makers, the council would be in special measures by now. Let me just put the Government on warning: Members of this House will not accept this as fulfilling their responsibility when casting such important decisions. Does the Treasury accept that part of the reason why the economic shock will be felt in our regions is the chronic under-investment and the stubbornness, through austerity, in hitting those economies right at the heart of their communities?
Mel Stride
No. If the House agrees to this deal, and we proceed to get a deal with the European Union that does all the things that I have many times in response to this urgent question outlined to Members, it will provide confidence. It will provide further investment. It will support jobs. It will seek growth. It will see unemployment, which is already at a 45-year low, nice and low, where we want it to be. So I would urge the hon. Gentleman to support the deal and to do so on behalf of his constituents.
Tonia Antoniazzi (Gower) (Lab)
Today, I am absolutely incandescent, because it is insulting to my constituents that that piece of paper that the Minister has produced today is going to make them poorer. The Minister has not had the decency to compare the current situation with what it would be like to remain in the EU. Welsh farming unions are being told that they have to accept the deal because otherwise there will be no deal. That is scaremongering—absolute scaremongering. I am fed up with people coming to me and telling me to back the withdrawal agreement. I will not back something that makes my constituents, my family and everybody else poorer. I am an unapologetic people’s campaigner; I want a people’s vote. This spin—what the Minister is saying and what the Government are saying to the people—is absolutely wrong. The Government are misleading them, and I am angry. Everybody is angry. We want a people’s vote.
Mel Stride
A second referendum would be deeply divisive for our country. It would send a signal—[Interruption.] The hon. Lady has had her say. She and I campaigned on the same side in the referendum. I wanted us to stay in the European Union, but the difference between us is that I am a democrat, and I believe that when we have a referendum, which was widely debated over a long period, and a result is given, on the highest turnout of any electoral contest in our country, that result must be respected.
Alison Thewliss (Glasgow Central) (SNP)
UK Government analysis in 2014 said that Scottish independence would cost the economy 0.4% to 1%, but HM Treasury analysis today says Brexit will hit the UK economy by 3.9%. With apologies to my former colleague Callum McCaig, the previous Member for Aberdeen South, does the Financial Secretary to the Treasury honestly believe that the UK can afford to be independent?
Mel Stride
Yes is the answer. We have a bright future ahead of us. We have the opportunity, with this deal, to go out and do other deals around the world with other countries. The report makes specific reference, for example, to the United States, China, India and other important trading nations. We know that those parts of the world outside the European Union are growing far more strongly than countries within the bloc of the EU27, so I am optimistic about the future of my country.
Peter Grant (Glenrothes) (SNP)
I am not going to draw any conclusions, Mr Speaker, on your assessment of how big or beguiling any of my attributes might be, because they obviously have not been enough to catch your eye until now. I draw the Minister’s attention to footnote 42 of the analysis, which states:
“For the purposes of EU exit modelling, the UK is assumed to pursue successful trade negotiations with the United States, Australia, New Zealand, Malaysia, Brunei, China, India…Brazil, Argentina, Paraguay…Uruguay”,
United Arab Emirates,
“Saudi Arabia, Oman, Qatar, Kuwait and Bahrain”.
In the real universe, in which none of those deals is fully in place by the end of the transition period, how much worse than the Government’s own grim forecasts will the economic impact of Brexit really be?
Mel Stride
The hon. Gentleman is questioning some of the assumptions within a very complicated model, and as he has identified, the assumptions include that free trade agreements will be entered into with a variety of other countries. It is incumbent on him, if that is an area of the model that he wishes to stress-test particularly forensically, to look further into it, to look at the work that I have already outlined to the House will be carried out independently on behalf of the Treasury Committee, to question Ministers on that specific issue as he sees fit and to proceed in that manner.
Points of Order
Mel Stride Excerpts(7 years, 4 months ago)
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Mr Speaker
I always seek to be helpful to Members with points of order, although I hope the hon. Gentleman will not take offence if I say that his intervention just now had many distinguishing features, but that of being a point of order was unfortunately not one of them. He seems to me to be raising a question that he would have liked to ask if he had had the opportunity to do so and that could have been raised by the shadow Chancellor if he had chosen to do so, but he did not. [Interruption.] The shadow Chancellor is signalling that it is a response to what has since been said, which is not an unreasonable point. I do not think that I can procure an answer for him now if a Minister does not wish to rise to his feet and stand at the Dispatch Box.
Mr Speaker
If the Financial Secretary wants to be helpful and courteous to the House, as he ordinarily is, by leaping to his feet to seek to respond to the point, he is welcome to do so. I am grateful to him for his co-operation.
Mel Stride
Further to that point of order, Mr Speaker. With respect to the hon. Member for Bootle (Peter Dowd), and I do respect him, in my responses to the various questions I was asked this afternoon, I made it very clear that with the report we have, indeed, responded in the way that was required. We have benchmarked the deal—expressed as a potential range of different outcomes, which he will know is exactly how the deal is expressed within the political declaration—against the status quo, our current relationship with the EU27.
Mr Speaker
We are grateful to the Minister for that. What I would say to the hon. Member for Bootle (Peter Dowd) is that it is perfectly possible for this matter to be further aired in correspondence, and I have a hunch that it might well be—[Interruption]—as we speak. Moreover, it is even possible for the matter to be aired by the alternative route of questions, and I have a physical image in my mind now of one or other of the two relevant parties on the Opposition Front Bench beetling towards the Table Office to table the said questions. Those routes—correspondence and written questions—are not mutually exclusive. I hope that is helpful.
Finance (No. 3) Bill (First sitting)
Mel Stride Excerpts(7 years, 4 months ago)
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Sir Robert Syms
Members of the Committee have a mandate to scrutinise the Government. If we take one day out of that scrutiny, we are reducing our ability to question the Minister on some very important matters. Personally, I would like to take all the time to question the Minister on why decisions have been taken, and I am sure I will get very good answers.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve under your chairmanship, Ms Dorries, and a pleasure to serve on my third Finance Bill Committee—I think that it is the fourth such Committee for the hon. Member for Bootle, but it is reassuring to see broadly the same team arrayed. We were a fairly jovial and decent lot in the last Committee, so I am pleased to be serving alongside them again. The hon. Member for Bootle said that he always believes everything that the Minister says, which is a fine start to our deliberations over the coming weeks. My hon. Friend the Member for Poole said that I was probably dusting off the previous Labour Government’s speech from when they were faced with the same questions. Indeed I have, so I hope that will be acceptable to Opposition Members.
Amendments (a), (b) and (c), tabled by the hon. Member for Aberdeen North, seek to revise the programme motion by introducing a day of oral evidence and extending the time spent in Committee. It is of course important that the provisions of the Bill receive sufficient parliamentary scrutiny. The Government’s tax policy making framework ensures that that occurs, and I do not think that evidence to a Public Bill Committee would effectively further that aim.
The amendments would introduce a day of oral evidence from, among others, the Institute for Fiscal Studies, the Chartered Institute of Taxation and the Office for Budget Responsibility. Let me be clear that I agree that effective parliamentary scrutiny of this and any other Finance Bill is crucial, and I am always open to considering how that can be improved. However, for the following reasons, I am not persuaded by the merits of delaying the Committee in order to allow oral evidence to be taken. We accept that any additional evidence sessions would certainly increase the amount of scrutiny of the Bill, but that is not the same as saying that, in the absence of such sessions, the scrutiny of the Bill would be insufficient—as my hon. Friend the Member for Poole has set out, there has been very considerable scrutiny already—or indeed that additional days of evidence would provide a proportionate response to the need for scrutiny.
First, in line with the new approach to tax policy making set out in the Government’s 2010 framework, the Government already undertake extensive consultation with stakeholders before legislating in the Finance Bill.
Kirsty Blackman
On that point, does the Minister not accept that this year that “extensive consultation” has not been as extensive as it has been in previous years, and nor as extensive as it should be?
Mel Stride
I do not accept that. As I will argue, there is a process that we go through, which starts with the Budget announcement. We then go into formal consultation, which is applied to a number of measures within the Bill. We also of course publish draft clauses—I think that was on 6 July this year. I believe that around 226 pages of draft legislation were published at that time out of a total Bill length of 315 pages. It is considerable. We have received written evidence, the Bill will go through this Committee, it was considered by Committee of the whole House, we will then have Report stage, and we will examine amendments all the way through. The level of scrutiny received by a Finance Bill is well in excess of most Bills that come before the House.
My second point, which was raised by the hon. Member for Aberdeen North, relates to the fact that the Bill was considered in Committee of the whole House. Were the amendments to prevail, any evidence session in this Committee would not capture the important issues debated in Committee of the whole House. The Committee should be aware that Committee of the whole House is, I would argue, where the more important measures are considered, and they are put to the whole House rather than simply the members of this Committee.
Jonathan Reynolds
The Minister referred to the historical state of affairs for scrutinising Finance Bills. My hon. Friend the Member for Bootle said that the change this time has been the failure to move the amendment of the law resolution. This is only the sixth or seventh time that has happened since 1929. By convention of the British constitution, that has happened only very close to or on either side of an election to tidy up the statute book and get measures through before Parliament prorogues. Is this the Government’s established state of affairs? Will we conduct Finance Bills in this way under a limited technical scope by failing to move that amendment of the law resolution?
