Finance Bill (Third sitting)

Rebecca Long Bailey Excerpts

Tuesday 5th July 2016 Public Bill Committees

[The Chair]

Will this it will be convenient to discuss the following:

That schedule 8 be the Eighth schedule to the Bill.

Clause 51 stand part.

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

Who knows what adventures the Finance Bill will take us on today? Hopefully the sittings will be a little more sedate than last week’s.

I will first address clause 50 and schedule 8, and then move on to clause 51 relating to television and video games tax relief. Clause 50 brings in schedule 8, which introduces a new relief for orchestral concerts, provides for consequential amendments to other parts of taxes Acts as a result, and arranges for the commencement of the relief. First announced in the autumn of 2014, the new tax relief for orchestral production will allow qualifying companies engaged in the production of concerts to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender the losses for a payable tax credit. The additional deduction and the payable credit are calculated on the basis of European Economic Area core expenditure, up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure, and the payable tax credit is 25% of losses surrendered.

The credit is based on the company’s qualifying expenditure on the production of a qualifying orchestral concert. The expenditure must be on activities directly involved in producing a concert, such as rehearsal costs. Qualifying expenditure will not include indirect costs, such as financing, marketing and accountancy and legal fees, and at least 25% of the qualifying expenditure must be on goods or services that are provided from within the EEA. Concerts that have among their main purposes the advertising of goods and services or the making of a recording, or that include a competition, will not qualify for relief.

The stated objective of the measure is to support the creative sector and sustainably promote British culture. I certainly back that approach, not least because the BBC Philharmonic orchestra is based in my constituency and continues to attract many like-minded orchestral organisations to my city. On the machinery of the calculations, however, as the deduction of credit is calculated on the basis of EEA core expenditure, what assessment has the Minister made of amendments that might need to be made to the clause as a result of Britain’s exit from the EU?

I am pleased that the Government took the time to consult on the measure, and I note that the summary of responses published in March 2015 indicates that the industry welcomed the introduction of the relief. I am also pleased that the Government took heed of the Opposition’s concerns about the initial proposal exempting brass bands from the relief, effectively introducing a brass band tax, and that the Government subsequently included brass bands in the relevant definition in March 2015. The draft Bill and a policy paper were published in December 2015, and the Government did not make any substantive changes after the technical consultation exercise, so I am confident that the legislation will do what it says on the tin.

The measure is expected to cost the Exchequer £5 million in the financial year 2016-17 and £10 million every financial year thereafter until 2019-20. The Opposition agree with the principle of supporting the UK’s creative industries and therefore support clause 50 and schedule 8, but we are concerned that we keep creating relief after relief. Why does this targeted measure take the form of a tax relief, rather than a grant? Also, the industry is concerned that the relief does not support commercial music production, which is supported in other countries. Will the Minister clarify today, or indeed in a written response after today, what support is in place for this important industry?

Finally, what modelling have the Government done to ensure that the legislation is rigorous enough to prevent use of the relief for avoidance purposes? I understand that there were some issues about film tax relief and avoidance, and I am also concerned that the wording in proposed new section 1217RL to the Corporation Tax Act 2009 may not be very robust, especially with reference to those tax avoidance arrangements that fall within the ambiguous term, “understanding”; I am sure that the Minister will agree that by their very nature those will not be contractual. Will he confirm whether he has given thought to additional resources that Her Majesty’s Revenue and Customs might need if it is adequately to investigate such scenarios?

Clause 51 simply makes minor, consequential amendments to the Taxation of Chargeable Gains Act 1992 and the Corporation Tax Act 2010, substituting the words “section 1218B” for “section 1218”. The Opposition support television and video games tax relief, as we introduced it. We see no issue with this technical clause.

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

It is a great pleasure to serve under your chairmanship again this morning, Mr Howarth. I welcome the hon. Member for Salford and Eccles to the Committee. She has taken on a substantial workload in the past few days. Having had experience of performing her role of holding the Government to account in the Finance Bill, I recognise how challenging it can be. I wish her luck in that; if I may say so, she has made an excellent start, raising important points about this group of clauses.

I will start with a few words about clauses 50 and 51 and schedule 8, and then I will respond to the hon. Lady’s questions. The Government have supported our world-leading creative and cultural sectors, which have entertained millions worldwide while attracting significant investment into the United Kingdom. Clause 50 and schedule 8 provide further support by introducing a new corporation tax relief for the production of orchestral concerts. The Government recognise the cultural value and artistic importance of Britain’s orchestras. The relief is intended to support them in continuing to perform for a range of audiences, and in contributing to British culture.

Clause 51 makes minor consequential amendments to the Taxation of Chargeable Gains Act 1992 and the Corporation Tax Act 2010 as a result of the introduction of video games tax relief in the Finance Bill 2013. The change is not expected to have an impact on businesses that claim the relief.

The UK is home to some exciting, world-famous orchestras. The relief introduced by clause 50 recognises their artistic importance and cultural value. Its objective is to support orchestras so that they can continue to perform for a wide range of audiences. To deliver that support, the Government are building on the success of existing creative sector tax reliefs available for the production of film, high-end television and children’s television, video games, animation and theatre. Those reliefs have shown how targeted support can make a real difference, not only by promoting economic activity, but by promoting British culture and the way that the UK is viewed internationally.

Clause 50 will introduce a new corporation tax relief and payable tax credit for the qualifying costs of producing an orchestral performance. It will support a wide variety of ensembles and performances, from chamber orchestras to large brass bands playing music ranging from jazz to blues. It will allow production companies to claim a payable tax credit worth up to 25% of the cost of developing an orchestral concert, with effect from 1 April this year.

In 2013, minor consequential amendments were made to the Corporation Tax Act 2010, as some sections were renumbered following the introduction of video games tax relief in the Finance Bill 2013. Clause 51 makes a further consequential amendment to the Act and the Taxation of Chargeable Gains Act 1992; it is not expected to have an impact on any business claiming that relief.

The Government are grateful for the constructive and positive engagement with the industry since the policy was announced, and during consultation in 2015. That has enabled us to understand better how the orchestra industry operates, and to design a relief that will work across the sector. The director of the Association of British Orchestras, Mark Pemberton, has commented that the relief

“will make a big difference to our members’ resilience in these challenging times, helping them to continue to offer the very best in British music-making to audiences both here in the UK and abroad.”

The hon. Lady asked whether there was a risk of the relief being abused. Effective anti-avoidance rules are critical to the long-term success and stability of orchestra tax relief. Rules similar to those applied to the creative industry reliefs aim to prevent artificial inflation of claims. In addition, there will be a general anti-avoidance rule based on the GAAR denying relief where there are any tax-avoidance arrangements relating to the production—and, of course, HMRC will monitor for abuse once the regime has been introduced. On HMRC resourcing, I point the Committee in the direction of the £800 million announced in last year’s summer Budget, which provided further investment in HMRC to deal with avoidance and evasion measures more generally.

I come back to the point the hon. Lady raised about film tax relief and how that was abused. It is true that an earlier design of film tax relief was brought in by the previous Labour Government and was abused. That relief was abandoned by that Government, and the replacement model has been much more successful. It has provided the support that the film industry needs and benefits from, and that has helped to ensure that we have a thriving film industry without anything like the risks of abuse we saw formerly. In the measures that we have taken, we have learned from the previous approach.

