Finance Bill (Fourth sitting)

Rebecca Long Bailey Excerpts

Tuesday 5th July 2016 Public Bill Committees

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

[Rebecca Long Bailey (Salford and Eccles) (Lab)]

I covered most of the points relating to this clause when discussing previous clauses. I am concerned that it is another example of complex arrangements being created for the purpose of, among other things, avoiding liability to pay corporation tax. Will the Minister confirm what specific activity has prompted these proposals?

[The Financial Secretary to the Treasury (Mr David Gauke)]

It is a pleasure to welcome you back to the Chair, Mr Howarth. Let me say a word or two about the clause in response to the hon. Lady’s question.

Clause 64 makes changes to prevent tax avoidance by ensuring that tax is chargeable upon any consideration received in return for agreeing to take over tax-deductible lease payments. Leasing of plant and machinery plays an important role in UK business by providing a means of access to assets for use in commercial activities. There may be a number of different reasons for choosing to lease plant and machinery—for example, where the assets are required for only a relatively short period, where a lease meets the requirements of the business’s cash flows, where the business does not have the funds to buy the asset outright or where the asset is of a type typically leased rather than bought.

The person who leases plant and machinery—the lessee—for use in their business is entitled to tax deductions for the rents payable under the lease. Her Majesty’s Revenue and Customs has become aware of arrangements relating to the transfer of a lessee position in an existing lease. In those arrangements, the existing lessee transfers its right to use the leased plant or machinery, together with the obligation to make the lease payments, to another person. The new lessee will use the plant or machinery in its business and claim tax deductions for the lease rental payments.

However, the arrangements for transfer also involve the new lessee or a connected person receiving a consideration in return for the new lessee agreeing to take over from the existing lessee. That is done in such a way that there is no charge for tax on that consideration. The new lessee is able to get tax deductions for rental payments, some or all of which are funded by the non-taxable consideration received. That is an unfair outcome, and in a number of examples seen by HMRC it is clearly part of a tax avoidance scheme.

It is right that where a person meets tax-deductible payments not from their own resources but out of an otherwise non-taxable consideration received for agreeing to take over those payments, that consideration should be taxed in full. The changes made by the clause will ensure that where a person takes over a lessee under an existing lease, obtains tax deductions for payments under that lease and, in return, receives a consideration, such consideration is chargeable for tax as income.

The changes proposed will ensure a fair outcome for tax purposes for such arrangements. No longer will it be possible for tax-deductible lease payments to be funded by untaxed considerations received for the transfer of responsibility to make those payments. The expected yield to the Exchequer over the scorecard period from the changes is £120 million. I therefore hope the clause will stand part of the Bill as a way of preventing businesses from gaining an unwarranted tax advantage.

Question put and agreed to.

Clause 64 accordingly ordered to stand part of the Bill.

Clause 82

Inheritance tax: increased nil-rate band

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

[Mr Gauke]

Clause 82 and schedule 15 ensure that the residence nil-rate band for inheritance tax will continue to be available when an individual downsizes or ceases to own a home. The clause builds on the provisions in the Finance Act 2015, which introduced a new residence nil-rate band, by creating an effective inheritance tax threshold of up to £1 million for many married couples and civil partners by the end of the Parliament, making it easier for most families to pass on the family home to their children and grandchildren without the burden of inheritance tax.

The combined effect of this package will almost halve the number of estates expected to face an inheritance tax bill in future. The Office for Budget Responsibility now forecasts that 33,000 estates will be liable for inheritance tax in 2020-21. As a result of this package, 26,000 estates will be taken out of inheritance tax altogether and 18,000 will pay less.

We recognise that people’s circumstances change as they get older and that they may want to downsize or may have to sell their property. We do not want the residence nil-rate band to act as a disincentive for people thinking about making such changes. That is why we announced in the summer Budget that anyone who downsizes or ceases to own a home on or after 8 July 2015 will still be able to benefit from the new residence allowance. Clause 82 and schedule 15 allow an estate to qualify for all or part of the residence nil-rate band that would otherwise be lost as a result of the downsizing move or disposal of the residence.

The extra residence nil-rate band or downsizing edition will only be available for one former residence that the deceased lived in. Where more than one property might qualify, executors of an estate will be able to nominate which former residence should qualify. The approach reduces complexity and ensures flexibility in the system.

