Finance (No. 2) Bill

Debate between Nigel Mills and Drew Hendry

2nd reading
Wednesday 17th April 2024 Commons Chamber

[Nigel Mills (Amber Valley) (Con)]

It is a pleasure to speak in this debate. When I got my copy of the Bill from the Vote Office, I was a bit worried that the middle 500 pages or so had been missed out. We are used to these Bills being somewhat thicker than this.

I am slightly nervous, Minister, that at this rate the Indians might catch up with us on the length of our tax codes. I hope that a large Finance Bill will be ready this autumn so that we can keep our lead. There are some potentially complicated rules coming, including the new nom-dom rules. We could also base the new inheritance tax on residency rather than domicile, and we also face the question of how on earth we will define “household” for the purposes of the high income child benefit charge? There probably is some meaty stuff to come, but it is fair to say that this Bill does not generate substantial excitement.

There is always a risk with reasoned amendments to a Finance Bill. If we voted for the SNP’s reasoned amendment, we would not get any income tax this year, which would probably do quite a bit of damage to public services—though imagine that might be popular with a few people.

I am slightly intrigued by the fact that, at a time when we are really struggling for tax revenues and to balance the books, anyone would prioritise reducing the price of a Rolex for very rich tourists. That is effectively what reintroducing tax-free shopping does: it saves a lot of money for very expensive tourist purchases. I have never been convinced of the attractions of reducing VAT for the tourism sector, because the problem is that it is a huge boon for hotel operators in London that has to be paid for by taxes elsewhere.

[Drew Hendry]

I am happy to educate the hon. Gentleman. If he would like to speak to any of the tourism organisations that have been calling for this change, he will find that it is a great way for them not only to cope with some of the increased costs they have just now, which are front-loading their business, but to encourage people to come and use their facilities. It is something that the tourism industry is very keen on, and I would be delighted to introduce the hon. Gentleman to some people who will educate him further.

[Nigel Mills]

It is a pity that the hon. Gentleman did not make the case for that in his own speech, when he barely touched on this issue. The point I was trying to make was that introducing that tax reduction would be a huge benefit to London hotels, which have high occupancy rates at a very high nightly rate, but then that money would have to be raised elsewhere in the country.

One of the advantages of Brexit—the hon. Gentleman might not like this—is we are now able to do differential tax rates by region. Therefore, if we wanted a tax rate targeted at boosting tourism, we could do it on a regional basis, looking at which have the lowest occupancy rates and the lowest employment rates. It would cost far less, and the reduction could be much smaller. We could boost investment where it is needed rather than where it is not. I suggest to the hon. Gentleman that looking at that would be more sensible than his proposal.

The hon. Gentleman is also criticising the lack of a starter rate. When we had a starter rate of income tax, from 1998 to 2008, it was for very low incomes. It was a 10p rate and it was charged on top of national insurance, which was also over 10% at that point. What we actually have now is income tax and national insurance starting at a much higher point. It is a 0% starter rate, which is a far better idea than introducing a new one, so I certainly will not be voting for the reasoned amendment, as it would be completely against the country’s interests.

The Minister mentioned the high-income child benefit charge. Strangely, the Bill increases the thresholds and promises a radical change at the start of the tax year after the next one, but it does not tell us what the Government are trying to achieve by that. We have rightly upped the starting point, but if we really want to go to a household calculation, either we should be very generous and have it start at £120,000, tapering up to £160,000—the equivalent of two incomes—or we risk making the situation worse by having a very big disincentive for second earners. If the new threshold were £100,000, rather than £80,000, a household with a second earner earning only £20,000 would be brought into the charge despite not being affected by it in the current financial year. I would not want to go down that line.

There is a very real risk that what sounds like a generous idea could have a very negative impact by discouraging second earners, whom I think we want to be encouraging with our childcare and other reforms. Before the Government publish the consultation, I urge them to think carefully about where they are pitching this. Surely there must come a point at which household incomes are pitched so high that almost no one will be paying the charge. What would be the point of all the complexity, uncertainty and cost of collecting it if it does not raise any money? We might be better off putting the 45p rate of income tax up by 0.5p, which would raise the same amount of money while losing all this complexity.

I think it would be better if, in Committee, the Minister introduced an automatic increase by inflation each year. It was a terrible mistake to keep the thresholds where they were. By far the simplest change would be to inflate the thresholds each year, so that we do not drag more people into the charge. Everyone would understand their position, which would be easier than trying to work out what on earth a “household” is for the purpose of this charge.

If we asked the Secretary of State for Work and Pensions, he would tell us that the formation and definition of households is one of the biggest areas of welfare fraud—people are pretending not to be a household to get extra benefits. It can be extremely hard to define a household and to enforce it. How much will it cost to work out who is or is not in a household? I suspect it will be so complicated to try to reintroduce a household definition within the tax regime that it never actually happens. If it does, it will probably cost more than it raises. I question whether it is sensible to retain this charge.