The hon. Lady referred to making use of an EEA definition, and understandably asked what the implications are of the vote to leave the European Union. It is too early to say exactly how that will work. We are not sure what relationship we will have with the European Union, other than that we will be leaving it. It is quite possible that EEA definitions and so on will remain relevant, but we currently remain members of the EU and are considering legislation that takes effect in April, so it is necessary to comply with the rules as they stand. If it is necessary to review definitions, that is something we will have to look at, but that will depend on the future renegotiation.

The hon. Lady expressed the concern that perhaps we have too many tax reliefs. As the Chancellor made clear in the House of Commons yesterday, there is a place for reliefs, but our general and main focus has been on lowering corporation tax rates, and that continues to be the case. There is scope for using tax reliefs to support investment in growth through the tax system, and that is why we provide a range of tax reliefs and allowances. The Government have restricted a number of tax reliefs and allowances; for example, we have introduced a cap on income tax reliefs, restricted relief for buy-to-let landlords and capped the amount of losses through which banks can reduce their tax, so we have taken action on reliefs where we feel that their use is disproportionate to the benefits for the wider economy.

On orchestras, the Government are committed to supporting the arts through both spending programmes and tax reliefs. The orchestra tax relief is intended to complement current funding. It is specifically aimed at supporting orchestras in continuing to produce high-quality music that is enjoyed by a range of audiences. In those circumstances, we think it is justifiable. I hope that the clause has the support of Members in all parts of the Committee.

Question put and agreed to.

Clause 50 accordingly ordered to stand part of the Bill.

Schedule 8 agreed to.

Clause 51 ordered to stand part of the Bill.

Clause 52

Banking companies: excluded entities

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

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[The Chair]

With this it will be convenient to discuss clause 53 stand part.

[Rebecca Long Bailey]

Clauses 52 and 53 relate to the taxation of banking companies. Clause 52 amends the excluded entity test that forms part of the definition of a bank for tax purposes, and clause 53 makes provisions to restrict corporation tax loss relief.

Following the financial crash in 2008, specific taxes were imposed on the banking sector, and a definition of “banking companies” was required. The excluded entity test forms part of this definition. Clause 52 revises the legislation so that undertaking a second activity is possible, provided that the entity undertakes one of the specified regulated activities in the excluded entities test, and that the other activity, when considered by itself—that is, without taking into account the regulated activity that is specified in the excluded entities test—would not require the firm to be both an IFPRU 730K investment firm and a full-scope IFPRU firm as defined by reference to the Financial Conduct Authority handbook.

As the British Bankers Association has explained in far more articulate layman’s terms,

“Effectively there is a list of permitted activities which do not cause you to be treated as a bank and brought into the various bank-specific taxes, even if you meet all the other conditions. The change to the rules allows you to carry on more than one of those activities and still be excluded.”

This measure clarifies the rules and has been welcomed by industry. We therefore have no issue with agreeing the clause today. We also welcome clause 53, which, to quote the explanatory notes to the Bill,

“further restricts the proportion of a banking company’s annual taxable profit that can be offset by brought forward losses to 25%. The further restriction will apply to accounting periods beginning on or after 1 April 2016.”

At autumn statement 2014, it was announced that the amount of taxable profit that could be offset by banks’ historical carried-forward losses would be restricted to 50% from April 2015. However, this clause further restricts the proportion of a banking company’s annual taxable profit that can be offset by brought-forward losses from 50% to 25%. The restriction will remain subject to a £25 million allowance for building societies, and an exemption for losses incurred by new entrant banks. The Government estimate that this will generate over £2 billion in extra revenue between the current financial year and 2020-21. They also state that the measure should be revenue-neutral in the long run for any one bank, but the timing of the measure may well have negative implications for cash flow.

The British Bankers Association has indicated that further restricting bank losses from the financial crisis to 25% of profits rather than 50% primarily brings about a timing difference; it effectively accelerates payment of £2 billion in tax into this Parliament and out of the next one. Combined with the previous changes, it means £5 billion is being brought forward to this Parliament.

Can the Minister say why the Chancellor needed to accelerate this windfall in tax revenues? Was it part of his desperate attempts to ensure a budget surplus by 2020? I suspect it might have been. However, that argument is now redundant, given the recent suspension of that aim, and I am really glad that the Chancellor is finally listening to the experts and my hon. Friend the shadow Chancellor. Nevertheless, we welcome this new requirement on banking companies to increase their contribution to the Exchequer in the light of their role in causing the current economic situation.

I am glad that the Government are taking steps to address the casino banking sector. However, the policy should be seen in the wider context of the Government’s new settlement with financial services, as announced by the Chancellor, which includes the shift in emphasis from the bank levy to the banks’ tax surcharge as a result of lobbying by the sector, and watering down promised regulatory provisions in the Bank of England Act 2016.

In the 2016 Budget, the introduction of a general restriction on carried-forward losses was announced. That will come into effect on 1 April 2017, and the Opposition support it. In the meantime, we are more than happy to agree to the further restriction set out in clause 53.

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[Philip Boswell]

Thank you. In relation to new clause 3, the cut to the supplementary charge set out in clause 54 is of course welcome. It will assist in encouraging business investment, and I commend this initiative. However, the UK Government’s support for the oil and gas industry, as it pertains to the cut in the supplementary charge and in a more general sense, does not go far enough. The alterations made to the financing of the oil and gas sector fall significantly short of the fiscal and regulatory reforms necessary to ensuring a steady recovery in the ongoing North sea crisis. Despite the oil price continuing to rise—it is currently around $50 for Brent crude—instead of the extensive regulatory changes experienced over the past 15 years, stability and certainty are required to increase and retain investment as well as some incentivisation. I must admit to being further encouraged by the Minister’s statements in this respect.

However, the UK Government must consider all possibilities that could facilitate fresh investment in the oil and gas sector. These possibilities need not be restricted to fiscal support. For example, schemes such as Government guarantees ought to be explored. I would welcome such initiatives from the Minister. Has he considered further the following suggestions, made by the Scottish Government to the Chancellor in February 2016: removing fiscal barriers, specifically for exploration and enhanced oil recovery; implementing fiscal reforms to improve access to decommissioning tax relief and encourage late-life asset transfers—that would reduce costs and help prevent premature cessation of production, which is critical if marginal fields are to be garnered in future—and implementing additional non-fiscal support, such as Government loan guarantees, to sustain investment in the sector? I welcome his commitment to future legislation, especially in relation to cluster allowances, and look forward to its introduction. The industry has called for a comprehensive strategic review of tax rates and investment allowances. Based upon my own experience of working in the sector, I believe that this review would be beneficial, hence my support for new clause 3.

In relation to new clause 6, the UK continental shelf is one of the first large fields in the world to reach super-mature status. This poses both a challenge and an enormous amount of opportunity. While no reservoir on the planet has harvested more than 50% of its reserves, and most of the “sweet oil”—the high-quality, easy-to-reach oil found to date, which requires minimum processing—has gone from the sector, we need to look at improving recovery and the technology required to maximise output through enhanced oil recovery, in order to maximise profits from these fields, marginal or otherwise.