Mel Stride
I am not going to be drawn into what may or may not happen in future—the usual channels and the Government of the day take those decisions—other than to say that this is not a unique occurrence. As the hon. Gentleman recognises, this has happened in the past. Indeed, the very argument that just because it has not happened in the past does not mean it should not happen now, which is being applied to the seeking of an additional day, could also apply to the amendment of the law resolution. It has happened in the past and this is not the first time with a Finance Bill. In fact, the two I have taken through the House to date have been subject to those provisions.
The IFS, the OBR and others produce analysis of Budget measures before or after the event. They also typically give oral evidence to the Treasury Committee on the Budget as a whole before the Committees on the Finance Bill. Oral evidence at a Public Bill Committee will replicate that analysis while limiting its scope to those parts of the Bill not selected for the Committee of the whole House.
Finally, the programming of business is a matter for business managers and the usual channels. Those channels establish the programme motion that was agreed by the Programming Sub-Committee, which is made up of Government and Opposition Members. They were not persuaded that oral evidence sessions would be beneficial and, I am afraid, neither am I. As such, I urge the Committee to reject the amendments.
Kirsty Blackman
The Minister’s argument does not make sense in relation to the things that are most important being discussed in the Committee of the whole House. I would contend that clause 1 is probably the most important in the Bill given that it allows Government to charge income tax for future years. I suggest that the ones discussed in the Committee of the whole House are the most political, as they are agreed between the usual channels, and ones where the Opposition tend to think they might be able to get a win out of the Government, as was adeptly proven last week with the number of amendments accepted by the Government. I take the opportunity to say that I am pleased about that, because our amendments are not often accepted—I am quite chuffed about that one.
The Public Bill Committee debates are on the more technical aspects. This is less political and less likely to be chewed over by the Financial Times on its front page because it is immensely technical. The tax code has changed significantly and increased massively in the past few years. There is a huge volume of tax legislation and lots of it is incredibly technical. The stuff we are discussing in the Public Bill Committee is immensely technical and I disagree with the Minister on how external organisations have raised concerns about how few of the draft clauses were consulted on.
Mel Stride
The hon. Lady is absolutely right that this Committee will debate a number of technical clauses. Surely if they are technical, does that not lend itself to an examination based on written evidence based on, for example, approaching me with written questions or discussions or indeed a meeting, or perhaps a meeting that I can facilitate with officials present to get into the detail, rather than a broad brush quick day with various advisers and organisations that we quiz?
Kirsty Blackman
The Minister makes a slightly circular argument. He suggests that questioning him would help us to improve the legislation and that questioning external experts who have to apply tax changes would be less useful.
The Chair
With this it will be convenient to discuss the following:
Clause 3 stand part.
Clause 4 stand part.
Mel Stride
Clause 1 provides the charge for income tax for 2019-20, clauses 3 and 4 set the main, default and savings rates of income tax for 2019-20. Income tax is one of the most important revenue streams for the Government, and raised nearly £181 billion last year. The power to charge income tax is legislated annually in the Finance Bill, and is central because it allows for income tax to be collected in order to fund the vital public services on which we all rely. Clause 1 grants this power for 2019-20. Clause 3 keeps the basic, higher and additional main rates of income tax at the same level as last year for England, Wales and Northern Ireland. Clause 4 keeps the basic, higher and additional rates of default and savings rates of income tax at the same level as last year for the whole of the United Kingdom.
We are supporting working people by increasing the tax-free personal allowance and the point at which people pay the higher rate of tax to £12,500 and £50,000 respectively. Keeping rates the same alongside increasing the personal allowance and higher rate threshold means people can keep more of what they earn. By April 2019 we will have cut taxes for 32 million people and taken 1.74 million of the lowest-paid out of income tax altogether since 2015. Clause 1 ensures that the Government can collect income tax in the tax year 2019-20 in order to fund key spending commitments. Clauses 3 and 4 ensure that the rates of income tax remain unchanged and make sure that hard-working people keep more of what they earn and that those who earn the most continue to pay their fair share. I commend the clauses to the Committee.
Kirsty Blackman
I hope the Minister can answer my question in the positive. In the clauses, the devolved and reserved aspects are split. They are considered separately, which makes a huge amount of sense. I asked the Minister earlier whether he would consider doing that in future years for all clauses, particularly those similar to clause 5. I am not expecting a positive, definite answer that he will do that in future years, but will he commit to considering splitting the devolved and reserved aspects on income tax in future years, so that the House can better scrutinise legislation?
Mel Stride
I thank the hon. Lady for her question, which we touched on in the Committee of the whole House. She will be aware that clause 3 is subject to the English votes for English laws process because non-savings earnings are devolved to Scotland, so that clause only applies to Northern Ireland, Wales and England, while clause 4 on the savings and dividend rates applies UK-wide. I understand her point and we will be happy to look at that in the future. As things stand, we support where we are at the moment in the division of those particular clauses.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2
Corporation tax charge for financial year 2020
Peter Dowd
I beg to move amendment 8, in clause 2, page 1, line 7, leave out from “tax” to end and insert
“may be charged for the financial year 2020 if the condition in subsection (2) is met.
(2) The condition in this subsection is, prior to 6 April 2019, the Chancellor of the Exchequer has laid before the House of Commons a review of the corporation tax receipts of multinational companies with UK-domiciled subsidiaries in relation to their publicly available UK-based revenue.”.
This amendment requires a review of the effects of corporation tax receipts of multinational companies compare with their UK-based revenue.
Mel Stride
I thank the hon. Members for Bootle and for Aberdeen North for their wide-ranging contributions to the important debate about corporation tax. As we know, clause 2 brings in the corporation tax charge for 2020, the rate of 17% having been set in part 2 of the Finance Act 2016.
The hon. Member for Bootle referred to slashing tax for big businesses. It is a typical Opposition characterisation of our tax policy to say that the largest companies are being treated to corporate welfare, as he put it, but tax cuts apply right across the board, including to the smallest businesses in our country. Given that we are reducing tax to 17% by 2020 for both small and large businesses, the Opposition’s proposal to increase it to 26% for large businesses and 21% for smaller businesses would represent overall tax increases of 50% and 25% respectively.
Anneliese Dodds
Does the Minister acknowledge that we are talking about profitable businesses and not about unprofitable businesses, of which unfortunately there are a large number in many parts of the country? I am pleased to hear him acknowledge that Labour’s tax plans include a differential rate for small businesses, but surely he must acknowledge the sunk cost in what his Government have done. Through their cuts to central Government funding, they have forced local authorities to rely more on business rates and council tax, so the fixed costs that all businesses pay have gone up.
Mel Stride
The hon. Lady correctly identifies that Labour’s position is for small businesses to pay 21% in corporation tax. Given that we are taking it down to 17%, her party’s policy would result in the tax bill for hard-pressed companies on high streets rising by some 25% for smaller businesses—a pretty extraordinary and hefty increase—and by some 50% for larger businesses. One has to ask what the effect of those tax increases would be. They would not drive productivity, as the hon. Member for Bootle would have us believe, but do quite the reverse: they would increase the costs on businesses, increase the pressures to drive up prices for their products and, critically, reduce returns to investors. The hon. Gentleman mentioned the importance of investment in our country, but we cannot increase that by driving up corporation tax rates.
As the hon. Members for Oxford East and for Aberdeen North rightly said, business rates are a fixed cost that cannot be avoided, irrespective of whether a business is profitable, but we are driving those rates down. In the last Budget, because of the prudent stewardship of our economy, we were able to announce a 30% reduction in rates for retailers at or below the rateable value of £51,000. That will take a huge amount of pressure off about 90% of the high street retailers in our country.
Jonathan Reynolds
I am extremely grateful for Minister’s courtesy. The Government would have a strong case if those big reductions in corporation tax had produced a commensurate increase in corporate investment. Surely the question for the Government is this: how come this country still has a lower rate of corporate investment than France, which has a corporation tax rate of 38%? How come it has a lower rate of corporate investment than Germany, with its corporation tax at 31%?
On UK inward investment, if as a minimum we simply matched the bottom rate in the G7, that would mean corporation tax rising to 24%. The point surely is the diminishing return from driving it down and relying on business rates and employer’s national insurance instead. The balance is wrong for the UK economy.
Mel Stride
I draw the hon. Gentleman’s attention to the position of the Office for Budget Responsibility on cutting corporation tax rates. It makes a clear link between cutting the level of corporation tax and a commensurate increase in the level of business investment. That is the view of that independent organisation and the information is there for all to see.
The hon. Gentleman raises the issue of the level of investment in the UK economy. In fact, it is 30% higher than it was in 2010, albeit we have been pulling ourselves out of the financial difficulties we entered at that time. He raises the issue of inward investment. It seems clear and obvious to me that the lower the level of corporation tax, the more attractive that is to companies overseas, who look at those businesses. He suggested earlier that our rate was very low compared with others. America has just reduced its corporation tax rate from 35% to just 21%.