Turning to what is in the Bill, and given that we now have a large range of earnings, what is the Minister’s advice to people who are not sure whether they will earn more than £80,000 because they do not know what bonus they will receive in this financial year? Should they stick with the simple route, as many people have, of disclaiming child benefit so that they do not get caught by this tax at the end of the financial year, for which they need to save in case they have to pay it—it is a bit of shock when they get there—or should they go back to claiming child benefit on the off chance? Should they put the money in the bank and see whether they are entitled to it and, if it turns out that they have not earned more than £80,000, get to keep and spend some of it? We seem to have a position in which many households will not know until very late in the financial year whether they are caught by this. If they disclaim it, they will lose a benefit to which they are probably entitled; and if they do not disclaim it, they might receive a bill that they do not have the money to pay. We need some certainty on that position.

Finance Bill

Debate between Nigel Mills and Drew Hendry

Committee of the whole House
Wednesday 10th January 2024 Commons Chamber

[Drew Hendry (Inverness, Nairn, Badenoch and Strathspey) (SNP)]

I am only going to make some brief remarks on the two clauses. The UK Government are clearly scrambling to fix an economic mess of their own making, and the Bill is full of such measures.

On clause 1, during the autumn statement I welcomed this move, but it does little to deal with the damage to business that has been caused by the big grey elephant in the room that none of the parties wishes to mention, which is Brexit. Far from the ideal of removing red tape and decreasing bureaucracy, as we have heard thrown about in this Chamber, it has actually led to more red tape and more difficulties for business. This is just one of the measures the Government should be taking, among many others they must consider in future. I hope to come to those later in the debate.

The “years of uncertainty” that the hon. Member for Ealing North (James Murray) mentioned have indeed been years of uncertainty caused by this Government, but they have definitely been impacted by the Brexit that Labour now supports, along with the Liberal Democrats. People are struggling with a cost of living crisis, and it is affecting domestic sales too, so they need other fixes. Again, I will have some questions about that later.

Clause 2 and schedule 1—I hope this will be helpful for the Minister—are like trying to make a jigsaw puzzle with no box, no picture and just some random bits and pieces to try to plug together to make something out of. Productivity does not work without the skills required in research and development. We do not get the advance or the boost we need without that and, once again, the spectre of Brexit means that we have a skills shortage across the nations of the UK. That is particularly affecting Scotland, which needs its own immigration rules. It is something we would ask to have powers over, short of our call—it would of course be the absolute best result—for Scotland to have independence so it can make these decisions itself.

[Nigel Mills]

It is a pleasure to speak in this debate. I want to direct my remarks to clause 1, on permanent full expensing for the purchase of plant and machinery, which I discussed during the autumn statement and on Second Reading.

This is actually quite a radical and expensive policy. We have, probably for longer than all our lifetimes, given companies relief for capital expenditure using capital allowances. That was originally quite a generous 25% in the first year—I suspect that most plant and machinery had a longer life than that when the rules were produced. We have chosen to do that for all these years, rather than just letting a business deduct its own accounting calculation of depreciation, because we did not want the manipulation of tax deductions by businesses doing their tax returns. We chose to do it this way.

The tool that Governments of all colours for decades have had when the economy hits trouble is to give first-year allowances and various enhancements. I remember a 40% first-year allowance and a 50% first-year allowance. We have had full expensing up to £1 million, as the shadow Minister referred to. That has been the way of incentivising investment in a period of economic recovery for probably as long back as there has been a toolkit.

Now we have landed on permanent full expensing, so businesses get full relief on plant and machinery spend in the first year. What are the Government expecting to happen differently here? Are we expecting capital investment by businesses of more than £1 million a year that otherwise would not be economically viable and would never have happened? Are we expecting investment to be brought forward and to take place earlier than it otherwise would have? That would be entirely welcome and would probably modernise businesses, protect jobs and give them a chance to grow in a way that they perhaps would not have had, which is not a bad policy aim at all. Or are we just giving business an earlier tax relief than they otherwise would have had, whereby they bank that and are happy but it does not change behaviour?

It is hard to get behind the numbers on this measure in the Green Book. As I said earlier, the estimate at the end of the five-year period, and probably the first full year that making this permanent will make a difference, is a tax cost of £10.9 billion just for this measure. If we run the numbers, bearing in mind that businesses will already have had 25% tax relief on that same expenditure in that year, that means we expect a £55 billion higher claim to get tax relief in that financial year than otherwise would have happened. However, the Minister said that only £3 billion of that is estimated by the OBR to be additional investment that would not otherwise have taken place at some point. It suggests that we have a lot of investment being brought forward with a lot of more generous tax relief that would have happened anyway. Will the Minister explain what the Government are aiming to achieve and what is being forecast? Is the OBR being unduly cautious? That would enable us to understand how we judge whether the measure has been successful.