Decommissioning is a key part of the life cycle of UKCS assets. Some have now lasted for over three decades, which in many cases considerably exceeds their original design life. It is advances in technology and additional tie-backs—additional nearby fields that can be tied into the existing infrastructure—which would otherwise be unprofitable if they required a bespoke pipeline, that have made our oil and gas industry so successful.

Oil & Gas UK has estimated that between now and 2040 the total decommissioning spend in the North sea on offshore assets is set to rise by £46 billion. That represents a huge opportunity for domestic supply chains, not to mention extensive finds further west of Shetland and off the west coast of Scotland, which as yet have hardly been touched. The companies that operate on the UK continental shelf are respected all over the world, as it is there, in rough seas with heavy swells, that technology has advanced in conjunction with safety measures to ensure that the North sea, and Scotland in particular, are at the forefront of offshore construction and sub-sea technology, which is something I specialised in at BP, Shell and Premier Oil.

Given our well-deserved status in sub-sea technology and the maturity of some of our fields, there is a real opportunity to become world leaders in well plugging and decommissioning. The UK Government need to incentivise and support the oil and gas industry so that UKCS expertise can be further developed in the North sea and exported around the globe. That begins with ensuring that the oil and gas industry is working in a fiscal regime that is appropriate to the maturity of the field, which is what new clause 6 seeks to do. Although there are always new fields being discovered and technological advances rendering previously unprofitable reservoirs profitable, it is in the management of mature assets, via enhanced oil recovery and further tie-backs, that optimise power output and profitability, a strategy adopted by Statoil, our near neighbours, the Norwegian national oil and gas company, where every barrel counts. That has proved very successful and is a strategy we should copy.

The removal of fiscal and regulatory barriers is imperative to the advancement of an internationally competitive tax regime in the North sea, such as Norway’s incentive to remove taxation on exploration where the contractor or operator drills a duster. The Minister of State, Department of Energy and Climate Change, the hon. Member for South Northamptonshire (Andrea Leadsom), in response to a question from my hon. Friend the Member for Aberdeen South (Callum McCaig) in September 2015, committed to a proactive policy to encourage the development of a capable and competitive UK supply chain. That proactive approach needs to start sooner rather than later.

I welcome the Minister’s announcement on the oil and gas technology centre in Aberdeen, and on the decommissioning focus in Aberdeen and the offshore construction centre in the UK, but what steps have the Government taken to compensate oil and gas companies for exploration in the UKCS where a duster is drilled? For example, in Norway no tax is applied to such exploration. What tax incentives are in place, or are being considered, to encourage or subsidise decommissioning projects by UK companies, where new technologies, techniques or even tried and tested decommissioning methods are utilised on various types of assets?

In September 2015 Wood Mackenzie reported that low oil prices could render marginal fields economically unviable and lead to potential decommissioning of up to 140 fields within the next five years. I reiterate that Brent crude remains at around $50 a barrel. If prices continue to rise to the forecast $70 to $75 dollars a barrel after the summer, what tax incentives has the Minister put in place to identify and retain critical infrastructure across the UKCS?

With that in mind, new clause 6 calls for a review of the ways in which the tax regime could be changed to increase the competitiveness of UK-registered companies in bidding for supply chain contracts associated with the decommissioning of oil and gas infrastructure, with the aim of ensuring that we take advantage of this momentous opportunity.

[Rebecca Long Bailey]

With permission, I will speak to clauses 54 and 128 together before moving on to the remaining clauses and new clauses.

As we have heard, clauses 54 and 128 reduce the rates of the supplementary charge levied on the ring-fenced profits of companies involved in oil and gas production and petroleum revenue tax respectively. Companies involved in the exploration for and production of oil and gas in the UK are charged ring fence corporation tax and a supplementary charge. RFCT is calculated in the same way as corporation tax but with the addition of a ring fence so that losses on the mainland cannot be offset against profits from continental shelf fields. It is important to note that the rates of RFCT differ from those of corporation tax, and that the main rate of RFCT is 30%. The supplementary charge is an additional charge on a company’s ring-fenced profits. Clause 54 would reduce the supplementary charge from 20% to 10% from 1 January 2016.

Petroleum revenue tax, which was introduced in 1975, is a tax on the profits from oil and gas production from fields approved before 16 March 1993. The Finance Act 1993 reduced the rate from 75% to 50%, and it was then reduced to 35% from 1 January 2016. Clause 128 reduces the rate to zero, effectively abolishing the tax, as the Chancellor explained in his Budget speech. These two measures, taken together, are expected to cost the Treasury just over £1 billion between this financial year and 2021. The Government expect the reduction in rates to increase the post-tax profits of affected companies. This will make investment in oil and gas projects on the UK continental shelf more attractive, which will lead to additional production of oil and gas.

According to the tax information and impact note, and as the Minister confirmed today, there are around 200 companies extracting oil and gas in the UK. The industry directly supports 30,000 jobs, with another 250,000 in the supply chain. The decrease in the supplementary charge and the petroleum revenue tax will have a positive impact on company post-tax profits and result in lower instalment payments being made. We have already welcomed this support for the UK’s oil and gas industry. The industry trade body, Oil & Gas UK, has broadly welcomed this reduction in the headline rate of tax paid on UK oil and gas production, from a rate of 50% to 67.5% to a rate of 40% across all fields.

However, it is important to note that Oil & Gas UK has stated that the reduction in tax will help only those companies that are actually making a profit. It estimates that fewer than half a dozen companies are paying corporation tax this year. Indeed, the 2016 Budget stated that the tax receipts for these companies in 2015-16 were zero. A reduction in those tax rates is therefore welcome, but it is a long-term benefit.

Frankly, I think that more needs to be done in the short term. Stakeholders have said that they are more concerned about the lack of exploration activity. Only one well was drilled in the first quarter of 2016, so more has to be done to stimulate exploration. Can the Minister confirm whether any plans are in the pipeline—excuse the pun, but we have to get our fun somewhere in the Finance Bill—to stimulate exploration on the UK continental shelf in the short term?

I have also heard concerns from the industry about the late-life asset market. As we have heard today from Scottish Members, decommissioning is a normal part of a production cycle, but it is very expensive. I am aware that a tax relief is available, but it depends on a company’s tax history. If new companies buy older fields, they cannot access the relief, thus blocking late-life asset trade. Essentially, assets are not being sold on as they should be. The policy paper on the 2016 Budget states that the Government are open to exploring

“whether decommissioning tax relief could better encourage transfers of late-life assets”,

if “significant progress” on reducing the cost of decommissioning has been made. I worry that that is rather vague. I would therefore welcome clarification from the Minister on exactly what “significant progress” means.

Clauses 55 to 59 make minor changes to the investment allowance, cluster area allowance and onshore allowance. These three allowances provide relief by reducing the amount of ring-fenced profits on which the supplementary charge is due. Investment and cluster area allowances are given at a rate of 62.5%, and onshore allowance at 75%. Clauses 55 and 58 update the conditions that disqualify expenditure from generating investment allowance and cluster area allowance respectively. They expand the conditions following the extension of the allowance to include some leasing expenditure by secondary legislation not yet enacted. As we have heard from the Minister, this is to ensure that there are no gaps in the legislation that would permit these allowances to be generated twice. This will have effect for expenditure incurred on or after 16 March 2016.