Mel Stride
I will be a little more generous even than the hon. Gentleman and say I believe it is 26%. Whatever the interplay between the rates, the corporation tax rate has been substantially slashed, to use the expression adopted by the hon. Member for Bootle. The Irish Republic has a rate of just 12.5%, which has been a big driver of the differential investment between the Irish Republic and Northern Ireland.
Peter Dowd
There is always a danger in these situations of comparing apples and pears. This is to compare the largest economy in the world—the United States—which has 50 states and different levels of tax, with this country. On the other hand, the comparison is with the Republic of Ireland, with a population of about 4 million and a gross domestic product significantly below ours. We need reasonable comparators. I am sure the Minister will agree that those are likely to be our European neighbours.
Would the Minister agree that he is missing the point? We have a contention, which I laid out and will not repeat. The issue is to address the amendments. Our argument is that the amendment requires a review of the effects of corporation tax receipts on multinational companies compared with their UK-based revenue. We make our assertions on the basis of independent evidence and say we should let the Government do that, through institutional mechanisms. Does the Minister not agree that that would be a sensible way forward and we can then have these debates again?
Mel Stride
I shall come to the issue of the amendments momentarily. I would just say in conclusion to this debate on tax that it is a dangerous position for the Opposition to adopt. They are telling large businesses and entrepreneurs and the 5 million small businesses up and down the country that a significant tax hike is in theirs and the economy’s best interest when it clearly is not. The clause introduces the ability further to relieve that element of taxation.
The hon. Members for Bootle and for Oxford East spoke at some length about avoidance. The Government have an exemplary record on clamping down on avoidance, evasion and non-compliance. There have been 100-plus measures since 2010, bringing in and protecting some £200 billion in revenue, a vital amount of money for our public services.
As the Committee will be aware, we have one of the lowest tax gaps in the world at 6% for 2015-16, the last year for which figures are available. That compares very favourably with the record of the last Labour Government—in 2005-06, the figure was well above 7%. The difference would fund every policeman and woman in England and Wales. We recognise that bringing in tax receipts is extremely important.
On HMRC staffing, 28,000 full-time equivalents in HMRC are engaged in tax inspection. We have invested an additional £2 billion in HMRC since 2010 for that purpose. The fruits are already being seen in near record lows in the tax gap.
The hon. Member for Bootle urged us to work closely with the EU on tax avoidance. The Committee of the whole House debated clauses 20, 23 and 19 on control of foreign companies, exit taxation rules and certain anti-hybrid rules, all of which emanate from the EU anti-tax avoidance directive. We have been in the vanguard of the base erosion and profit shifting project, as the Committee will know, to clamp down on avoidance.
The hon. Members for Bootle and for Aberdeen North mentioned digital businesses. We need to understand the important point that, when we look at profits generated by companies through digital platforms and the interaction of UK consumers with them, we are not referring specifically to avoidance—the hon Member for Bootle may have suggested that. We are looking at the current international tax regime and whether it is fit for purpose in taxing that form of profit generation. The current regime basically assigns taxation rights to the jurisdiction when there is economic activity in that jurisdiction, as defined by the buildings, where the intellectual property rests, whether people are employed, where the risks are taken, where the management is domiciled and so on. We want to move to a situation where we are able to tax those businesses because of the profit generation—the value generation—that they are creating, as I have described.
Kirsty Blackman
It would be useful if, after this meeting, the Minister could write to us with details of countries with which he or his team have had discussions. Any other information about the nature of those discussions would be incredibly useful. so that we can be sure that the Government are taking this seriously on a multinational level.
Mel Stride
I would be very happy to do that. The hon. Member for Bootle specifically asked me what meetings I had had about the digital service tax measure. I have had personal interactions with a number of countries. I attended the OECD meeting in Paris some months ago where I furthered and put forward the UK’s position, which is broadly that we should work on a multilateral basis with the OECD and the EU so that we come to a collective agreement. The value of doing that is not limited to the fact that we would iron out any risks of double taxation that would result from going on a unilateral basis. However, we have also made very clear, as the Chancellor announced in the Budget, that we will unilaterally bring in just such a tax by 2020 in the absence of multilateral arrangements. I would be very happy to write to the hon. Lady with further detail on her specific question.
Amendments 8 and 9 seek to make the clause contingent on a report on how the corporation tax receipts of multinational companies and technology companies compare with their respective UK-based revenue. Like most countries, the UK taxes companies on their UK profits and not their UK revenues to reflect their ability to pay. Therefore, the proposed report would have limited relevance to policy. However, the Government have not been complacent about taking action within the rules of the international corporate tax system, as I have described.
Amendment 10 seeks to make the clause contingent on a review of HMRC’s effectiveness in applying the general anti-avoidance principles in relation to corporation tax collection. The Government apply a wide range of anti-avoidance measures, as I have set out, bringing in some £200 billion since 2010. The general anti-abuse rule, or GAAR, has been operational since 2013. Although the GAAR works principally as a deterrent, it has enabled HMRC to counteract the tax advantages that people try to gain by using abusive arrangements. An additional review of the GAAR’s effectiveness would not add significant value. The GAAR advisory panel provides an important safeguard by ensuring that HMRC’s decisions on GAAR cases are informed by its independent opinion.
Anneliese Dodds
On that point, the current incarnation of GAAR is focused on abuse rather than avoidance, as the Minister mentioned. I wonder whether he can clarify something. I understand that the GAAR panel has given 12 opinions, but there are only nine on the website, although in any case that seems a relatively small number of decisions taken. Does he not feel that it would be appropriate to review the GAAR panel’s operations at this stage?
Mel Stride
I do not, for the reasons that I have given. On the matter of how many references there have been, nine in total have supported HMRC’s position. That said, if the hon. Lady has information that suggests there have been 12 referrals, I will look into what might be a further three and what the status of those was.
Anneliese Dodds
I received notice that there were 12 in a ministerial response to a written question that I tabled. That might indicate that the panel did not support HMRC in three cases. If that is the case, it would be enormously helpful for us to know why.
As the Minister knows, when the panel was created, considerable concern was expressed about the variety of its membership. The individuals themselves are obviously upright, knowledgeable people of good standing, but they come from a restricted group of people, many of whom have been involved in devising some of the tax schemes that the panel might be required to look at.
Mel Stride
The hon. Lady makes an entirely reasonable request for that information. As I indicated, I am happy to provide it to her. In fact, divine inspiration has just arrived—I have an answer; I knew it was lost somewhere in my mind. There have, in fact, been 12 opinions, all of which have been supportive of HMRC. If she would care for any further information, I am happy to provide it outside the Committee.[Official Report, 3 December 2018, Vol. 650, c. 5MC.]
Amendment 11 would make the clause contingent on a review of how the application of globally agreed measures to combat avoidance by multinationals would impact the tax gap. HMRC publishes annual updates on its tax gap analysis. The corporation tax gap is estimated to have declined from 12.4% of total theoretical liabilities in 2005-6, under the previous Government, to 7.4% in 2016-17.
Peter Dowd
I have a quick question. There is a cumulative effect of the Minister saying to us that there have been reviews on this and reviews on that. The phrase used is, “We keep these things under review.” I completely accept that the Government do that, but —I think I have asked about this before—it would be helpful to find out what the process is for keeping such things under review, other than a Sir Humphrey-type approach, which is to just say, “We keep these things under review,” so we all sit down and think, “That was a good answer,” and forget to ask the next question.
Mel Stride
I think the hon. Gentleman has described the process beautifully. I would add to his observation that we do have more formal methods of engagement than that which he describes. We publish tax information impact notes for every single tax measure and there is the process that we debated earlier for how taxes and the measures in a Finance Act are scrutinised over time, and so on.
To conclude this fairly lengthy debate, I urge the Committee to reject the amendments and I commend the clause to the Committee.
Peter Dowd
I thank the Minister for his response and those hon. Members who intervened to try to tease the matter out. He has not told me, or anybody on this side of the Committee, anything that suggests that the Government take the matter of corporation tax and the need for reviews as seriously as we do, or that gives reassurance to the public out there. While everybody else is receiving a pay rise—just about—after 10 years, potentially on a sustained level, the Government have said that, eventually, they will invest in the NHS, but as those things begin to come through, people are still not convinced that corporations, which many of them work for, are playing by the rules.
The Minister has not said anything that convinces us to the contrary; hence our amendments. If he is convinced of his argument—I have no reason to believe otherwise—he needs to convince not just Government Members, but Opposition Members and the great British public. Some 80% of people do not believe that large corporations are playing fair by the system. Either they are wrong, in which case the Government should tell them so, or they want an eye kept on this issue, which our amendment would do.
I have no doubt that we will come back to this matter in the next Finance Bill, when the Minister and I might or might not be here in Committee. No matter what the Government think, it is not going away—it will come back to haunt the Finance Committee year in, year out. I exhort the Minister to listen to that.
Mel Stride
If it is in order, Ms Dorries, I will give the hon. Member for Oxford East an additional piece of information on the issue of referrals to the panel. There were nine cases rather than 12; there were 12 opinions on those nine cases, all of which supported HMRC. That might explain how I had a figure of nine while the hon. Lady was focused on 12.[Official Report, 3 December 2018, Vol. 650, c. 5MC.]
