Finance Bill (Second sitting)

Peter Dowd Excerpts

Committee Debate: 2nd Sitting: House of Commons
Tuesday 17th October 2017 Public Bill Committees

[The Chair]

With this it will be convenient to discuss the following:

Amendment 21, in schedule 3, page 155, line 15, at end insert—

“Chapter 3

Review of chapters 1 and 2

783BR Review of operation of this Part

(1) Prior to 30 June 2020, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the provisions of this Part.

(2) The review shall consider in particular—

(a) the use and effects of full relief,

(b) the use and effects of partial relief,

(c) the use of relief in relation to trading income, and

(d) the use of relief in relation to property income.

(3) The review shall compare the effects on the Exchequer in each of the first two years of its operation with the effects forecast by the Office for Budget Responsibility at the time of—

(a) the 2016 Budget, and

(b) the 2016 Autumn Statement.

(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”

This amendment would require HMRC to undertake a review of the operation of the new trading and property allowances in the first two relevant tax years.

That schedule 3 be the Third schedule to the Bill.

[Peter Dowd (Bootle) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Walker.

I appreciate that the strictures of Finance Bill procedure commonly give rise to the overwhelming excitement of review amendments, so I ask the Committee to withhold its lack of surprise that amendment 21 would introduce yet another review. The Government’s sensible stated aim in introducing the allowance is to recognise that many taxpayers no longer fit within a neat and simple model of PAYE-only income or self-assessment-only income. We all recognise that that is the reality, but we should not get too carried away by the idea that online hobby trading is an entirely new activity triggered by the advent of the online sharing economy; I suspect it is more like old wine in new skins. Spending a weekend repairing a few clocks as a hobby and then selling them on eBay for extra income on the side is not an entirely new phenomenon. People 20 years ago did the same through car boot sales, antique fairs or classified ads; this is just a modern version.

Modernising the tax system to recognise the multiple sources of income that taxpayers may now receive is sensible, but we should not always imagine that the problems that we are trying to solve are entirely new, nor should we make too hasty a stab in the dark for solutions. The Association of Taxation Technicians says that, as drafted, the provisions discriminate against individuals who, in addition to having the type of microbusiness to which the trading allowance is intended to apply, also have a sole trader business which cannot benefit from the trading allowance. In that situation, the provisions prevent the microbusiness from qualifying for the trading allowance. The ATT’s concern is that the allowance is potentially discriminatory.

The Government state that the aim of the allowance is to provide

“simplicity and certainty regarding Income Tax obligations on small amounts of income from providing goods, services, property or other assets…and to help the UK become leaders in the digital and sharing economy”,

but it could easily end up creating new complications for taxpayers, or lead inadvertently to perverse incentives. The Chartered Institute of Taxation’s Low Incomes Tax Reform Group welcomes the aim of the measures, but has said that it is

“very concerned that unrepresented low-earners will struggle to understand some of the more complex rules, especially if they have overlap profits, more than one trade or source of income or have not elected, as often will be the case, to use the cash basis of accounting.”

Its concerns stem especially from the fact that this relief’s intended group of users is less likely to engage professional accountants or other advisers. As a result of the complications involved in having to choose a particular accounting basis or work out the types of income that apply, the allowance may fail to benefit that group of users. It may instead become yet another strand in the complex web of allowances that professional advisers throw into the mix when helping their clients to avoid tax.

[Anneliese Dodds]

I appreciate my hon. Friend’s comments about the role of personal advisers; the same point came up this morning. Moreover, has not HMRC’s online system for calculating the taxes payable on relatively small amounts of income already been found wanting? As a result of the interaction between the four different allowances—personal savings, tax-free dividend income, the savings starting rate and the personal allowance—individuals have become liable for more tax than they should have to pay, because the online system is not calibrated appropriately. In theory, the new provision is meant to obviate the need to declare income for those purposes, but does my hon. Friend not agree that it must be designed carefully to avoid the flaws that affect people with small incomes who qualify for the allowances?

[Peter Dowd]

My hon. Friend hits the nail on the head; that is an excellent forensic point that the Minister will have heard, and will, I hope, take up, especially in relation to our amendment.