The Government have tabled seven amendments to schedule 15 to ensure that the legislation works as intended in certain situations that are not currently covered by the downsizing provisions. Amendment 15 caters for situations in which an individual had more than one interest in a former residence, to ensure that they are not disadvantaged compared with those who owned the entire former residence outright. Amendment 16 clarifies the meaning of disposal in situations where an individual gave away a former residence but continued to live in it. Amendment 19 ensures that where an estate is held in a trust for the benefit of a person during their lifetime, a disposal of that former residence by the trustees would also qualify for the residence nil-rate band.

Amendments 13, 14, 17 and 18 make minor consequential changes to take into account the other amendments. Clause 82 and schedule 15 will help to deliver the Government’s commitment to take the ordinary family home out of inheritance tax by ensuring that people are not disadvantaged if they move into smaller homes or into care. That commitment was made in our manifesto and I am pleased to deliver it fully with this clause.

[Rebecca Long Bailey]

As we have heard from the Minister, clause 82 and schedule 15 provide that the inheritance tax transferrable main residence nil-rate band will apply to an estate even when somebody downsizes. As the Tax Journal’s commentary on the Bill concisely explains, schedule 15 in particular contains provisions to ensure that

“estates will continue to benefit from the new residence nil rate band even where individuals have downsized or sold their property, subject to certain conditions. The residence nil-rate band is an additional transferable nil rate band which is available for transfers of residential property to direct descendants on death. The additional relief will be available from 6 April 2017 and the relief for downsizing or disposals will apply for deaths after that date where the disposal occurred on or after 8 July 2015.”

My hon. Friend the Member for Hayes and Harlington and I tabled amendments to leave out clause 82 and schedule 15 today—we will therefore oppose the clause—although they were not selected for debate.

The Government’s objective seems to be that

“individuals may wish to downsize to a smaller and often less valuable property later in life. Others may have to sell their home for a variety of reasons, for example, because they need to go into residential care. This may mean that they would lose some, or all, of the benefit of the available RNRB. However, the government intends that the new RNRB should not be introduced in such a way as to disincentivise an individual from downsizing or selling their property.”

If we go back a couple of steps, at summer Budget 2015 the Government announced that there would be an additional nil-rate band for transfers on death of the main resident to a direct descendant set at £100,000 and subject to a taper for an estate with a net value of more than £2 million. The band will be withdrawn by £1 for every £2 over the threshold. During the passage of the Finance Act 2015, which introduced the additional nil-rate band, the Opposition spokesperson, my hon. Friend the Member for Worsley and Eccles South (Barbara Keeley), stated:

“We have been clear that we believe that the focus of tax cuts should be on helping working people on middle and low incomes and on tackling tax avoidance…the Treasury has admitted that 90% of households will not benefit from the Government’s inheritance tax policy, so we should be clear about the part of society we are talking about.”

She went on:

“The priority for the Government, we believe, should be helping the majority of families and first-time buyers struggling to get a home of their own. That is why Labour voted against the Government’s inheritance tax proposals in the July Budget debate. The Treasury estimates that the changes to inheritance tax will cost the Exchequer £940 million by 2020-21—nearly £1 billion.”––[Official Report, Finance Public Bill Committee, 17 September 2015; c. 56.]

I echo those comments in the light of the measure today. We simply do not believe that expanding the conditions in which inheritance tax is not payable should be a priority for the Government. As my hon. Friend said at that time, this measure will cost nearly £1 billion by 2020-21. That is a vast amount of money that could be better spent supporting those on middle and low incomes who are struggling to get by.

As with so many measures in the Bill, the Government are prioritising the wrong people, with tax giveaways for the wealthy, such as this measure, and cuts to capital gains tax, at a time when they were considering taking billions away from working people through cuts to tax credits and disability payments. Not only do we disagree with the principle of this tax giveaway; we are also concerned that the legislation is badly drafted. A similar outcome could be achieved through a simpler mechanism. The Chartered Institute of Taxation has said:

“It appears to us that the legislation in Schedule 15 as currently drafted is deficient in one particular respect in that no provision has been made for downsizing when the home is held as a trust interest (for example, and especially, an Immediate Post-Death Interest (“IPDI”)). The typical scenario would be that the home (solely owned by husband) was left on a life interest basis to his widow, with remainder over to his children. The widow goes into care and the trustees wish to sell the property. An IPDI is becoming increasingly common to safeguard the interests of children from a first marriage when their parent enters into a second.”