Anneliese Dodds
How can there be more than one opinion about an individual case?
Mel Stride
I shall write to the hon. Lady on this matter and any others that she wishes to inquire about.
Question put, That the amendment be made.
Finance (No. 3) Bill (Second sitting)
Mel Stride ExcerptsTuesday 27th November 2018
(7 years, 4 months ago)
Public Bill CommitteesRead Full debate Finance Act 2019 View all Finance Act 2019 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 27 November 2018 - (27 Nov 2018)
Peter Dowd
I hope everybody had a refreshing lunch and that not too much claret was drunk.
Peter Dowd
That is a nice start to the afternoon. I will turn to amendment 17 to 19 and 22 which, I must say at this stage, we will also push to a vote unless we have the acquiescence, capitulation or otherwise of the Minister after he has heard my words of wisdom. I hope he has even more divine intervention and inspiration this afternoon from his officials telling him to agree with me.
Clause 7 introduces further reforms to optional remuneration arrangements for cars and vans. The measure seeks to make two changes to the current regime, as outlined in the Treasury’s policy paper. First, it is designed to
“ensure that when a taxable car or van is provided through OpRA, the amount foregone, which is taken into account in working out the amount reportable for tax and National Insurance contributions purposes, includes costs connected with the car or van (such as insurance) which are regarded as part of the benefit in kind under normal rules”.
Secondly, this measure is also expected to
“adjust the value of any capital contribution towards a taxable car when the car is made available for only part of the tax year.”
I imagine that the Treasury’s line is that this seeks to ensure that the value of this benefit is connected only to cost, but we are concerned that these changes may further complicate pre-existing optional remuneration arrangements that are already in place for employers and employees to utilise company cars and vans. That in turn may be a deterrent, as some employers may consider that it is too much hassle or too bothersome, and that there is too much red tape, when it comes to offering such a scheme. Similarly, employees may decide that the risks and liabilities of taking up the offer of a company car or van scheme may be too high, and that under these circumstances both rentals and automotive sales may fall.
To put it as succinctly as I can—I accept that I am prone to being succinct, which is a fault of mine—the Opposition do not believe that it is in the interest of our economy, which is heavily reliant on the automotive sector for jobs, or that of workers, to make it harder for them to use a company car or van through an optional remuneration scheme. That is why we have tabled amendment 17, which would amend page 5, line 2 of the Bill and insert:
“The Chancellor of the Exchequer must review the effect of the provisions in this section on the motor vehicle industry in parts of the United Kingdom and regions of England and lay a report of that review before the House of Commons within six months of the passing of this Act”
as linked to the nations.
I accept that Government Members must recognise the clear link between automotive sales and their use as company cars or vans in optional remuneration arrangements. Work vehicles make a significant contribution to the automotive industry’s more than £82 billion annual turnover and £20.2 billion of value added.
Kirsty Blackman (Aberdeen North) (SNP)
Many of the points that I was going to make have been covered by the hon. Member for Bootle. However, a few things require to be dwelt on for more time or should be looked at from a slightly different angle.
When I first became aware of the Opposition’s amendments, I did not think that it was a tack that they should take. However, when I looked into the information behind them and at the detail, I discovered that it is actually a very sensible tack to take, for a number of reasons. I note the comments about the 4,000 Scottish jobs that could be affected. It is important to note the number of jobs that could be affected by any changes to this area, particularly through tweaks to the benefit-in-kind system.
I also point out the number of new car registrations, which the Society of Motor Manufacturers and Traders has on its website. There has been a 7.2% fall in the year to date, which is incredibly significant. If the Government are thinking about ensuring that companies have those up-to-date cars with the lowest emissions, it is really important that companies are incentivised to ensure that their employees drive an up-to-date fleet, rather than older cars.
The other thing to note is that registrations in October 2018 were at their lowest level since 2013, which is significant. We might expect low numbers when we were coming out of a recession, but there has been a significant drop in registrations over the past year. It is important that the Government think about this wider context when making these decisions.
It is particularly important to note the impact of these changes on the industry, given the context of Brexit and the concerns raised by the car industry. Now is not a good time to consider making changes that are likely to negatively impact the automotive industry, particularly given the nature of its supply chains, which are so integrated with European Union countries. There is the potential for those supply chains and those manufacturing businesses and jobs to move wholesale to the EU, rather than the integrated supply chains that we have now being maintained. It is important to note that wider context when making any changes, because the Bill will not act in isolation; it will have to operate in the context of whatever potential economic hit will come from Brexit.
On the ICAEW’s comments about the potential for an accidental charge following emergency repairs, I agree with the hon. Member for Bootle that the Government might need to amend the Bill further in order to make it workable, so that it does what they intend it to do. If we are not going to listen to the utmost experts on this issue, what is the point in having the consultation? If we are to have a consultation, it will be meaningful only if the Government listen and actually make the suggested changes. These people are the experts and negotiate the tax system on a daily basis, so they are the ones who can highlight potential problems.
To expand on that a little bit, I totally accept that protecting the Treasury is important in the changes being made, and that the Government are attempting to protect the Treasury from problems that it did not necessarily foresee when it created the Bill in the first place. However, there are changes to the Finance Bill every year. As the hon. Member for Bootle said, this is the fourth Finance Bill Committee that I have served on, and every year there seem to be different changes to benefit in kind issues. I understand that the Treasury is trying to protect itself, but if there is an immensely complex tax system and it is changed every year, it is difficult for people to comply with the legislation, even those who are trying to do so. I think that the Government need to think more carefully and do some sort of sensible review, as suggested by the Opposition, into the whole landscape of benefit in kind issues and then make changes in one go, so that they are easily understood and can be complied with them. As I said earlier, there is no point having a tax system if people do not understand it and cannot pay the tax because they do not understand how they are supposed to comply with the system.
That also has a knock-on effect on the automotive industry. If it is too difficult for employees to claim the relief that they are supposed to be able to claim, or to have the benefit in kind accepted as such, as they are supposed to, it means that fewer companies will be willing even to attempt to comply with the legislation. I think that it is really important, in terms of the new vehicles and ensuring that the Government can collect the correct tax.
In relation to whether or not this is a stealth tax, I would certainly say that there are stealth changes being made to these taxes, and not ones that have been widely publicised or understood well enough by individuals having to go through the system. If the only way to comply with tax changes is to ensure that you have a very good tax lawyer or tax adviser in place, then I would suggest that the system is a bit too confusing. It should be easier for people to jump through the hoops that are in place, and constant changes by the Government are not helping.
I will speak briefly to the proposed amendment. The explanatory notes, on pages 14 and 15, state that this was first proposed in the autumn statement 2016 and put through a technical consultation. The Government are having to make changes in relation to the anomalies that were raised. The Government decided to take action to protect the Exchequer at the first opportunity. Although this was consulted on, the Government did not see the potential pitfalls in the way they put forward the legislation. Therefore, either the consultation was deficient or the Government’s ability to listen to the consultation responses was deficient. There was certainly an issue with the process.
I am pleased that the Government have changed their ways—or have said that they will—about the number of Finance Bills we are going to have in any given year, especially as I have served on four Finance Bills since 2016, and I only avoided one in 2017 because a general election was called. That seems to me to be too many tax changes in any year, given that we still have all the changes happening on a significantly more than annual basis. I think the Government need to take a step back in some of these situations and have a much more wide-ranging look at the issues, particularly in relation to benefits in kind. Every single year there are changes in the benefits in kind legislation in the Finance Bill, which every year we have stood up and debated.
First, we need to look at the whole system of benefits in kind and then make decisions about the entire system that are easily understood by people. People are much more likely to comply if they can actually understand the legislation. If there are constant changes, that makes it is much more difficult for people to jump through the hoops they are supposed to jump through and to pay the correct tax that they are supposed to pay.
Secondly, in relation to the impact on the automotive industry, I am particularly pleased that the Labour party has put forward the amendment about the different regions and nations of the UK. It is really important that we consider the differential impact, not least in the context of Brexit. Areas where there is significantly more manufacturing, such as the north of England, are likely to be hardest hit by the economic shock resulting from Brexit. That is shown across the Whitehall analysis papers. If they are being hit by that, we do not want them to be hit by other things. Doing that analysis on a regional basis is really important.
Mel Stride
I thank the hon. Members for Bootle and for Aberdeen North for their contributions to the debate.
Clause 7 makes two changes to ensure that the optional remuneration arrangement—OpRA—rules for cars and vans work as intended. First, the clause addresses an anomaly in the OpRA legislation. Under current legislation, the value of any connected costs is not included when calculating the value of the amount foregone. That was not the original policy intention. It is important to note that we are not looking at new measures as such; we are looking at closing loopholes and ensuring that the original legislation passed in 2017 operates as intended. The clause ensures that the value of the amount forgone includes any costs connected with the taxable car or van, such as servicing and insurance. The clause also ensures that the value of the deduction available for a capital contribution is adjusted if a company car is made available for only part of the tax year. Again, that brings the original intention of the legislation into effect.