Are we expecting to see whole loads of investment in plant and machinery that never would have been viable before, or are we expecting to see it brought forward? If what we are getting is brought forward, at some time the cost should start to taper down, because this is not a new tax relief that businesses would not have already had; it is just an acceleration of tax relief and businesses will pay more tax in all subsequent years, because they are not getting the relief they used to get. The measure could cost £11 billion in the first year and gradually that would level down and in the fullness of time there would be no more annual cost, in effect. Can the Minister clarify that?

It is not immediately clear how the Government plan to assess whether the measure has worked or is working. I assume that from electronic corporate tax returns we can track down to the pound the amount of investment claimed for full expense relief every year. We could have a report within six months of the end of a calendar year on how much of these 100% allowances has been claimed and compare that with the total amount claimed for capital allowances in whichever preceding years we like. We could see whether full expensing was driving behaviour change. Will the Minister talk us through what he expects to happen and how he will assess whether this has been an effective way of boosting productivity and increasing investment for £11 billion a year? It is probably one of the most sizeable line entries we have seen in a Finance Bill in my 14 years here. Normally we expect the big number to be a tax cut for individuals, and this measure is significant.

As we are making this measure a permanent feature of our tax system, it shines a light on what we are trying to get from our corporation tax system. There will not be any kind of compliance saving. The Minister made a brave attempt at saying there might, but effectively all that will change is that the number that a business currently puts in its additions to its writing down allowance pool will now be put in the 100% first-year claim box. It is the same number in a different box; that is the only compliance change we have here. It throws into question some previous policy decisions we have made, because for a business to get full benefit from this, it needs to be paying enough tax to use the full relief in that first year.

If a business cannot use the full relief, the incentives are not as powerful as they would otherwise be, because then the option is effectively to carry that excess deduction forward, but we introduced rules a few years ago that are strict on how many losses a business can use in a year. If we really think that giving people the earliest possible cash tax benefit for capital investment drives investment, we should probably take away that restriction on using losses, so that businesses can get the benefit as early as possible and not have it spread over a number of years going forward. Will the Minister explain whether the Government will look at that and make sure we are not accidentally undoing some of the benefit we are seeking to get?

My second question is: what do we do with the legacy writing down allowance pool that relates to plant and machinery expenditure for God knows how many past years? On a reducing balance basis of 25%, it takes many, many years to get full tax relief for expenditure, so every business will have a large pot of money that it has not yet had tax benefit for. Are we expecting them to run that down at 25% reducing balance a year and still be doing so in 23 years’ time, by which point no one will have any idea what on earth that balance ever was? Or should we say, “That is a bit of a nonsense. Why do we not just let you take the whole balance at 20% a year over the next five years and finish that problem off, because we do not need to be focusing on that?”? We could find any number we like there, but it would draw a line under that past expenditure in a way that genuinely simplifies things.

We then have the question of, “What do we do with capital expenditure on items that are not plant and machinery?” The tax relief we give on structures and buildings is not generous, but if we are trying to drive an increase in productivity and large businesses to invest in new gigafactories to build batteries for electric cars or for electricity storage or whatever, do we not want to incentivise them to build the factory building as well, rather than either giving them no relief or giving it over a long time? If we are spending £11 billion a year to encourage investment in plant and machinery, should we not spend a little money on trying to encourage other things that are key for industrial investment to take place, by being a bit more generous on buildings and structures? Has the Minister any thoughts on that?

The Government did a capital allowances review only a year or two ago, which did not look at permanent full expensing as one of the options, but it would be interesting to see whether they have had any further thoughts on that. We are now asking every business to go through and track every item of capital that they spend and treat it differently in their tax return from how they treat it in their accounting records. Then we have all manner of different laws depending on whether it is a long-life asset, a short-life asset, a car or an environmentally friendly car—I could go on. For the amount now at stake, and given that we have given full relief for plant and machinery, which is the biggest amount, do we really need all that cost and complexity? Or should we just say for all those other items, “You can just have your accounting calculation”? Okay, businesses might take it a bit quicker than we would like, but in actual fact the cost of that is not all that material in the grand scheme of things.

We could move to a system where the only adjustment someone has to make to their tax return is to claim a very generous tax relief on plant and machinery, and they would not have to touch anything else. That would be a more coherent corporation tax regime, now that we have spent all this money incentivising plant and machinery. It would then genuinely be a compliance saving for a business in that situation.

I support the measure and truly hope that it works, but, as a significant amount is being spent, it would be helpful to understand what we are trying to achieve and how we will know whether we have been successful. I hope that the Government will move on to think about how we can slightly recast our tax system so that it makes sense, having made this radical and generous change.