Will the Minister clarify what will happen in that instance?

I will touch briefly on Government amendments 13 to 19, which according to the Minister’s helpful letter of 30 June make a number of technical amendments to ensure that the legislation operates as intended in a limited number of specific circumstances that are not currently covered by the downsizing provisions. I am glad that the Government are taking steps to improve the legislation, but I cannot see how the amendments address the concerns outlined by the Chartered Institute of Taxation.

The Opposition do not feel that these measures, which expand the number of situations in which inheritance tax is not due, are a priority, given the apparent funding constraints we often hear about from the Government. We will therefore oppose clause 82 and schedule 15.

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

[Rebecca Long Bailey]

The Minister will be pleased to hear that I do not have many comments on this clause, which provides that inheritance tax will not be charged if a person leaves unused funds in a pension drawdown fund when they die. In April 2015, the Government introduced changes to pension tax rules allowing people to access their pension funds flexibly from the age of 55. That flexibility, and an increase in drawdown arrangements, means that the inheritance tax charge will potentially apply to more people. The changes, which the Opposition supported at the time, meant that pensioners could access as much of their pension pots as they wanted, without having to buy an annuity. That meant, however, that if people became entitled to the funds but did not actually draw on them before death, the money would be subject to inheritance tax at the usual rate. According to the explanatory notes, that was not the original policy intention, so the clause has been introduced to correct things. The Opposition supported the changes to pension tax rules so will not be opposing the clause.

[Mr Gauke]

As we have heard, clause 83 makes changes to ensure that when an individual dies, unused funds in a drawdown pension are not treated as part of their estate for inheritance tax purposes. Without the clause, a small number of pensions would be liable for inheritance tax in some circumstances, which was not our intention.

As the Committee will be aware, funds that remain in a pension scheme do not traditionally form part of a deceased’s estate and are generally exempt from inheritance tax. Nevertheless, under the current tax rules, in a small number of circumstances undrawn pension funds are unintentionally caught. For example, if an individual has designated funds for pension drawdown and then passes away without having drawn down all those funds, an inheritance tax charge may arise.

The Government introduced changes to the pensions tax rules from April 2015 that allowed more people to flexibly access their pension funds from age 55. That flexibility means that the inheritance tax charge might apply to more people who pass away leaving undrawn funds in their pension scheme. It was not intended that an IHT charge should arise in such circumstances; the clause ensures that it will not do so. It changes the existing rules so that an inheritance tax charge will not arise when a person has unused funds remaining in their drawdown pension when they die.

The changes will be backdated and will apply for deaths on or after 6 April 2011, so that they include any charges that could arise from the time when the general rule ceased to apply. The minor changes made by the clause will help to maintain the integrity and consistency of the pensions system while supporting those who have worked hard and saved responsibly throughout their lives. I commend the clause to the Committee.

Question put and agreed to.

Clause 83 accordingly ordered to stand part of the Bill.

Clause 84

Inheritance tax: victims of persecution during Second World War era

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

--- Later in debate ---

It goes without saying that the value of our culture and heritage to society is immeasurable. The changes that I have outlined will mean that our museums and galleries can continue to benefit from tax exemptions that will allow them to purchase more works of art for the enjoyment of the British public. The changes will also provide much needed consistency in the way that conditionally exempt objects are treated. I therefore hope that the clauses can stand part of the Bill.

[Rebecca Long Bailey]

The Minister has given us an articulate and detailed summary of how the clauses work in practice, so I will not go over too much of that again. I briefly note that the provisions make technical changes to the tax treatment of gifts or sales of property to public museums and galleries and objects of national scientific, historic or artistic interest respectively.