Kirsty Blackman
The Minister said that an oversight was made in relation to the legislation as drafted. Does he share my concern that the Government should not be making oversights in tax legislation and agree that, in fact, the process we have for scrutinising tax legislation is therefore deficient?
Mel Stride
I certainly accept the hon. Lady’s contention that oversights are never acceptable—of course they are not. As I set out, there was significant consultation and scrutiny of both the policy measure and the detailed legislation. Unfortunately, on this occasion the two issues being highlighted here did not come to the appropriate attention in the drafting of the 2017 legislation. If the hon. Member for Aberdeen North is saying that there was insufficient scrutiny, I do not believe that was the case, given the large amount of scrutiny applied in this circumstance.
The changes are expected to affect a small proportion of the 1 million or so individuals who are provided with a company car or van for private use. The average cost of the changes for those affected has been estimated at between £120 and £140 a year in extra tax. There will also be a slight increase in national insurance contributions for employers, in line with the original policy intent. The Exchequer yield from the changes is estimated to be negligible, but by stopping the growth of separate arrangements, significant amounts could be protected.
The hon. Member for Oxford West and Abingdon suggested that the issue of emergency repairs needed to be looked at in greater detail. That is already covered by the legislation. As the explanatory notes state, the clause
“does not affect the operation of sections 239(1) and (2) in relation to other payments or benefits. For example, should an employer reimburse an employee for costs incurred (such as replacing a tyre), the exemption in section 239(2) will still apply.”
HMRC will also ensure that that is reflected clearly in the guidance.
Peter Dowd
I want to bring some of the points I raised to the attention of the Minister again. He talked about consultation. Let us not take the totality of the automotive industry, because it is a big industry. What about Arval, which is a leasing company? Did the Government think, “We are going to make changes to leasing and rental arrangements, so let’s consult those companies directly affected”? Were any of those companies, many of which are quite big businesses, consulted on the measures?
Mel Stride
As I said, there were 259 written responses from employers, tax professionals and representative bodies, 77 from individuals, and 18 meetings with a wide range of employers, tax professionals and representative bodies, including two with the ICAEW. Officials had face-to-face meetings with more than 100 employers. There was pretty extensive engagement. The Government are constantly liaising very closely with industry. I know that the Exchequer Secretary recently met, for example, the chief executives of Vauxhall and Jaguar Land Rover in Ellesmere Port, and discussed a variety of important issues. The measures in the Bill were not raised on that occasion, but if the suggestion is that we are not close enough to industry and to businesses, I can assure the hon. Member for Bootle that we are.
The hon. Gentleman talked about the potential impact of the measures on the tax yield. I will use his figures—always a slightly risky thing to do, but I will on this occasion. [Interruption.] That may be unfair. He suggested that the tax yield per company car is, on average, £2,638. It is estimated that in the order of 10,000 individuals of the 1 million company car users in the UK will be affected by the ironing out of the deficiencies in the 2017 legislation—10,000 individuals will be adversely impacted by now having to pay the correct tax rather than being able to rely on the deficiencies in order to legitimately avoid that tax. That equates to about £20.6 million of forgone taxation, if every single one of those 10,000 were, as a consequence of the changes, to drop having a company car.
Of course, there are two points to make here. One is that the vast majority will not do that, so it will be a figure well below £20 million per year, and the other is that it will be offset by the additional taxation brought in by those who will no longer be absolving themselves of taxation as a result of the deficiencies in the 2017 Act. With regard to the impact on tax that the hon. Gentleman raises, I suggest that that underpins the Treasury’s view that the impact will be negligible.
The Government have already published a tax information impact note on clause 7, in line with normal practice. As set out in that note, as I have already said, clause 7 simply corrects two anomalies in the existing legislation. These changes affect only a very small number of people who have been taking advantage of the loopholes, so it will not have a significant impact on any of the areas addressed by the amendments. I therefore call on the Committee to reject the amendments tabled. I commend the clause to the Committee.
Peter Dowd
I want to pick up on a couple of points. We keep coming back to the fact that the Minister seems to brush aside the woeful lack of consultation aimed specifically at leasing companies. They are the ones dealing with this day in, day out. They are the ones who draw up the contracts. They are the people who the Government should be going to. I do not know whether the Government have been to those particular companies, but in future maybe that is something they should consider. If they have, and if I were to have conversations with those companies in future, I would check that they were aware that the Government did discuss this with them because, if that is the case, they appear to have been asleep on the job. I do not know whether that is the case, but I am sure we can check with them; I am certainly happy to check with them.
That goes to the heart of the issue about consultation. It is happening time after time that the Government are rushing through this legislation, and having huge amounts of tax legislation is complicating things as time goes by. The Bill before last, I think—I have lost track of them—was the largest Finance Bill we had ever had. I think that was before the election. It was an attempt to ram through a whole load of proposals that, fortunately, the Opposition at that point were able to stop.
I do not think 10,000 people being affected by this is a small number. It may be a small number in proportion to the number of people who could have been affected by it, but 10,000 people affected is a fair old whack. I am sure that if I were standing here saying that Labour was going to take £150 or £200 off 10,000 people, the gasps of outrage from Conservative Members would be palpable.
The other thing worth noting is that I think an awful lot of people entered into these arrangements in the best of good faith, and the Minister talking about them “taking advantage” of the tax loophole was maybe an unfortunate phrase. I do not want to pick him up on that point, but it is important to note that the vast majority of people affected by this entered into these arrangements with the best intentions, and I do not suspect that they were in any way trying to find any loopholes. They would have been advised of these arrangements by their employers or by leasing or rental companies, and I do not think it would have been on the basis of, “Here’s a tax dodge; here’s a tax loophole; go down this path.” It is important that we try to put that into context.
Mel Stride
I will briefly respond to those comments. I congratulate the hon. Gentleman, because he is about to tease out from me, as he likes to term it—his term “teasing out” has gone into the parliamentary lexicon—the specific issue of consulting leasing companies and listening to their views, which we also feel is important. The draft legislation was subject to technical consultation between 6 July and 31 August 2018. One of the written responses we received was from the British Vehicle Rental and Leasing Association, so we certainly had input from it.
On the hon. Gentleman’s point about those 10,000 people affected, I think two things. First, I certainly accept, and I think I said so in my remarks, that this was not tax avoidance, but a deficiency in the way the tax legislation has been brought into effect. In no way am I casting any aspersions on the activities of those who have benefited from that deficiency. Secondly, this is not about going out and taking money off 10,000 people —I think that was the expression the hon. Gentleman used. It is just about ensuring that the tax rules we introduced in 2017, which operate effectively for the vast majority of taxpayers, apply to everybody, rather than almost everybody.
Mel Stride
I thank the hon. Members for Bootle and for Aberdeen North for their contributions, as well as my hon. Friend the Member for Poole for his congratulations, which should largely be for me, because I am the Tax Minister and this is, after all, a tax measure, but we will leave it at that.
Clause 11 makes changes to modernise the tax exemption for premiums paid by employers to provide their employees with retirement and death benefits in life assurance products or certain pension schemes. Employers can provide death benefits for an employee through a life assurance policy or a retirement benefit through pension schemes. The employee will receive a pension out of those payments when they retire, or they can name a beneficiary to receive any payment of retirement benefit after they die.
Currently, most premiums or contributions paid by employers into these schemes are exempt from income tax. However, for certain types of scheme, as we have been discussing, this is the case only if the beneficiary is the employee, a member of the employee’s family or a member of their household. “Family” and “household” cover spouses, civil partners, parents, children and their spouses or civil partners, and dependants, domestic staff and the employee’s guests. The premiums paid by the employer for these schemes are treated as a taxable benefit in kind, if the eventual beneficiary is not covered by this definition, such as a charity or a friend. The changes made by this clause make the exemption fairer by extending it to cover premiums for policies where the beneficiary is any individual or a charity. The legislation will apply to premiums paid from 6 April 2019.
I will deal with amendments 14 and 15 together. Amendment 14 would require a review of the revenue implications of the provisions of the clause, to be reported to the House before this change can have effect. Amendment 15 would require a review of the effect on pension benefits of the provisions of the clause, to be reported to the House before this change can have effect. These amendments are unnecessary.
As with other tax measures, the Government have already published a tax information impact note for this measure. This shows that the changes are expected to have a negligible impact upon the Exchequer. Premiums paid by employers to almost all UK pension schemes and overseas pension schemes are already covered by separate tax exemptions, which apply regardless of who the beneficiary is. Therefore, the change introduced by the clause applies only to certain niche overseas pension schemes and employer-financed retirement benefit schemes.
The hon. Member for Bootle asked for specific examples of which schemes fell within the scope of this particular measure. I am afraid that we are unable to provide that information, because it depends what the terms and conditions state within each scheme.
In essence, this is a welcome change, but it affects a small number of schemes and a relatively small number of individuals. As a result, our assessment, supported by the Office for Budget Responsibility, is that the revenue implications are negligible. I think that answers the question raised by the hon. Gentleman on what the impact will be on the Exchequer and whether this has been taken into account. It certainly has been looked at and agreed upon by the Office for Budget Responsibility. The impact on pension benefits will therefore also be relatively minor. This change simply ensures that the benefits-in-kind rules apply in the same way across pension schemes and life assurance policies. I therefore urge him not to press his amendments.