The clauses are technical measures with which I have no issue whatever. However, stakeholders have expressed frustration that it has taken so long to lay before Parliament the regulations extending the allowances. According to Oil & Gas UK, the consultation on the draft statutory instrument concluded in January, and since then things have gone quiet. Could the Minister take this opportunity to confirm exactly when the draft SI will be laid before Parliament?

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To conclude, the changes made by clause 60 will ensure that the patent box complies with the new internationally agreed framework, while the amendments ensure that the benefit of the patent box is protected for claimant taxpayers. I therefore commend clause 60, schedule 9 and amendments 50 to121.

[Rebecca Long Bailey]

Clause 60 and schedule 9 make substantial changes to the patent box, which provides for a reduced rate of corporation tax on profits from patents and similar intellectual property. The changes in this clause ensure compliance with the new international framework developed by the OECD for preferential IP regimes as part of the base erosion and profit shifting project.

The changes mean that the amount of profit for an IP asset that qualifies for the reduced 10% rate of corporation tax available through the UK patent box will depend on the proportion of the asset’s development expenditure incurred by the company. According to the explanatory notes to the Bill, the amended rules will require profit for the purpose of the patent box to be calculated at the level of an IP asset—for example, the patent, product, or product family relying on an IP asset or assets. The profit will be adjusted to reflect the proportion of the development activity on the asset, product, or product category undertaken by the company.

As the Minister confirmed, the measure will have effect for new entrant companies to the patent box on or after 1 July 2016, and also for some IP assets acquired on or after 2 January 2016. The new rules are being phased in, which is welcome; the current patent box rules will apply to some companies and IP throughout a transitional period lasting until 2021. The new rules will apply to all companies and IP after 2021.

By way of background, in December 2009 the Labour Government announced that they would consult on introducing a patent box—a reduced rate of corporation tax applied to income from patents—from April 2013 at a possible annual cost of £1.3 billion. The coalition Government took up our proposals for a patent box in a wider review of corporate taxation launched in November 2010. The consultation document argued that a tax relief would be most effective if it focused on patents, and that it would be proportionate to charge corporation tax at just 10% on profits made from them.

The coalition Government confirmed their plans in the 2011 Budget, and published a further consultation document in June. Draft legislation for the Finance Bill 2012 was published in December, including provisions for the patent box. In Budget 2012, the Government confirmed the introduction of the patent box, which would be phased in over five years from 1 April 2013. They estimated that its cost would rise from £350 million in 2013-14 to £910 million by 2016-17.

The Opposition welcomed the introduction of the relief, while moving an amendment to require the Government to report on

“other opportunities to introduce targeted support for business”.

This tax reform was clearly strongly supported by business at the time, but was not uncontroversial. Concerns were raised by several European countries, as well as the European Commission, that reform might represent harmful tax competition, encouraging companies to shift the ownership of patents created in other countries to the UK.

In late 2013, the EU code of conduct group raised concerns about the UK patent box, leading to press speculation that the Government might have to substantively amend the new relief. In November 2014, the Government announced that the UK had agreed with Germany that preferential intellectual property regimes—of which the UK patent box is one—should not encourage harmful tax competition and, as a result, certain changes would be made to the UK regime from June 2016. Subsequently, in October 2015, HMRC launched a consultation on amending the patent box regime to take account of these concerns. In December 2015, draft legislation to give effect to this change was published along with an impact note on the measure.

The 2016 Budget specifically confirmed that

“The government will modify the operation of the Patent Box to comply with a new set of international rules created by the OECD, making the lower tax rate dependent on, and proportional to, the extent of research and development expenditure incurred by the company claiming the relief. This will come into effect on 1 July 2016.”

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[Mr Gauke]

I thank the hon. Lady for her broad support for the patent box. What we sought to do with the patent box—both when it was introduced and now—is ensure that we have incentives in our tax system to encourage internationally mobile activity. This is about bringing jobs and investment to the United Kingdom. It is not about artificial profit shifting. On the Government’s wider approach to the international tax system, we believe that there should be close alignment between economic activity, the profits that relate to that, and where those profits are taxed. That is why the UK has taken a leading role in the OECD’s base erosion and profit shifting process. Of course, any process like BEPS requires compromise, but the direction in which we believe the international tax system should go—towards closer alignment—is the one that BEPS has pursued, and we are pleased with the outcomes.

The changes to the patent box reflect a degree of compromise, but in essence, thanks to the patent box, the UK continues to offer an attractive place in which intellectual property may be developed. That is something that we wish to continue. I have to pick up on three of the points made by the hon. Member for Salford and Eccles. In the context of the EU, I will make a similar point to one I made earlier: we are still in the EU and a negotiation has yet to be undertaken to know where we stand exactly. There is also a wider point: when addressing the challenges of the international tax system, much of the legislation would apply whether we were in the EU or not, because the OECD BEPS process applies to all OECD countries. I do not think that anyone is proposing a referendum on whether we should leave the OECD—it is not one that I would welcome. In these circumstances, we expect to comply with the OECD standard, and that is very much our approach.

The hon. Lady also made a couple of technical points, the first of which was about what constitutes exceptional circumstances. For example, IP might have been purchased but turned out to be worth less, so that its contribution to the fraction is out of line with the cost. Obviously I cannot be exhaustive, but I hope that example is helpful in illustrating the types of things we are talking about. She also asked about tracking and tracing at an individual product level, and why that is not the approach we have taken. Companies will be able to track and trace at IP product level, so I hope that she is reassured, but I will write to her with further information.

Amendment 50 agreed to.

Amendments made: 51, in clause 60, page 94, line 38, leave out “either”.

Amendment 52, in clause 60, page 94, line 43, leave out “multi-IP” and insert “IP”.

Amendment 53, in clause 60, page 94, line 43, at end insert

“, or

(c) a sub-stream consisting of income properly attributable to a particular kind of IP process (a “process sub-stream”)”.

Amendment 54, in clause 60, page 95, line 1, leave out from “See” to second “and” and insert

“subsection (5) for the meaning of “IP item” and “IP process””.

Amendment 55, in clause 60, page 95, line 2, before “further” insert

“see subsections (5A) and (6) for”.

Amendment 56, in clause 60, page 95, line 2, at end insert “and process sub-streams”.

Amendment 57, in clause 60, page 95, line 12, at end insert—

“But see section 357BIA (which provides that certain amounts allocated to a relevant IP income sub-stream at Step 3 are not to be deducted from the sub-stream at this Step).”

Amendment 58, in clause 60, page 95, leave out lines 13 to 17.

Amendment 59, in clause 60, page 95, line 19, leave out from beginning to “deduct” in line 20.

Amendment 60, in clause 60, page 95, leave out lines 40 to 47 and insert—

“(5) In this section—

“IP item” means—

(a) an item in respect of which a qualifying IP right held by the company has been granted, or

(b) an item which incorporates one or more items within paragraph (a);

“IP process” means—

(a) a process in respect of which a qualifying IP right held by the company has been granted, or

(b) a process which incorporates one or more processes within paragraph (a).

(5A) For the purposes of this section two or more IP items, or two or more IP processes, may be treated as being of a particular kind if they are intended to be, or are capable of being, used for the same or substantially the same purposes.”

Amendment 61, in clause 60, page 95, line 48, leave out

“which is properly attributable to a multi-IP item”.

Amendment 62, in clause 60, page 95, line 49, after “sub-stream” insert “or process sub-stream”.