Clause 85 makes technical changes to support the exemption from inheritance tax of gifts or sales of property to public museums and galleries. It is necessary, as the Minister said, because recent changes in local authorities have led museum collections to be placed in charitable trusts. Those trusts do not presently fall within schedule 3 to the Inheritance Tax Act 1984, which describes the bodies that attract inheritance tax and capital gains tax relief. The clause simply rectifies that and moves the power to designate schedule 3 bodies from HMRC to HM Treasury. We have no issue with this technical clause, but I am interested to know what the justification was for moving the power to add bodies to schedule 3 from HMRC to HM Treasury. As a general question, what assessment was made in the long term of the efficacy of local authorities in managing museums and galleries? The Minister might want to refer that question to another Department and get back to me in writing.

Clause 86 puts a stop to using existing law to pay inheritance tax at a lower rate than estate duty. Estate duty was replaced in 1975 by capital transfer tax, which was replaced by inheritance tax in 1984. However, legacy estate duty legislative provisions still remain in force in relation to exemptions given pre-March 1975. Estate duty can be levied at up to 80%, whereas inheritance tax is currently at 40%. The clause stops individuals using a gap in legislation to claim conditional exemption solely to facilitate a later sale of 40% instead of up to 80%.

There is also provision for HMRC to be able to raise a charge when the owner loses an estate duty exempt object. That leads me nicely on to Government amendments 122 to 126, which make technical changes to ensure that the legislation operates as intended. Amendment 122 clarifies the rules around HMRC’s ability to raise a charge for duty on the loss of an item, so that it will raise only a single charge rather than a dual one. Amendments 123 and 124 ensure that the legislation works in specific circumstances, as intended, and amendments 125 and 126 simply make minor consequential changes. We are more than happy to support these clauses and Government amendments.

Question put and agreed to.

Clause 85 accordingly ordered to stand part of the Bill.

Clause 86

Estate duty: objects of national, scientific, historic or artistic interest

Amendments made: 122, in clause 86, page 143, line 6, after “as if”, insert

“—

(a) after subsection (3) there were inserted—

“(3A) But where the value of any objects is chargeable with estate duty under subsection (2A) of the said section forty (loss of objects), no estate duty shall be chargeable under this section on that value.”; and

(b) ” .

Amendment 123, in clause 86, page 144, line 2, at end insert—

‘(5A) In section 35 of IHTA 1984 (conditional exemption on death before 7th April 1976), in subsection (2), for paragraphs (a) and (b) substitute—

“(a) tax shall be chargeable under section 32 or 32A (as the case may be), or

(b) tax shall be chargeable under Schedule 5,

as the Board may elect.””

Amendment 124, in clause 86, page 144, line 9, at end insert

“, and

(b) in sub-paragraph (4), after “40(2)” insert “or (2A)”.”

Amendment 125, in clause 86, page 144, line 10, leave out “Subsection (6) has” and insert “Subsections (5A) and (6) have”.

Amendment 126, in clause 86, page 144, line 11, after “referred to in”, insert “section 35(2) of or”— (Mr Gauke.)

Clause 86, as amended, ordered to stand part of the Bill.

Clause 87

Apprenticeship levy

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

[The Chair]

With this it will be convenient to discuss the following:

Government amendments 22 to 24.

Clauses 88 and 89 stand part.

Government amendments 25 and 26.

Clause 90 stand part.

Government amendment 27.

Clauses 91 to 108 stand part.

Government amendment 28.

Clauses 109 and 110 stand part.

New clause 2—Review of the Apprenticeship Levy—

‘The provisions of this Act relating to the Apprenticeship Levy shall not come into force until the Chancellor of the Exchequer has laid before Parliament a report on how the levy will be implemented, including but not limited to information on how equitable treatment of the different parts of the UK will be assured in its implementation.’

--- Later in debate ---

[Kirsty Blackman]

I understand that guidance on the apprenticeship levy has been released. The information I was able to find online said that further guidance on things such as provisional bands would be released in June 2016, but I cannot find any. Perhaps it is just that I have been unable to find it, but it would be useful if that guidance was provided.

I draw attention to the issue with employee-owned companies. I was approached by such a company that pays its employees their share of the profits through PAYE, so that share of the profits will be subject to the apprenticeship levy. Had the company been set up to pay dividends to shareholders, it would not have to pay the levy. The staff there have come to me with a specific issue that is unique to them, because they would not have to pay the levy if their company was structured differently. Will the Minister comment on such employee-owned companies?