Amendment 16 would require a statement of the House on discussions between the Government and the Charity Commission on this clause. HMRC does, of course, liaise with the Charity Commission and others, wherever appropriate, so such a statement would not be necessary. However, it might be helpful if I explain the position in relation to charities. The exemption will apply only where the beneficiary is recognised by HMRC as a charity for UK tax purposes. These will include charities registered with the Charity Commission in England and Wales, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland. The hon. Member for Aberdeen North asked whether I might write to the Committee with further information on discussions that may have been held, and I would be happy to do that. In the first instance, it might be helpful if she were to write to me, setting out exactly what she would wish me to respond to.
Not all charities need to be registered in England and Wales. Some are exempt or excepted from registration, but most charities will be recognised by HMRC in order to claim tax relief such as gift aid. Employers will need to check with the charity that it is either registered or recognised as a charity for UK tax purposes when it is named as a beneficiary.
I hope that explains the position and that the hon. Member for Bootle might consider withdrawing the amendment.
Peter Dowd
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 11 ordered to stand part of the Bill.
Clause 12
Tax treatment of social security income
Anneliese Dodds
It is an enormous pleasure to be in this Committee with you in the Chair, Ms Dorries, and to make my first brief speech here. I would like clarification from the Minister on the specific issue of tax treatment of council tax reduction schemes. Subsection (5) on page 8 of the Bill refers to “a” council tax reduction scheme, stating that
“Payment under a council tax reduction scheme”
is exempt from income tax. However, page 26 of the explanatory notes refers to
“the” council tax reduction scheme.
I am sure that colleagues will know that there is no longer one council tax reduction scheme across the UK, since central Government decided to top-slice that form of social security and devolve the design of it to different local authorities, albeit with the stipulation that the protection should be maintained for older people. Only a very small number of local authorities still provide full council tax relief, including council tax relief for low-income families. I am enormously proud that Oxford City Council is one of those.
Central Government have washed their hands of responsibility for this benefit. They have refused to provide figures on take-up, for example, in response to parliamentary questions that I have tabled. They have also refused to provide figures on the number of low-income people now being taken to court because they cannot pay council tax, because they are no longer provided with the relief. I am not cavilling over semantics when I ask the Minister to make crystal clear that the exemption from income tax provided in the Bill will apply to all council tax reduction schemes, not to some particular version of those schemes that the Government might wish to focus on.
Related to that, I heard a very worrying rumour that the Government might seek spuriously to argue that funds spent on council tax relief for families by local authorities should not be counted in central Government’s assessment of local authorities’ expenditures, because they are, in theory, discretionary. I disagree fundamentally with that position, because it would penalise those authorities that support the worst off. It would be helpful if the Minister confirmed that, just as I hope he will confirm that council tax relief for families is viewed as legitimate in the Bill, and for income tax purposes, it will be viewed as legitimate expenditure when it comes to the allocation of central Government support for local authorities.
Mel Stride
I start by addressing the specific points raised by the hon. Members for Aberdeen North and for Oxford East. On the explanatory notes and the value or otherwise of a specific reference to input from the Scottish Government, I will certainly be happy to look at that in the future. I assure the hon. Member for Aberdeen North that there were significant discussions on these measures between the Treasury and Scottish officials in the appropriate manner. On the technical point raised by the hon. Member for Oxford East around “the” scheme versus “a” scheme, the information I have is that the scheme came into force in April 2013. However, I will look into her specific question about whether the measures apply to “a” scheme or “the” scheme. I am afraid that I do not immediately have an answer to that, but I will get back to her as soon as I can.
Clause 12 clarifies and confirms the tax treatment of nine social security benefits. The income tax treatment of social security benefits is legislated for in part 10 of the Income Tax (Earnings and Pensions) Act 2003, which provides certainty about existing benefits and needs to be updated when new benefits are introduced. For example, the Scottish Government are introducing five new payments following the devolution of powers, including the young carer grant, the discretionary housing payment and the carer’s allowance supplement. Other payments covered by the clause have been in operation elsewhere in the UK for some time, such as the council tax reduction scheme and the flexible support fund, but are not yet covered clearly in legislation.
The changes made by clause 12 ensure that such payments are taxed appropriately, and that that is clear in legislation. The clause clarifies and confirms that such payments are exempt from tax, with one exception—the carer’s allowance supplement—which is taxable. That is in accordance with “The agreement between the Scottish Government and the UK Government on the Scottish Government’s fiscal framework”, which states:
“Any new benefits or discretionary payments introduced by the Scottish Government will not be deemed to be income for tax purposes, unless topping up a benefit which is deemed taxable such as Carer’s Allowance.”
Amendment 2 would require the Chancellor of the Exchequer to review the revenue effects of the clause and lay a report of that review before the House within six months of the passing of the Bill. Such a review is unnecessary. The Government have already published a tax information and impact note for this measure, and our assessment, supported by the OBR, is that the Exchequer effects are negligible.
On the carer’s allowance supplement, which was introduced in Scotland in 2018, as a general rule benefits are taxable if they replace lost income. The carer’s allowance has therefore always been taxable. The vast majority of those receiving the supplement have income below the personal allowance and would therefore not be expected to pay any income tax. That is an important point in respect of the point made by the hon. Member for Bootle. I will not dwell on each payment covered by the clause, but I reiterate that eight of these payments are exempt from taxation. HMRC has not and will not collect any tax from these payments.
As the tax information and impact note sets out, the taxation of the carer’s allowance supplement is expected to have negligible Exchequer effects because, as I have said, the vast majority of those carers receiving the additional payment do not earn sufficient income to pay any income tax at all. However, any income tax receipts from that will of course go to the Scottish Government.
The Committee will also know that taxable social security income is aggregated and reported to HMRC through self-assessment after the end of the tax year. This is an important point in the context of the amendment. That income will not need to be reported until January 2020. A review would therefore be impractical only six months after the Bill’s passing. I therefore ask the Committee to reject the amendment. I commend the clause to the Committee.
Peter Dowd
We will not push the amendment to a vote. However, I push the case to the Government that, while these amounts of money may be negligible to the Treasury or to HMRC, if the measure affects a particular woman who is already under the stresses and strains of helping a relative, it is important that we give them as much latitude as we possibly can. Whether we like it or not, this will be perceived as a continued attack on women who continue to be the biggest assistants to relatives—yet again, it is an attack on those people who are doing a caring role.
Mel Stride
Once again, divine inspiration has arrived and I can confirm that the CTR is a reference to multiple schemes—so it is “a” rather than “the”. The measure therefore covers all those schemes.
Mel Stride
Clause 13 and schedule 1 introduce provisions, with effect from April 2019, to tax non-residents on the gains they make on UK commercial property and to extend the charge on residential property. That levels the playing field between UK resident and non-resident investors in UK land and buildings. The modern OECD model tax treaty gives the jurisdiction in which land and buildings are located the primary right to tax income and gains from those land and buildings. Historically, non-residents have not been subject to UK tax on the gains they make on UK land and buildings. That has been the policy of successive Governments over several decades. The Government have steadily revised the UK’s approach in recent years. In 2013, we introduced a targeted tax on gains relating to property within the charge of the annual tax on enveloped dwellings. In 2015, the Government went further and brought in certain non-residents’ gains on the sale of residential property owned directly.
Those 2013 and 2015 changes were a substantive reform to the taxation of non-residents investing in UK property. Now that the charges have been in place for several years, it is the right time to take a more comprehensive approach. Clause 13 achieves that by extending a charge to the gains made by non-residents on commercial property and expanding the scope of the existing residential charge by removing the carve-out for widely held companies. To ensure that transactions that are essentially sales of UK land are taxed, and to reflect the commercial reality of many large property transactions, the clause introduces a charge on indirect disposals of UK property. That charge will apply to gains made on the disposal of an interest in an entity that derives 75% of its value from UK land.
The Government recognise that these reforms are extensive, and recognise the value that investment in UK land and buildings brings to the United Kingdom. The clause implements the rules in a way that minimises disruption and avoids unintended consequences. Non-resident companies will pay corporation tax on all the chargeable gains they make on UK land and buildings, creating a single cohesive set of rules. Those taxpayers who are exempt from UK tax on the gains that they make for reasons other than their residence, for example pension funds and qualifying charities, will continue to be exempt. Steps have been taken, using principles currently applied to UK funds, to ensure that these and other investors are not disadvantaged where they invest in UK property via funds.
In legislating for this policy, the clause restates, in a simplified form, the main charging provisions for the taxation of capital gains. Other than implementing the policy, this makes no changes to the existing law. It significantly and permanently simplifies the legislation and aids taxpayers’ interpretation of the law.
Government amendment 1 will remove a redundant subsection of the Corporation Tax Act 2009. That subsection currently ensures that corporation tax is not charged on gains that are subject to capital gains tax. As I have set out, clause 13 will introduce a single cohesive set of rules charging companies corporation tax on all the chargeable gains they make on UK land and buildings, which means that this subsection is no longer required.