The potential problems might be still bigger in the case of property income where the new relief interacts with existing schemes such as rent-a-room relief. Taxpayers will need to work out which relief applies before determining whether and how they need to make a self-assessment return. Although I am confident that the Minister is genuine in his desire to help more people get on the right side and make the right declarations for their taxes, I worry that the added complexity could easily put off more people from making the correct declaration. I suspect that none of us wants that, including him, because it is not particularly sensible. In many cases, it will not be due to anyone’s desire for dishonesty; it will be because taxpayers used to operating only within pay-as-you-earn will be confronted with a confusion of options in considering how they must declare to HMRC.

The Low Incomes Tax Reform Group has rightly highlighted the complications that might arise for lower-income households. The new reliefs might free taxpayers from the need to declare very small amounts to HMRC, but will not have the same effect of releasing their obligations to account to the Department for Work and Pensions if they are universal credit claimants. Those are the households that would benefit most from simplification, rather than finding themselves subject to the most bewildering requirements to account to the state. I do not wish to waylay the Committee with the ongoing issue of universal credit implementation, as we will undoubtedly have a debate about that tomorrow, but the Low Incomes Tax Reform Group highlights a fair point: so-called simplifications involving tax and social security can sometimes have the opposite effect on those expected to use them. I think that we have all witnessed that to a greater or lesser degree.

Our amendment proposes an HMRC review, to report by 2020, of the use of the reliefs and the resulting effects on the Exchequer. I know that the inclination is to resist all Opposition amendments, but I can see little cause to resist this one. Inevitably, just like other measures discussed earlier, the reliefs will be revisited, unpicked, reworked and recalibrated in future Budgets. Sensible and calm review by HMRC must be in the interests of everybody involved.

[Kelvin Hopkins (Luton North) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Walker. I support my hon. Friend the Member for Bootle. It is said that Britain has more accountants per head of population than any other country, probably because the complexity of our tax system means that we all need to use one. However, in this situation, as he said, the amounts involved might be small, and the cost of an accountant might be quite high. That could deter people from using accountants, getting them into more difficulty.

Is there not a case for a proper review by HMRC, which knows the score because it deals with such things on a daily basis? HMRC could advise the Government on introducing appropriate changes that would simplify the tax system as well as helping those who would benefit from tax reliefs in a more practical and pragmatic way.

[Mel Stride]

Clause 17 and schedule 3 introduce two new tax allowances so that, from April 2017, individuals with gross trading or property income below £1,000 no longer have to declare or pay tax on that income. Digital platforms are allowing more and more people to supplement their income by sharing property, resources, time and skills. It is perhaps a rather more rapidly growing segment than the hon. Member for Bootle recognised. The UK is a world leader in the sharing economy; a report by PwC shows that the UK sharing economy has grown at the fastest pace in Europe, with transactions worth about £7.4 billion in 2015. This is expected to grow to £140 billion in 2025.

As the economy changes, the tax system should keep pace. For this reason the Government want to support the sharing economy and ensure that the tax system is not burdensome for those making small amounts of income, whether through selling goods, providing services or renting out their property. This could include those advertising their plumbing services through an online platform or those renting out a driveway space, for example. The changes made by clause 17 will introduce two new income tax allowances so that the individuals with gross trading or property income below £1,000 will no longer have to declare or pay tax on that income. Many individuals engaging in these activities on a small scale are not aware of their tax obligations. The new allowances make these obligations clear and straightforward, providing much needed clarity for people making small levels of extra income.

The trading allowance will also include miscellaneous income from providing assets or services, creating certainty for individuals, who will not have to understand tax case law to determine whether their activities should be taxed as a trade. The Government estimate that at least 700,000 individuals could benefit from the allowances. Over three quarters of these are basic rate taxpayers who could save up to £400 in income tax each year.

The Opposition raised a number of points. One was the lack of availability of this allowance to those who are already making self-assessments to HMRC, because they are already sole traders. Part of the reason for that is to ensure that we do not have any diversion of activity from those individuals’ general work arrangements into this scheme driven solely by an attempt to lower taxation. The point has been made about the importance of simplicity in the scheme. Certain aspects of the scheme clearly make it simple: people with that kind of income are not required to make a submission to HMRC, and there is a “miscellaneous” category of income that can address the complications around whether this is trading income—“miscellaneous” is quite a wide-ranging term.