[Rebecca Long Bailey]

As we have heard, this substantial group of clauses introduces the apprenticeship levy that was announced in the summer Budget and autumn statement in 2015. I shall address my remarks to clauses 87 to 110 as a group, touching on new clause 2, tabled by the hon. Member for Kirkcaldy and Cowdenbeath, and Government amendments 22 to 28.

The apprenticeship levy was announced in 2015 and will come into force in April 2017 as part of the Government’s commitment to reaching 3 million apprenticeships by 2020. The levy will be charged on large employers with annual pay bills in excess of £3 million. According to the HMRC policy paper, that means that less than 2% of employers will pay the levy. It will be charged at 0.5% of an employer’s pay bill through PAYE. Each employer will receive one annual allowance of £15,000 to offset against its levy payment. Employers operating multiple payrolls will be able to claim only one allowance. As we have heard, levy funds will be retained as electronic vouchers in a digital apprenticeship service account. The employer can spend these vouchers on training and end-point assessment from accredited apprenticeship providers, but not on associated costs such as administration of apprenticeships, pay or allowances.

According to the Government’s costings, the levy is expected to raise £2.7 billion in its first financial year, rising to just over £3 billion by 2020-21. HMRC’s policy paper states specifically:

“It is expected that the levy will support productivity growth through the increase in training. It may have a near-term impact in reducing earnings growth, although by supporting increased productivity, it is expected that the levy will lead to increased profitability for businesses, and increased wages over the long-term.”

The paper also assesses the impact on business, stating:

“For employers paying the levy, the measure is expected to have some impact on administration costs and the impact will vary by employer, depending on the size of their pay bill. The policy intention is that they will calculate and pay the levy on a monthly basis. HM Revenue and Customs (HMRC) will engage with employers to discuss and assess the impacts on them.”

Opposition Members are certainly happy to support the introduction of the apprenticeship levy, but we have some concerns that we would like the Minister to provide some reassurances on.

Business representatives have broadly welcomed the levy as a commitment to delivering increased apprenticeship places. However, they have widely expressed concern at the short timeframe for implementation, the lack of guidance to date ahead of the introduction and the limitations that the proposals place on expenditure. Indeed, the Confederation of British Industry has called for a “realistic lead-in time” and for

“taking the time to get this right”,

while EEF, the Manufacturers Organisation, has specifically called for a delay to the levy’s introduction full stop.

In addition, the high target of 3 million apprenticeship starters by 2020 has caused concern that there could be a race to the bottom in terms of the quality of apprenticeships. Mark Beatson, chief economist at the Chartered Institute of Personnel and Development, has said:

“We’d argue that the three million target should not be sacrosanct, and that quantity should not trump quality.”

Can the Minister therefore outline what regulatory framework or safeguards are in place to ensure that the quality of apprenticeships is up to scratch?

The Charity Finance Group is particularly concerned that the charitable sector does not have highly developed human resources departments or accredited apprenticeship training schemes. The sector remains reliant on volunteers whose expenses cannot be remunerated via the apprenticeship levy. The CFG is also concerned that significant charity resources are tied up in public sector contracts or that charitable donors will seek confirmation that their donations will fund a charity’s specific cause.

Indeed, public sector employers themselves have expressed concern that, first, the levy is being introduced at a time of severe funding cuts and, secondly, that it is accompanied by a new requirement in the sector to ensure that 2.3% of workers are apprentices. The Local Government Association has urged that local authorities be exempted from payment but given authority to oversee administration of levy funds locally. Can the Minister confirm that the Government have considered that approach?

There may be scope for local authorities to co-ordinate. For instance, councils could take up a commissioning role in the Digital Apprenticeship Service, or unallocated levy funding could be reallocated to contributing areas and commissioned locally rather than being retained centrally.

Another issue that I would like the Minister to shine some light on today is agency workers and large recruitment agencies. In particular, the largest recruitment agencies have expressed concern to me that they will be liable to make large levy payments for placing employees in other companies, including for periods that would not qualify for a quality apprenticeship—over 12 months.

The Recruitment and Employment Confederation has raised concerns that large recruitment agencies will have to pay the levy on their pay bill when they place employees in temporary employment in different workplaces, so that those employees are paid by the agency but not working for it. Indeed, the TUC has expressed concern that agency contracts may be used by employers to lower their PAYE bill and reduce their levy requirement. Opposition Members are really concerned about that, so can the Minister say what steps are in place to ensure that it does not happen?