Amendment 63, in clause 60, page 96, line 5, at end insert—

‘( ) Any reference in this section to a qualifying IP right held by the company includes a reference to a qualifying IP right in respect of which the company holds an exclusive licence.”

Amendment 64, in clause 60, page 98, line 2, leave out “357A” and insert “357A(1)”.

Amendment 65, in clause 60, page 98, line 21, after first “income” insert “, finance income”.

Amendment 66, in clause 60, page 100, line 41, at end insert—

“357BIA Certain amounts not to be deducted from sub-streams at Step 4 of section 357BF

(1) This section applies where a company enters into an arrangement with a person under which—

(a) the person assigns to the company a qualifying IP right or grants or transfers to the company an exclusive licence in respect of a qualifying IP right, and

(b) the company makes to the person an income-related payment.

(2) A payment is an “income-related payment” for the purposes of subsection (1) if—

(a) the obligation to make the payment arises under the arrangement by reason of the amount of income the company has accrued which is properly attributable to the right or licence, or

(b) the amount of the payment is determined under the arrangement by reference to the amount of income the company has accrued which is so attributable.

(3) If the amount of the income-related payment is allocated to a relevant IP income sub-stream at Step 3 of section 357BF(2), the amount is not to be deducted from the sub-stream at Step 4 of section 357BF(2) unless the payment will not affect the R&D fraction for the sub-stream.”

Amendment 67, in clause 60, page 104, line 6, leave out from beginning to end of line 31 on page 105.

Amendment 68, in clause 60, page 108, line 13, at end insert—

“(3A) If an election made by the company under section 18A of CTA 2009 (election for exemption for profits or losses of company’s foreign permanent establishments) applies to the relevant period, expenditure incurred by the company during the period which meets conditions A and B—

(a) is not “qualifying expenditure on relevant R&D undertaken in-house”, but

(b) is “qualifying expenditure on relevant R&D sub-contracted to connected persons”,

so far as it is expenditure brought into account in calculating a relevant profits amount, or a relevant losses amount, aggregated at section 18A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign permanent establishments amount for the period.”

Amendment 69, in clause 60, page 108, line 22, leave out

“incorporated in a multi-IP item”

and insert

“—

(i) to which income in the sub-stream is attributable, or

(ii) which is incorporated in an item”.

Amendment 70, in clause 60, page 108, line 23, at end insert

“, or

(c) in a case where the sub-stream is a process sub-stream, relates to a qualifying IP right granted in respect of any process—

(i) to which income in the sub-stream is attributable, or

(ii) which is incorporated in a process to which income in the sub-stream is attributable.”

Amendment 71, in clause 60, page 109, line 8, leave out “65% of any” and insert “the”.

Amendment 72, in clause 60, page 109, leave out lines 10 to 15 and insert

“in making payments within subsection (2).

(2) A payment is within this subsection if—

(a) it is made to a person in respect of relevant research and development contracted out by the company to the person, and

(b) the company and the person are not connected (within the meaning given by section 1122).”

Amendment 73, in clause 60, page 109, line 15, at end insert—

“(3) If an election made by the company under section 18A of CTA 2009 (election for exemption for profits or losses of company’s foreign permanent establishments) applies to the relevant period, expenditure incurred by the company during the period in making payments within subsection (2)—

(a) is not “qualifying expenditure on relevant R&D sub-contracted to unconnected persons”, but

(b) is “qualifying expenditure on relevant R&D sub-contracted to connected persons”,

so far as it is expenditure brought into account in calculating a relevant profits amount, or a relevant losses amount, aggregated at section 18A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign permanent establishments amount for the period.”

Amendment 74, in clause 60, page 109, line 23, after “means” insert “the total of—

(a) any expenditure which is “qualifying expenditure on relevant R&D sub-contracted to connected persons” as a result of section 357BMB(3A) or 357BMC(3) (certain expenditure attributed to company’s foreign permanent establishments), and

(b) ”.

Amendment 75, in clause 60, page 109, line 23, leave out “65% of any” and insert “the”.

Amendment 76, in clause 60, page 109, leave out lines 25 to 30 and insert

“in making payments within subsection (2).

‘(2) A payment is within this subsection if—

(a) it is made to a person in respect of relevant research and development contracted out by the company to the person, and

(b) the company and the person are connected (within the meaning given by section 1122).”

Amendment 77, in clause 60, page 109, line 39, leave out from “company” to end of line 41 and insert

“in making during the relevant period payments within any of subsections (1A), (1B) and (1C).

(1A) A payment is within this subsection if it is made to a person in respect of the assignment by that person to the company of a relevant qualifying IP right.

(1B) A payment is within this subsection if it is made to a person in respect of the grant or transfer by that person to the company of an exclusive licence in respect of a relevant qualifying IP right.

(1C) A payment is within this subsection if—

(a) it is made to a person in respect of the disclosure by that person to the company of any item or process, and

(b) the company applies for and is granted a relevant qualifying IP right in respect of that item or process (or any item or process derived from it).

(1D) Where the company has incurred expenditure in making a series of payments to a person in respect of a single assignment, grant, transfer or disclosure, each of the payments in the series is to be treated for the purposes of this section as having been made on the date on which the first payment in the series was made.”

Amendment 78, in clause 60, page 110, line 2, leave out

“incorporated in a multi-IP item” and insert “—

(i) to which income in the sub-stream is attributable, or

(ii) which is incorporated in an item”.

Amendment 79, in clause 60, page 110, line 4, at end insert

“, or

(c) in a case where the sub-stream is a process sub-stream, a qualifying IP right granted in respect of a process—

(i) to which income in the sub-stream is attributable, or

(ii) which is incorporated in a process to which income in the sub-stream is attributable.”

Amendment 80, in clause 60, page 110, line 22, leave out “357BME” and insert “357BMD”.

Amendment 81, in clause 60, page 111, leave out from beginning of line 8 to “, and” in line 11 and insert

“in each of subsections (1A), (1B) and (1C) the word “relevant” were omitted”.

Amendment 82, in clause 60, page 112, line 25, leave out “357A” and insert “357A(1)”.

Amendment 83, in clause 60, page 112, line 46, at end insert—

“Small claims treatment

357BNA Small claims treatment

(1) This section applies where—

(a) a company carries on only one trade during an accounting period,

(b) section 357BF applies for the purposes of determining the relevant IP profits of the trade for the accounting period, and

(c) the qualifying residual profit of the trade for the accounting period does not exceed whichever is the greater of—

(i) £1,000,000, and

(ii) the relevant maximum for the accounting period.

(2) The company may make any of the following elections for the accounting period—

(a) a notional royalty election (see section 357BNB),

(b) a small claims figure election (see section 357BNC), and

(c) a global streaming election (see section 357BND).

This is subject to subsections (3) and (4).

(3) The company may not make a notional royalty election, a small claims figure election or a global streaming election for the accounting period if—

(a) the qualifying residual profit of the trade for the accounting period exceeds £1,000,000,

(b) section 357BF applied for the purposes of determining the relevant IP profits of the trade for any previous accounting period beginning within the relevant 4-year period, and

(c) the company did not make a notional royalty election, a small claims figure election or (as the case may be) a global streaming election for that previous accounting period.