The hon. Member for Bootle raised a fair point on rent-a-room tax relief arrangements; that is why HMRC’s efforts in detailing its guidance on the gov.uk website are so important. All the allowances will be very carefully explained. The guidance is being prepared alongside representative bodies and will include clear, step-by-step explanations and a number of examples, so it will be very easy for people to follow exactly how the arrangements work. Support will also be available via the HMRC helpline.

Amendment 21 would require HMRC to complete a review of the cost and effectiveness of the allowances by 2020 and the effects on the Exchequer in each of the first two years. Such a review is unnecessary. As I have set out, the two new allowances ensure that the tax system is not burdensome for those making small amounts of income. Their effect will be to support the enormous contribution that the sharing economy is making to the UK economy, while simplifying the tax system to support the job creators of the future. As there is no need for taxpayers to declare this income to HMRC, any review would impose a disproportionate burden on taxpayers and be inconsistent with the core rationale for the reliefs. In addition, the Bill also includes specific clauses designed to prevent abuse, and HMRC will carefully monitor the reliefs to ensure that they work as intended. I therefore urge the Committee to resist this amendment.

The two new tax allowances will help micro-entrepreneurs by removing complexity and uncertainty for those wanting to earn small amounts of extra income. There will be no forms to fill in and no tax to pay. It is a tax break for the digital age, furthering the Government’s commitment to simplify the tax system and help the UK become a global leader in the digital and sharing economy. I therefore commend the clause to the Committee.

[Peter Dowd]

We will not press the amendment to a vote but the Minister acknowledges, de facto, that the economy and the world of work is changing fast. There are so many developments out there—apps, online, the whole kit and caboodle—which is all the more reason for the Government to keep on top of this issue. That is why we want the review, because the world changes so quickly.

[Ruth George (High Peak) (Lab)]

Obviously, universal credit is being rolled out. That will be a particular detriment to people on very low incomes who are self-employed, because they will be deemed to earn the minimum wage on 35 hours a week throughout the year: around £13,600. If their actual income is below that at the moment, they can receive tax credits and are eligible to apply if they have children and a family. Under universal credit, they will not be able to receive such payments, though they may be liable for tax. That is another reason why a review after the roll-out of universal credit would be particularly useful, to see the impact on the self-employed and people with micro- businesses.

[Peter Dowd]

My hon. Friend makes a valid point. This is not quite as simple as the Minister would like us to believe, although I am not suggesting that he is trying to cajole us into it. The bottom line is that we will not push this to a vote today but we hope that the Minister takes into account the views we have expressed. If he does not wish to take account of our views, I exhort him to consider those of at least the two organisations that sent us documentation on the matter.

Question put and agreed to.

Clause 17 accordingly ordered to stand part of the Bill.

Schedule 3 agreed to.

Clause 18

Carried-forward Losses

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

[The Chair]

With this it will be convenient to discuss the following:

Amendment 22, in schedule 4, page 230, line 37, at end insert—

“188FAA Review of operation of this Part

(1) Prior to 30 June 2020, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the provisions of this Part.

(2) The review shall consider in particular—

(a) the use and effects of reliefs under this Part,

(b) the effects on the Exchequer in each year of operation,

(c) a comparison of the amounts referred to in paragraph (b) and any official forecasts of those amounts prior to the introduction of this Part.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”

This amendment would require HMRC to undertake a review of the operation of the provisions for group relief for carried-forward losses.

Amendment 23, in schedule 4 page 247, line 2, at end insert—

55A (1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review in accordance with the provisions of this paragraph.

(2) The review shall consider the changes made in—

(a) paragraphs 24 to 26 of this Schedule in relation to insurance companies,

(b) paragraphs 27 to 46 of this Schedule in relation to certain creative industries,

(c) paragraphs 47 to 55 of this Schedule in relation to oil activities.