Finally, I have some concerns about how the levy will work under a devolved Administration, and I think that the hon. Member for Kirkcaldy and Cowdenbeath shares those concerns, as do his colleagues. That is reflected in new clause 2, where they have requested a review addressing how equitable treatment of the different parts of the UK will be assured in its implementation. Throughout their submissions they have asked some very pertinent questions, and I look forward to hearing the Minister’s responses to them.

The levy will be UK-wide, so employers operating across the devolved nations will pay their contribution based on all their UK employees, irrespective of where they live or work. However, the vouchers that levy-paying employers will be allocated—they can spend them on apprenticeship training—will be based only on the portion of the levy that they pay on the pay bill for their English employees. Funds available for training in devolved Administrations are provided through the block grant, and allocation will be decided upon by the Administration.

There appears to be very little guidance on how the apprenticeship levy will work in the devolved Administrations, so I would be grateful if the Minister could provide more detail today. For example, will the funds levied from a company’s UK operations based in devolved nations be identifiable in the grants made to devolved Administrations? We will support new clause 2 if it is pushed to a vote today.

I turn now to Government amendments 22 to 28, which relate to clauses 88, 90, 91 and 109. Clause 90, as drafted, states that where there is an aggregate pay bill of a group of connected companies that will qualify to pay the apprenticeship levy and each would be entitled to a levy allowance, only one will in fact be entitled to the allowance. The connected companies must nominate which company will qualify. Similarly, clause 91 sets out that at the beginning of the tax year, where two or more qualified charities are connected with one another, only one will be entitled to the levy allowance to be offset against the apprenticeship levy.

Government amendments to those two clauses allow companies and charities that are connected for the purposes of the apprenticeship levy to share their annual levy allowance of £15,000 between them, instead of only one company or charity being entitled to the allowance. There is also a consequential amendment to clause 88, which, according to the Minister’s letter,

“allows for the levy allowance not being the full £15,000, if a group of connected employers choose to split it under sections 90 or 91.”

The Government have stated that these changes are in response to representations they have received, and the Opposition are also aware of concerns from stakeholders about the legislation as currently drafted. We therefore fully support these amendments.

Amendments 26 and 28 are technical amendments that clarify that the definition of a company in clause 90 applies to the whole of part 6 of the Bill relating to the apprenticeship levy. Again, we are happy to support these Government amendments.

In conclusion, the Opposition have long called for Government action to drive growth in productivity. That is the underlying problem that the Chancellor has failed to deal with time and again. Supporting apprenticeships is certainly an important factor in doing so, and we are therefore supportive of these measures in the Bill. However, we have some serious concerns about the machinery of the specific clauses, as I have outlined, and I hope that the Minister can address them in his response.

[Mr Gauke]

Let me see if I can address the points that have been raised in the debate. It has been argued that business organisations are calling for a delay in implementation. We recognise that employers have concerns about the development and planned implementation of the levy, but we urgently need to address the skills shortage in our economy and improve the quality of vocational training, which employers are calling for. We are holding regular working groups with various employers and employer groups in order to keep them updated on progress and the timing of announcements, and we will shortly be publishing draft funding rates and rules to provide further information to help them plan for the introduction of the levy. The hon. Member for Aberdeen North is not wrong: there is still further information that needs to be published. That information will be published shortly.

Our focus is on ensuring that the levy works for businesses of all sizes as they adapt and seize opportunities in the coming months. In April we set out how the operational model for the apprenticeship levy and the new digital apprenticeship service will work, and how the funding of apprenticeship training will change. We continue to work with employers to design the apprenticeship levy around their needs, and we will publish further details of the draft rates and rules shortly.

Picking up on the point raised by the hon. Member for Brentford and Isleworth about Brompton Bikes and the particular concern about niche areas such as braziers, a key part of reform to apprenticeships is the trailblazer programme, which invites employers to create their own standards. It needs 10 employers, but in exceptional cases the Department for Business, Innovation and Skills is happy to accept smaller, more niche specialisms, such as braziers. I encourage all employers in such circumstances to enter into dialogue with BIS.