(4) The company may not make a small claims figure election for the accounting period if—

(a) the qualifying residual profit of the trade for the accounting period exceeds £1,000,000,

(b) section 357C or 357DA applied for the purposes of determining the relevant IP profits of the trade for any previous accounting period beginning within the relevant 4-year period, and

(c) the company did not make an election under section 357CL for small claims treatment for that previous accounting period.

(5) In subsections (3) and (4) “the relevant 4-year period” means the period of 4 years ending with the beginning of the accounting period mentioned in subsection (1)(a).

(6) For the purposes of this section, the “qualifying residual profit” of a trade of a company for an accounting period is the amount which (assuming the company did not make an election under this section) would be equal to the aggregate of the relevant IP income sub-streams established at Step 2 in section 357BF(2) in determining the relevant IP profits of the trade for the accounting period, following the deductions from those sub-streams required by Step 4 in section 357BF(2) (ignoring the amount of any sub-stream which is not greater than nil following those deductions).

(7) For the purposes of this section, the “relevant maximum” for an accounting period of a company is—

(a) in a case where no company is a related 51% group company of the company in the accounting period, £3,000,000;

(b) in a case where one or more companies are related 51% group companies of the company in the accounting period, the amount given by the formula—



where N is the number of those related 51% group companies in relation to which an election under section 357A(1) has effect for the accounting period.

(8) For an accounting period of less than 12 months, the relevant maximum is proportionally reduced.

357BNB Notional royalty election

(1) Subsection (2) applies where a company has made a notional royalty election for an accounting period under section 357BNA(2)(a).

(2) In its application for the purposes of determining the relevant IP profits of the trade of the company for the accounting period, section 357BHA (notional royalty) has effect as if—

(a) in subsection (2) for “the appropriate percentage” there were substituted “75%”, and

(b) subsections (3) to (6) were omitted.”

357BNC Small claims figure election

(1) Subsection (2) applies where a company has made a small claims figure election for an accounting period under section 357BNA(2)(b).

(2) In its application for the purposes of determining the relevant IP profits of the trade of the company for the accounting period, section 357BF(2) (steps for calculating relevant IP profits) has effect as if in Step 6—

(a) for “marketing assets return figure” there was substituted “small claims figure”, and

(b) for “(see section 357BL)” there was substituted “(see section 357BNC(3))”.

(3) Subsections (4) to (9) apply for the purpose of calculating the small claims figure for a relevant IP income sub-stream established at Step 2 in section 357BF(2) in determining the relevant IP profits of a trade of a company for an accounting period.

(4) If 75% of the qualifying residual profit of the trade for the accounting period is lower than the small claims threshold, the small claims figure for the sub-stream is 25% of the amount of the sub-stream following Step 4 in section 357BF(2).

(5) If 75% of the qualifying residual profit of the trade for the accounting period is higher than the small claims threshold, the small claims figure for the sub-stream is the amount given by—



where—

A is the amount of the sub-stream following the deductions required by Step 4 in section 357BF(2),

QRP is the qualifying residual profit of the trade of the company for the accounting period, and

SCT is the small claims threshold.

(6) If no company is a related 51% group company of the company in the accounting period, the small claims threshold is £1,000,000.

(7) If one or more companies are related 51% group companies of the company in the accounting period, the small claims threshold is—



where N is the number of those related 51% group companies in relation to which an election under section 357A(1) has effect for the accounting period.

(8) For an accounting period of less than 12 months, the small claims threshold is proportionately reduced.

(9) Subsection (6) of section 357BNA (meaning of “qualifying residual profit”) applies for the purposes of subsection (4) and (5) of this section.

357BND Global streaming election

(1) Subsection (2) applies where a company has made a global streaming election for an accounting period under section 357BNA(2)(c).

(2) In its application for the purpose of determining the relevant IP profits of the trade of the company for the accounting period, this Chapter has effect with the following modifications.

(3) In subsection (2) of section 357BF (relevant IP profits)—

(a) omit Step 2,

(b) in Step 3 for “each of the relevant IP income sub-streams” substitute “the relevant IP income stream”,

(c) in Step 4—

(i) in the words before paragraph (a), for “each” substitute “the”,

(ii) for “sub-stream”, in each place it occurs, substitute “stream”,

(d) in Step 6—

(i) at the beginning insert “If the relevant IP income stream is greater than nil following Step 4,”,

(ii) for the words from “each” to “Step 4” substitute “the stream”,

(iii) for “sub-stream”, in the second place it occurs, substitute “stream”,

(e) in Step 7—

(i) for “each relevant IP income sub-stream” substitute “the relevant IP income stream”,

(ii) for “sub-stream”, in the second place it occurs, substitute “stream”,

(f) omit Step 8, and

(g) in Step 9 for “given by Step 8” substitute “of the relevant IP income stream following Step 7”.

(4) In subsection (3) of that section for “given by” substitute “of the relevant IP income stream following the Steps in”.

(5) In subsection (4) of that section for “given by” substitute “of the relevant IP income stream following the Steps in”.

(6) Omit subsections (5), (5A) and (6) of that section.

(7) In section 357BIA(3) (certain amounts not to be deducted from sub-streams at Step 4 of section 357BF)—

(a) for “a relevant IP income sub-stream” substitute “the relevant IP income stream”;

(b) for “sub-stream”, in the second and third places it occurs, substitute “stream”.

(8) In section 357BJ (routine return figure)—

(a) for “sub-stream”, in each place it occurs, substitute “stream”, and

(b) in subsection (1) for “Step 2” substitute “Step 1”.

(9) In section 357BL (marketing asset return figure) for “sub-stream”, in each place it occurs, substitute “stream”.

(10) In section 357BLA (notional marketing royalty)—

(a) for “sub-stream”, in each place it occurs, substitute “stream”, and

(b) in subsection (1) for “Step 2” substitute “Step 1”.

(11) In section 357BLB (actual marketing royalty) for “sub-stream”, in each place it occurs, substitute “stream”.

(12) In section 357BM (R&D fraction: introduction)—

(a) for “sub-stream” (in each place it occurs) substitute “stream”, and

(b) in subsection (1) for “Step 2” substitute “Step 1”.

(13) In section 357BMA(1) (R&D fraction) for “sub-stream” substitute “stream”.

(14) In section 357BMB(4) (qualifying expenditure on relevant R&D undertaken in-house) for the words after “1138)” substitute “which relates to a qualifying IP right to which income in the stream is attributable”.

(15) In section 357BME(2) (qualifying expenditure on acquisition of relevant qualifying IP rights) for the words from “means” to the end substitute “means a qualifying IP right to which income in the stream is attributable”.

(16) In section 357BMG (cases where the company is a new entrant with insufficient information about pre-enactment expenditure) for “sub-stream”, in each place it occurs, substitute “stream”.

(17) In section 357BMH (R&D fraction: increase for exceptional circumstances) for “sub-stream”, in each place it occurs, substitute “stream”.

(18) In section 357BNC (small claims figure election)—

(a) for “sub-stream”, in each place it occurs, substitute “stream”;

(b) in subsection (3) for “Step 2” substitute “Step 1”.”

Amendment 84, in clause 60, page 113, line 17, at end insert—

“( ) Where section 357BF applies by reason of this section for the purposes of determining the relevant IP profits of a trade of a company for an accounting period, the company may not make a global streaming election for the accounting period under section 357BNA(2)(c).”