(3) The review shall consider in particular and in relation to each of the sectors mentioned in sub-paragraph (2)—

(a) the use and effects of the changes made,

(b) the effects on the Exchequer in each year of operation,

(c) a comparison of the amounts referred to in paragraph (b) and any official forecasts of those amounts prior to the introduction of this Part, and

(d) any effects on the economic activities of companies and others in each of the sectors mentioned in sub-paragraph (2).

(4) The Chancellor of the Exchequer shall lay a report of the review under this paragraph before the House of Commons as soon as practicable after its completion.”

This amendment would require HMRC to undertake a review of the operation of the provisions for carrying forward trade losses for insurance companies, creative industries and oil activities.

That schedule 4 be the Fourth schedule to the Bill.

Clause 19 stand part.

[Peter Dowd]

These two clauses and the schedule represent the most complicated measures in the Bill, as I suspect everybody acknowledges. The corporate tax system and its rules on carrying forward losses present a maze of regulations and rules to be navigated by the heads of companies before they can claim relief. There is, therefore, some merit behind the Government’s measures to relax the rules around losses.

Under these measures, companies can set losses arising on 1 April this year against the total taxable profits, rather than particular types of income of a company and its group members. The amount of losses they can carry forward will be restricted to 50% and will apply to any losses incurred at any time. Of course, on top of that, each company or group will be entitled to a £5 million annual allowance of unrestricted profit, ensuring that 99% of companies are unaffected by the restriction.

I would like to ask the Minister how the £5 million figure for the annual allowance was reached. In addition, what consideration has the Treasury given to lowering or raising the threshold for unrestricted profit? The reforms being discussed today were first announced at the 2016 Budget. The Government then consulted on the measure in the business tax road map, as it was called, which I understand has led to this package of clauses and schedule.

The changes to the current rules have been encouraged because, under the old system, companies could offset all their eligible taxable profits through losses carried forward. That led to a situation where in some instances a large company pays no tax in a year when it makes a substantial profit. The majority of G7 countries already have restrictions of this kind in place.

I believe it is important to look at international comparisons and examine how other countries deal with this complex issue. From my research, it is clear that the big distinctions on how countries focus on carried-forward losses are: the length of time losses can be carried back; the length of time losses can be carried forward; and when losses can be shared with other companies.

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[Kelvin Hopkins]

There is a lot of evidence that the banks are still engaging in risky gambling on the international exchanges, and compensating for that by squeezing ordinary taxpayers, ordinary bank customers and small businesses in particular to back up their gambling losses. Would my hon. Friend say that we are still facing danger in the future because of the banks’ behaviour?

[Peter Dowd]

We always have to be vigilant—that is the key. Vigilance is crucial. Virtually no one had experienced anything like the banking crisis in living memory. Given that, we have to be on our guard that we do not all breathe such a sigh of relief that it was so long ago that we lose our vigilance.

It seems to me that strong regulations, which will not only protect the taxpayer and their savings, but develop practices at the heart of the industry, are the only bulwark against another financial crisis being created and enacted through reckless banking practice. I hope that the Minister will give some thought to that, particularly given that when we finish the summer-autumn Finance Bill we will immediately start the winter Finance Bill. Given the Government’s delayed and, I have to say, sometimes chaotic timetable, it will no doubt end up being called the spring Bill instead. Dare I say it, we have a Minister who is the man for all seasons in that regard. [Interruption.] Don’t give up the day job, as they say—or perhaps hon. Members would like me to.

Many of the stakeholders to whom the Opposition spoke raised concerns about the complexity of the proposals and the speed with which the Government have attempted to take them through.

[Anneliese Dodds]

I am grateful to my hon. Friend for running through many of the problems that stakeholders have mentioned to us. One addition to the many ambiguities he mentioned is that, to my mind, a clear rationale does not seem to have been provided for the decision to loosen the rules so that past losses can be offset against any type of profit, rather than the current position of only being able to offset them against the same type of profit—for example, only offsetting trading losses against trading profits. That is yet another change for which we perhaps require further information and debate.