Amendment 23 would require a public register of those subject to capital gains tax as a result of schedule 1. The categories of person who will be brought into scope by clause 13 and schedule 1 are absolutely clear. I have set that out to the Committee today and it is set out in detail in the schedule. The Government do not, as the amendment would require, identify specific individuals or companies that are brought within the scope of particular tax charges; it would be inappropriate to do so.
Kirsty Blackman
I will speak relatively briefly. It is always difficult to follow the hon. Member for Oxford East, who is leading for the Opposition on these measures. I concur with her comments about the Labour amendments—the Scottish National party will be happy to support them. Foreign ownership of properties and the impact on price is pertinent and relevant to the SNP proposal.
On amendment 34, the explanatory notes are incredibly difficult to follow. By the time we get to “ggg” in the explanatory notes, things become very difficult to refer to. If there is another explanatory note of that length in future years, it would be useful if the staff could come up with a better numbering system. As I say, it is difficult to refer to those sections when we are going around the alphabet for the third time.
The public register proposed by Labour is an interesting idea and, in principle, the Scottish National party is in favour. As I said, transparency is important when encouraging everybody to pay the correct amount of tax, because if tax owed is publicly known—the calculation of the tax gap is pertinent to this topic—people are more likely to pay. The Government should say clearly, “This is the amount of tax owed, this is how hard we are chasing it down and, as a result, this is the tax gap.” It bothers me that the Government say regularly that the UK tax gap compares favourably with that of other countries. It does not matter whether it compares favourably with other countries: any tax gap is a bad thing and, if one exists, the Government clearly need to work to ensure that they are reducing it as far as possible. Given the issues that have been brought up by Opposition Members and by many external organisations, it is clear that the Government could do more to reduce the tax gap. It is not good enough to say, “We are doing quite a good job, and therefore we should stop here.” The Government need to be able to say, “We are doing the best job on reducing the tax gap that we possibly can.”
On foreign ownership and the residential property price, I was disappointed that the Labour amendment on landholdings was not accepted—I understand the reasons why it was not allowed, but I would have been keen to debate it. There are specific Scotland-related issues not so much about residential property—that is an issue in Scotland but not to the same extent as it is in London—as about other landholdings. That is a significant problem in the Scottish context. Foreign ownership of those landholdings concerns a huge number of people in Scotland.
Regarding the benefits of transparency, the SNP has called for measures to reduce tax avoidance, and the Government have talked a good game about things like Scottish limited partnerships after a huge amount of pressure from the Scottish National party. However, we are still waiting for action. If the Government say they are doing positive things to reduce tax avoidance, they need to follow through. Rather than just producing a consultation, they need to take the required action to reduce the numbers of people who are abusing Scottish limited partnerships. We need the Government to be seen to be serious in this regard, and to take the action they have promised to take. The House operates on trust, and throughout my time in this place, I have seen a number of Opposition amendments withdrawn because ministerial teams from all Departments have given assurances. If the Government do not take action soon on Scottish limited partnerships, they risk seriously eroding that trust and may end up in a situation in which ministerial assurances, and particularly assurances from Treasury Ministers, are not accepted because the Government have not followed through previously.
The income tax, national insurance contribution and capital gains tax gap sits at about £13.5 billion, which is a significant amount of money. If any changes are being made to those taxes, and particularly to CGT, it is reasonable to ask about the impact on the tax gap, and reasonable for the Government to have those figures at their fingertips. They should be able to say not just what the impact is on the total tax take from any changes, but also what the impact is on the tax gap.
If the Government are talking about cracking down on tax avoidance, it is important that they prove to us that the tax gap is being reduced. It is not good enough to just say, “We think this measure will reduce tax avoidance.” The Government need to tell us by how much they will reduce tax avoidance. They need to be clear on the impact of those changes before they introduce them.
I intend to push amendment 34 to the vote if we have the opportunity to do so. I would be happy to support the Labour party on their amendment. I would also like to seek further assurance and a clarification from the Minister in relation to the pursuit of tax avoidance reduction measures, and a commitment from him that the Government will follow through on the tax avoidance reduction commitments they make today.
Mel Stride
I thank the hon. Members for Oxford East and for Aberdeen North for their contributions. I compliment the hon. Member for Oxford East on arraying a mass of highly technical questions on a very technical area. I will do my best to answer her them, but I will write to her accordingly if I am unable to do so. She accurately mapped out the process that we have been going through for a number of years, moving into the space of the appropriate taxation of non-resident entities when it comes to property transactions. She recognises, as I do, that it is the right direction of travel, and that it is right to introduce the measures set out in clause 13, although she has several concerns about the detail.
The hon. Member for Oxford East dedicated a specific section of her remarks to the issue of property-rich businesses and the trading exemption. She gave some examples where she felt that this would be an inappropriate exemption, around both the general principle of the exemption for trading purposes and the specific threshold figure of 75%. She used the expression “cliff edge” to refer to what there might be around that number.
On the basic principle, this measure seeks to avoid the circumstances whereby a business—a significant supermarket chain, for example—might be sitting on a substantial amount of land and might even have banked some land for future development. However, the business’s principal purpose is the purchase and sale of a variety of goods, with that being the core of the particular business being looked at. Were a sale of that business under those circumstances to occur, it would seem appropriate that the investors in that business—where it was consequently below the 75% threshold—would not fall within the measures due to the taxation measures that we have been considering.
As to the specific figure of 75%, it is the same issue as the 25% threshold figure that the hon. Member for Oxford East raised in relation to whether individual investors would fall within these measures, or whether they would be expected to know or not know about the property richness of the business in which they were investing—we inevitably run into a generalised problem with figures, which is that we have to choose one. There will always be a debate about whether 75% is the right figure, or indeed 25%. However, a figure has to be applied, to make it scientific and rigorous.
Then there is the question of what we have done to ensure that 75% and 25% are the right figures, as opposed to figures that we have just plucked out of the air. That leads us to the extensive consultation that has been undertaken in respect of the Bill, with some 80 responses around the measures raised by the hon. Member for Oxford East. As I would say of all tax measures, this one included, they are kept under continuous review by the Treasury, so it is quite possible that we will return to these matters in future legislation, specifically on the issue of thresholds.
The hon. Member for Oxford East spent some time referring to the amendments and the question of whether there should be a register of those who fall within the scope of these capped measures. There is a basic principle here that just feels right to me, which is that the Government should not be in the business of holding up individuals to the public as falling due for particular types of tax. Once you start moving into that kind of space, it feels rather disproportionate and a little authoritarian, if I may say so. It is right to resist that urge.
I was going to raise one other matter in that context, which is important, and that is that the hon. Member for Oxford East referred—she very kindly did this for me although I did not do so in my opening speech—to the implementation of a register of beneficial owners of overseas entities owning or buying property in the UK. We will bring that in by 2021, and the register will be the first of its kind in the world. That underscores the importance of transparency to this Government.
Sir Robert Syms
Is the amount of revenue raised in this area more or less than was raised under the previous Labour Government?
Mel Stride
If I interpret my gallant and hon. Friend’s question as relating to the specific issue of overseas holdings of UK land and properties and paying CGT on the transactions they are in, I would be fairly confident in saying that we will be raising more. Indeed, through time and through dealing with the measures I identified earlier, I strongly suspect that the answer is yes. I am seeing nods of an inspirational kind from over my left shoulder, so I can reassure him that is indeed the case.
The hon. Member for Oxford East also raised the effect of these measures on the market and the suggestion of a review to look at price effects. The Office for Budget Responsibility has already done such an analysis and concluded that these measures would have a negligible effect on price. She also raised the issue of taxation treaties, particularly Luxembourg, which is a fair point because there are instances when the international taxation treaties—the bilateral treaties between ourselves and other tax jurisdictions—do not quite fully accommodate the measures we are looking at here. I know we are actively engaged in the specific case of Luxembourg to seek changes to those arrangements to make sure they facilitate the measures we are looking at here.
With regard to TIINs, I must say that I do not have the same confusion as the hon. Member for Oxford East. I am not making a specific point, other than that I have not noticed it, but I will look at it again. The relevant TIIN is the one entitled “Capital gains tax and corporation tax: taxing gains made by non-residents on UK immovable property”, which was last updated on 7 November 2018.
The hon. Member for Aberdeen North had several points to make, particularly about the tax gap. She suggested that there might be some complacency on the part of the Government, and that it might be assumed that, because we already have a world-beating tax gap level, we are not pushing forward with further measures. I can reassure her that that is not the case. Indeed, the Bill contains several measures that further bear down on the tax gap, of which this is one. It will build our tax base and further enhance our ability to raise tax, which of course is very important. The point I would make is that we have both the legislation, some of which I have referred to, and several other practical measures that the Government are bringing in that are driven by HMRC —for example, making tax digital, which is an approach to bearing down on the tax gap when it comes to the operations of smaller companies in the United Kingdom.
I hope that has covered the majority of the issues raised, but I would be happy for the hon. Members for Oxford East or for Aberdeen North to write to me if they would like me to respond to any other issues.