Amendment 85, in clause 60, page 113, leave out lines 34 to 44 and insert—

“(a) the company and the person who assigned the right or granted the licence were connected at the time of the assignment or grant,

(b) the main purpose, or one of the main purposes, of the assignment of the right or the grant of the licence was the avoidance of a foreign tax,

(c) the person who assigned the right or granted the licence was not within the charge to corporation tax at the time of the assignment or grant, and

(d) the person who assigned the right or granted the licence was not liable at the time of the assignment or grant to a foreign tax which is designated for the purposes of this section by regulations made by the Treasury.”

Amendment 86, in clause 60, page 114, line 1, leave out “(9)(b)” and insert “(8)(d)”.

Amendment 87, in clause 60, page 114, line 4, at end insert—

“( ) Regulations may not be made under subsection (8)(d) after 31 December 2016.”

Amendment 88, in clause 60, page 114, line 21, leave out “(b)” and insert “(c)”.

Amendment 89, in clause 60, page 114, line 24, leave out

“and each product sub-stream”

and insert

“, each product sub-stream and each process sub-stream”.

Amendment 90, in clause 60, page 114, line 32, leave out

“and product sub-streams”

and insert

“, each of the product sub-streams and each of the process sub-streams”.

Amendment 91, in clause 60, page 114, line 42, leave out “a multi-IP item” and insert

“an IP item or IP process”.

Amendment 92, in clause 60, page 114, line 44, after “sub-stream” insert “or process sub-stream”.

Amendment 93, in clause 60, page 114, line 45, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 94, in clause 60, page 115, line 1, after “item” insert “or process”.

Amendment 95, in clause 60, page 115, line 4, after “item” insert “or process”.

Amendment 96, in clause 60, page 115, line 8, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 97, in clause 60, page 115, line 9, leave out “item or items” and insert “items or processes”.

Amendment 98, in clause 60, page 115, line 11, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 99, in clause 60, page 115, line 13, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 100, in clause 60, page 115, line 17, after “sub-stream” insert “or process sub-stream”.

Amendment 101, in clause 60, page 115, line 18, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 102, in clause 60, page 115, line 20, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 103, in clause 60, page 115, line 24, after “sub-stream” insert “or process sub-stream”.

Amendment 104, in clause 60, page 115, line 26, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 105, in clause 60, page 115, line 27, after “sub-stream” insert “or process sub-stream”.

Amendment 106, in clause 60, page 115, line 27, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 107, in clause 60, page 115, line 29, after “items” insert “or processes”.

Amendment 108, in clause 60, page 115, line 31, leave out “a multi-IP” and insert

“an IP item or IP process”.

Amendment 109, in clause 60, page 115, line 35, after “items” insert “or processes”

Amendment 110, in clause 60, page 115, line 35, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 111, in clause 60, page 115, line 38, after “items” insert “or processes”.

Amendment 112, in clause 60, page 115, line 38, leave out “multi-IP item” and insert

“IP item or IP process”.

Amendment 113, in clause 60, page 115, line 40, at end insert—

“( ) In section 357FB (tax advantage schemes)—

(a) in subsection (2)(b) (list of ways by which deductions can be inflated)—

(i) omit “or” at the end of sub-paragraph (ii), and

(ii) after sub-paragraph (iii) insert “, or

(iv) an R&D fraction (see subsection (4A)) being greater than it would be but for the scheme.”, and

(b) after subsection (4) insert—

“(4A) The reference in subsection (2)(b)(iv) to an R&D fraction is a reference to such a fraction as is mentioned at Step 7 of section 357BF(2).””

Amendment 114, in clause 60, page 115, line 40, at end insert—

“( ) After section 357GC insert—

“Transferred trades

357GCA Application of this Part in relation to transferred trades

(1) Where—

(a) a company (“the transferor”) ceases to carry on a trade which involves the exploitation of a qualifying IP right (“the relevant qualifying IP right”),

(b) the transferor assigns the relevant qualifying IP right, or grants or transfers an exclusive licence in respect of it, to another company (“the transferee”), and

(c) the transferee begins to carry on the trade,

the following provisions apply in determining under this Part the relevant IP profits of the trade carried on by the transferee.

(2) The transferee is to be treated as not being a new entrant if—

(a) an election under section 357A(1) has effect in relation to the transferor on the date of the assignment, grant or transfer mentioned in subsection (1)(b) (“the transfer date”), and

(b) the first accounting period of the transferor for which that election had effect began before 1 July 2016.

(3) The relevant qualifying IP right is to be treated as being an old qualifying IP right in relation to the transferee if by reason of section 357BP it is an old qualifying IP right in relation to the transferor.

(4) Expenditure incurred prior to the transfer date by the transferor which is attributable to relevant research and development undertaken by the transferor is to be treated for the purposes of section 357BMB as if it is expenditure incurred by the transferee which is attributable to relevant research and development undertaken by the transferee.

(5) Expenditure incurred prior to the transfer date by the transferor in making a payment to a person in respect of relevant research and development contracted out by the transferor to that person is to be treated for the purposes of sections 357BMC and 357BMD as if it is expenditure incurred by the transferee in making a payment to that person in respect of relevant research and development contracted out by the transferee to that person.

(6) Expenditure incurred prior to the transfer date by the transferor in making a payment in connection with the relevant qualifying IP right which is within subsection (1A), (1B) or (1C) of section 357BME is to be treated for the purposes of that section as if it is expenditure incurred by the transferee in making a payment in connection with that right which is within one of those subsections.

(7) Expenditure incurred by the transferee in making a payment to the transferor in respect of the assignment, grant or transfer mentioned in subsection (1)(b) is to be ignored for the purposes of section 357BME.

(8) In this section—

“trade” includes part of a trade, and

“relevant research and development” means research and development which relates to the relevant qualifying IP right.

(9) For the purposes of this section research and development “relates” to the relevant qualifying IP right if—

(a) it creates, or contributes to the creation of the invention,

(b) it is undertaken for the purpose of developing the invention,

(c) it is undertaken for the purpose of developing ways in which the invention may be used or applied, or

(d) it is undertaken for the purpose of developing any item or process incorporating the invention.””

Amendment 115, in clause 60, page 116, line 9, for “357A” substitute “357A(1)”.—(Mr Gauke.)

Clause 60, as amended, ordered to stand part of the Bill.

Schedule 9

Profits from the exploitation of patents etc: consequential

Amendments made: 116, in schedule 9, page 330, line 30, at end insert—

“1A In section 357B (meaning of “qualifying company”), in subsection (3)(b)(ii), for “section 357A” substitute “section 357A(1)”.”

Amendment 117, in schedule 9, page 331, line 20, at end insert—

“( ) In subsection (6), in paragraph (a)(ii) of the definition of “relevant accounting period”, for “section 357A” substitute “section 357A(1)”.”

Amendment 118, in schedule 9, page 331, line 24, leave out paragraph 9 and insert—

“9 (1) Section 357CL (companies eligible to elect for small claims treatment) is amended as follows.

(2) In subsection (1) for “elect” substitute “make an election under this section”.

(3) In subsection (6) for “section 357A” substitute “section 357A(1)”.”