[Peter Dowd]

My hon. Friend makes another good point. The Chartered Institute of Taxation has criticised the Government—“criticise” is the word I use, although I am not sure it would say that; it would most probably say it has brought this to the Government’s attention—for not balancing

“its desires to raise some modest revenue with its duty to produce legislation that can be followed with predictability and certainty.”

Other financial organisations have argued that the measure is likely to create winners and losers. Small groups unlikely to have £5 million of losses, for which this is a high proportion of the total, will benefit from the change. For large groups that wish to access the group relief changes, it is less clear. Deloitte has argued that the slowdown in offset of brought-forward losses for large groups may in fact mean an acceleration in the tax cost for larger companies. Will the Minister offer more clarity on how the group relief will work in practice—particularly the nomination process, whereby a specific company has to be nominated to manage the whole group relief?

The measure seems fraught with potential dangers. For starters, the Bill makes no mention of what happens when a company chooses to join or leave a group that benefits from the group relief. Will the Minister explain whether such a mechanism will be built into the legislation, or whether we will need a further clause in a future Finance Bill that tinkers with carried-forward losses once more? Given the uncertainty felt by many in the business community, the Opposition believe it is only right that the Government submit a review of the operation of the group relief in the carried-forward losses, assessing the cost and impact of the new restrictions and how they will impact on large companies.

[Mel Stride]

Clauses 18 and 19 and schedule 4 make changes to the rules for corporation tax losses, as we have discussed. They modernise the losses rules by increasing their flexibility, while at the same time ensuring that companies pay tax in years when they earn significant profits. When a company makes a loss, it can carry it forward and use it to offset the tax liability of certain income in future years. Carrying forward losses is an important feature of the tax system and ensures that the tax paid by companies is proportionate with their profits over the long term.

However, these loss relief rules are not reflective of the way businesses operate and are out of step with international practice, which I shall come on to in a moment. First, carried-forward losses can typically only be set against profits from the activities to which they relate, as the hon. Member for Bootle pointed out, rather than the profits of other activities in a company, or the profits of other companies within a group. Secondly, the absence of any restriction on the amount of taxable profit that can be relieved by carried-forward losses means businesses making substantial UK profits may not pay any corporation tax due to losses incurred on historic activities.

The clauses will have effect from 1 April 2017, in line with the commencement date previously announced by the Government. The changes made by clause 18 will mean that rules will be relaxed for losses arising from 1 April 2017 that are carried forward, such that those losses can be set against the profits of different activities within a company and the taxable profits of its group members. As we have said, the amount of annual profit that can be relieved by carried-forward losses will be restricted to 50% from 1 April 2017, subject to an allowance of £5 million per group.

The hon. Member for Bootle asked specifically about that £5 million figure, and about whether the Treasury has looked at international comparisons and factored that into its thinking on this matter. I assure him that it has. This rate is more generous than the rates in a number of other countries. In Germany, for example, the rate is €1 million. As he pointed out, the main rationale for focusing the restriction above £5 million is to bear down on the top 1% of profitable businesses in the country without going further down the spectrum. We believe that we have achieved the right trade-off between the level of the figure and the number of companies that will potentially be affected by the restriction.

--- Later in debate ---

These clauses and the schedule introduce new rules that will modernise the UK’s loss relief and will help to ensure that businesses cannot use carried-forward losses to pay no tax in each accounting period in which they make substantial profits. I hope that Opposition Members will not press their amendment, and I commend these measures to the Committee.

[Peter Dowd]

I tried to set to out as comprehensively as I could, without getting too complicated, complex or specific, why we were concerned to keep tabs on this. Trying to keep tabs on the Government’s proposals has been today’s theme, and that is why we have asked for reviews. In the current climate, when there are so many pressures on public services and a range of challenges for the country, we are all concerned to ensure that organisations that benefit from our fantastic country and from the protection of the rule of law pay their dues. That is not to point the finger at anyone specifically to say they are not paying their dues, but to ensure that we to some extent guard the guards. That is what we are trying to do today: to guard the guards; that is our job and our responsibility. Given the Minister’s explanation, we will not press the amendment, but no doubt we will come back to these issues in due course.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 19 ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Graham Stuart.)