Crown Dependencies Update
Mel Stride Excerpts(7 years, 4 months ago)
Written StatementsRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mel Stride)
Three new customs arrangements between the UK and the Crown Dependencies (Guernsey, the Isle of Man and Jersey) were signed on 26 November 2018 in London. The texts of the arrangements are available on the www.gov.uk website and will be deposited in the Libraries of both Houses. The text of the arrangements will be scheduled to three related draft Orders in Council and laid before the House of Commons in due course. These new customs arrangements are intended to come into force when the UK and Crown Dependencies leave the EU customs union and are compatible with any agreement the UK reaches with the EU.
[HCWS1113]
Tourism Industry: VAT Reduction
Mel Stride Excerpts(7 years, 4 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mel Stride)
I congratulate the right hon. Member for Orkney and Shetland (Mr Carmichael) on securing this debate and on his perseverance in ensuring that we have this opportunity to debate these important matters. He quite rightly raised the importance of tourism, of which the Government are extremely aware: 1.6 million people are employed in the sector. He made important points about the sheer reach across the economy of the tourist sector, right down to the very point that he raised in his own constituency of examples of farms where additional income is being raised through participating in tourist-related activity. The sector provides £66 billion to the UK economy and 3.8% of gross value added. He is also right that, at the moment, tourism is booming not just in his constituency, but across the United Kingdom. Last year, 2017, was a record year, with 39.2 million visitors to the UK, which was 4.3% up on 2016. Not only are more tourists coming, but they are spending more as well, with an even larger increase in the amount that they are spending.
It is important to put on the record the admiration that we as a Government have for the sector and the gratitude that we have for all those who work so hard in what is quite a tough industry—it is one of those sectors that has rather a nice, soft and fun feel to it, but we all appreciate that a lot of hard work goes on behind that. The Government not only recognise the importance of tourism, but are also there to support tourism. I cite three broad areas in which we do that. The first is to get the broader economic factors correct. As the House will know, we have had eight years of economic growth and the Office for Budget Responsibility is now projecting a further five years of growth. We have high levels of employment, low levels of unemployment and we are seeing inflation coming down towards its target as well. That is an important broader macroeconomic context in which we hold this debate and discuss tourism.
The second area is business in general. We have reduced tax on companies across the board from 28% in 2010 down to 17% in the coming couple of years.
James Heappey
I am very grateful to my right hon. Friend for giving way. Does he agree that one of the taxes that could really catalyse growth in our visitor economy, not just for tourism, but for business travel as well, is further reductions in air passenger duty, beyond the very welcome announcement in the Budget, because nothing, surely, can catalyse growth in our visitor economy more than further reductions in APD?
Mel Stride
APD is certainly one of those taxes that we, along with all others, constantly keep under review. My hon. Friend will have noticed the freezing in short-haul APD that occurred at the time of this Budget, but he is right that we seek to keep that and other taxes as low as we can.
We supported our high streets in our recent Budget by reducing business rates by some 30% for smaller retailers, which will be of great benefit to some of the coastal towns in particular that the right hon. Gentleman will be thinking of, I know, when he speaks about the importance of tourism to the economy.
Peter Heaton-Jones (North Devon) (Con)
I thank the Minister for giving way. On the subject of coastal towns, as he and the whole House will be aware, the best places to visit as a tourist are some of the wonderful coastal towns of North Devon. The tourism industry in my constituency has lobbied hard for exactly the position that the right hon. Gentleman has proposed. It is something for which I have a great deal of sympathy, but I wonder whether, as well as Her Majesty’s Treasury entering into those sorts of thoughts, we could look across the Government at other ways that the tourism industry can be supported. The point that is often made to me is that, for a relatively modest spend on promotion of the UK and its regions as a tourist destination, we can have greater benefits for the local economies.
Mel Stride
I thank my hon. Friend for his intervention. I recognise the sterling work that he does in promoting tourism in his own constituency. He is a constituency neighbour of mine and I am well aware of the good work that he does. He is right: we must do a lot of important things in terms of specifically supporting tourism.
Jim Shannon
I thank the Minister for his response so far. It is always a pleasure to intervene on him. Will he acknowledge that one of the great disadvantages that we have in Northern Ireland is the border, to which the right hon. Member for Orkney and Shetland (Mr Carmichael) referred? There is an inflow of tourists going into the Republic of Ireland who take advantage of the 9% VAT rate as against what we have in Northern Ireland. It is about making sure that those tourists and visitors go across the border. Does he see the disadvantage of having the two different VAT rates, and does he also see the advantage of having a reconciled VAT rate, which would mean that we in Northern Ireland could then take bigger advantage of the US visitors who go to the Republic of Ireland?
Mel Stride
The hon. Gentleman raises the issue of VAT specifically in Northern Ireland. As he will be aware, we undertook a call for evidence, which we announced at the Budget before last. We have now reported on that and will continue to look at the issue of VAT, although we are currently constrained by virtue of our membership of the European Union, as I will argue later. Northern Ireland actually has some advantages over the Republic of Ireland when it comes to VAT. For example, we have the highest VAT threshold for businesses that have to charge VAT in the European Union and the OECD, including the Irish Republic.
The right hon. Member for Orkney and Shetland mentioned the specific support we provide for tourism. We provide some £60 million per year for our GREAT Britain campaign, £20 million per year of which goes to VisitBritain. Our tourism action plan looks at regulation, transport, skills and all the other things that underpin tourist activity as well as money and taxation. Some £40 million goes to the Discover England fund for promoting tourism outside London.
At the heart of the right hon. Gentleman’s ask is clearly a reduction in VAT, particularly with regard to food and beverages, attractions and accommodation— the areas that he cited when he mentioned the VAT directive and the derogations in items (7), (12) and (12a). The Government recognise the strength of feeling on this matter. We have met campaigners over many years, and I have engaged extensively with Members right across the House. We will keep VAT and VAT on tourism under review, but unfortunately there are some issues from which we cannot hide away. One of those issues is the fact that, if we are to make a change, under the current arrangements with the European Union that change would have to be UK-wide. It would therefore come with quite a hefty price tag.
The Treasury estimates that, in the first year at least—although one recognises there are dynamic effects of reducing taxes, increasing activity and therefore perhaps getting more tax revenue further down the line—we would be looking at a cost of about £10 billion for reducing VAT from 20% down to 5% in the categories that I mentioned. That would be about £7 billion on food and beverages, £2 billion on accommodation and £1 billion on attractions. Some of that loss, or some of the relief that we would be providing, would be dead weight in the sense that it would not necessarily solely apply to supporting tourism.
Mr Carmichael
There is one important factor of which we should not lose sight, which is that our tourism sector is enormously competitive. Therefore, there would be every incentive for the operators in the industry to pass on the money that would be available to them by having a reduced rate of VAT. As a consequence, we would see that recycling effect accelerated in a way that we probably would not see in any other industry.
Mel Stride
The right hon. Gentleman makes a very important point. As somebody who philosophically believes in lower taxes, I think that is a very strong argument. However, unfortunately there is the cost argument. To use the same kind of principles to the right hon. Gentleman’s argument on recycling, clearly if we were bringing in less by way of taxation as a consequence of the reduction, there would be less to spend on other things that arguably might help tourism, including improved infrastructure and maybe even tax reliefs in other areas, such as the progress that we have made in reducing small retailers’ business rates.
We have one of the highest VAT thresholds of any country in both the European Union and the OECD, which is an advantage to us and our tourist sector.
Paul Girvan (South Antrim) (DUP)
We see the reduction in VAT as one of the cards in the deck that can help to grow our economy, and it is vitally important, from a tourism perspective, that we look at that. However, one of the other tools in the box is air passenger duty. We are competing against Dublin because the Republic of Ireland has zero APD. That is not just affecting Northern Ireland—it affects airports throughout the UK because, to save on APD, people are travelling from the UK to Dublin to go on to America. That has an impact not just on Northern Ireland but on airports in the UK.
Mel Stride
The hon. Gentleman makes a very important point. In fact, I have been to Northern Ireland and met representatives of Belfast airport and others, and I have met them here in the UK—in London—as well. As he will know, we had a call for evidence on APD, which was launched at the Budget before last, and we have reported back on that. We have now set up a technical working group to see what kinds of opportunities there may be to devolve APD to Northern Ireland, although at the moment there is the critical issue of the absence of a Northern Ireland Executive. In the longer term, we would certainly be committed to seeing the issue devolved, and then of course it would be for the Northern Ireland Executive, once reconstituted and up and running, to take the appropriate decisions around that.
Returning to VAT, we do of course have reduced rates in the United Kingdom in areas like museums and transport such as buses and trains, which is not universally the case across our competitor nations. It is also possible, through the retail export scheme, for certain visitors to the UK to reclaim VAT from certain retailers. That is another important VAT relief.
In essence, the right hon. Member for Orkney and Shetland is right that I was not going to spring up to the Dispatch Box and announce a huge tax cut across the tourism sector, much as I would love to have done. Perhaps in this crazy world in which we are living, I should have done, but there we are—I did not. I restrained myself and was responsible, for once. However, I absolutely reassure him that everything that he has said on this matter this evening, and indeed has said in the past and will say in future, has been and will be very carefully noted. We will continue to look at all taxes, and certainly VAT. I look forward to further engagement with him in the coming weeks and months, and thank him very much indeed for bringing this important debate to the House.
Question put and agreed to.