Amendment 119, in schedule 9, page 332, line 16, at end insert—

“13A In section 357EB (allocation of set-off amount within a group) in subsection (3)(a) for “section 357A” substitute “section 357A(1)”.

13B In section 357ED (company ceasing to carry on trade etc) in subsection (2)(c) for “section 357A” substitute “section 357A(1)”.”

Amendment 120, in schedule 9, page 332, line 18, at end insert—

“14A In section 357FB (tax advantage schemes) in subsection (4)(b) for “section 357A” substitute “section 357A(1)”.

14B (1) Section 357G (making an election under section 357A) is amended as follows.

(2) In the heading, for “section 357A” substitute “section 357A(1) or (11)(b)”.

(3) In subsection (1) for “section 357A” substitute “section 357A(1) or (11)(b)”.

14C (1) Section 357GA (revocation of election made under section 357A) is amended as follows.

(2) In the heading, for “section 357A” substitute “section 357A(1)”.

(3) In subsection (1) for “section 357A” substitute “section 357A(1)”.

(4) In subsection (5) for “section 357A” substitute “section 357A(1)”.”

Amendment 121, in schedule 9, page 332, line 28, at end insert—

“16A In section 357GE (other interpretation), in subsection (1), at the appropriate place insert—

“payment” includes payment in money’s worth,”.”— (Mr Gauke.)

Schedule 9, as amended, agreed to.

Clause 61

Power to make regulations about the taxation of securitisation companies

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

[Rebecca Long Bailey]

I want to say a few words about the clause; although it might not seem exciting at first glance, it really is, so listen carefully to what I am about to say.

Three principal themes underpin the Labour party’s approach to the provisions in clauses 61 and 64, which we will come to later—in particular, those relating to the taxation of financial products. First, we need to ensure that, when the UK leaves the EU, its arrangements for regulating taxation and financial activity serve the country best and protect it from abusive practices such as tax avoidance and financial crime. Those arrangements must demonstrate the highest levels of transparency and probity.

Secondly, we need to ensure that the infrastructure supporting the UK economy accords with international standards on taxation and regulation, including the relevant OECD and International Accounting Standards Board models, which are applicable to this Bill. Finally, we need to secure Britain’s place in the world by ensuring that it maintains the highest international standards.

The Bill’s proposals on the taxation of financial instruments may appear on the surface to be merely technical, but they raise a number of significant questions about the organisation of our economy and infrastructure in the near future. Clause 61 appears to be a simple extension of the corporation tax treatment of securitisation companies to the taxes Acts generally. However, in 2008 the non-existent regulation of securitisation structures amplified a medium-sized storm in the US real estate market, and it became a fully-fledged banking crisis. I would like to ask the Minister how closely HMRC and the Treasury have considered the risks that the provision will be used for tax avoidance purposes.

Experience suggests that, if we alter the basis on which tax is levied, financial institutions will attempt to create derivative products that generate losses for tax purposes on, before and after the transition between the two tax codes, as we saw in the case of Inland Revenue Commissioners v. Scottish Provident Institution 2003 and many other cases in Hudson’s “The Law on Financial Derivatives”.

Just in the reported cases, there are several examples of financial institutions using slippery derivative products, for want of a better phrase, to avoid tax liability, such as Prudential plc v. Revenue and Customs Commissioners 2008. In that case, Chancellor Morritt held that banks should not be entitled to dictate the tax consequences of their transactions by attributing particular descriptions to them. That sort of tax avoidance, using changes in the tax treatment of products, has been criticised by Professor Alastair Hudson as

“a veritable industry in off-the-peg tax avoidance schemes”

in his book “The Law on Financial Derivatives”. Has the Minister considered the misdescriptions that might be possible under this provision?

To return to the particulars of clause 61, securitisation structures operate by transferring assets—whether subprime mortgages, credit card receivables or similar cash flows—into off balance sheet special purpose vehicles. Ordinarily, the profits, or cash flows, received from those assets pass through the special purpose vehicle to the investors who have acquired bonds in the special purpose vehicle. Usually, the residual amounts—the focus of clause 61—that are left in the special purpose vehicle are small, compared with the sums paid to the investors. However, as with all such artificial financial structures, it is possible to manipulate those amounts.

If the residual amounts held by special purpose vehicles are to be saved from withholding tax, as clause 61 proposes, and are to be treated in a different manner for tax purposes—although the provision does not make plain exactly what the different tax treatment will be—that makes it possible for the payment flows through a special purpose vehicle to be raised artificially so that larger sums could benefit from this different tax treatment.

Will the Minister confirm what is stopping an unscrupulous financial institution involved in the off-the-peg industry of tax avoidance derivatives from passing large sums—otherwise subject to withholding tax as payments of interest, for example—through special purpose vehicles? Have the Government considered in detail how such cash flows should be treated to prevent artificial or abusive tax avoidance?

Furthermore, securitisation products, in the form of collateralised debt obligations, use complex derivatives as part of their structure—namely, credit default swaps. The purpose of credit default swaps has always been to permit two things: first, speculation on the creditworthiness of companies and Governments issuing bonds; and secondly, a form of artificial insurance. A feature of credit default swaps and all other credit derivatives is that they are flexible tools—so flexible, in fact, that they are ideal for manipulating tax statutes for tax avoidance purposes.

Professor Alastair Hudson has described the inherent flexibility of financial derivatives in his book “The Law on Financial Derivatives”, which I recommend to the Minister for his summer holidays. Professor Hudson states that

“different legal structures and different pricing structures can generate different commercial and structural results out of substantially similar subject matter”.

As he shows, it is possible for options contracts to be reorganised as swaps, and vice versa, so the possibilities for tax avoidance are endless. Consequently, it would be simple for financial institutions to repackage their payment obligations to achieve whatever characteristics are most helpful for tax purposes. I fear that clause 61 is really only the tip of the iceberg. There is a serious general point behind the specificity of my concerns about the clause.

--- Later in debate ---

[The Chair]

With this it will be convenient to discuss that schedule 10 be the Tenth schedule to the Bill.

[Rebecca Long Bailey]

The same general points that I made about clause 61 broadly apply to this clause. The United Kingdom finds itself occupying a new place in the world and the provisions in the clause relate to the difficult business of double tax treaties. Such treaties currently need to be negotiated on a bilateral basis with countries that are outside large trading blocs such as the EU. They are therefore a model for the sort of issues that will be vital for the UK outside the EU.

There are model double tax treaties created by the OECD, which will guide our work. A future Labour Government would be outward looking in forging alliances of the sort possible under the OECD umbrella to create viable tax regulation and financial regulation internationally. However, there are some contexts in which the provisions in schedule 10, which the clause introduces, appear to be a little vague. For example, proposed new section 259BD(8) prevents a company from being “under taxed”, by identifying the highest rate at which tax is charged and asking whether that is lower than the company’s full marginal rate of tax should have been.

That is to be done by taking into account, on a “just and reasonable basis”, any credit for underlying tax. The reference to just and reasonable appears somewhat vague when contrasted with, for example, provisions governing international accounting standards in earlier clauses. As a survivor of the legal world, will the Minister confirm what “just and reasonable” is intended to mean and how HMRC will use that broad measuring stick in practice? Does he think that is a sufficiently clear mechanism for identifying whether sufficient tax has been paid, or do the Government simply seek to grant HMRC as much slack as they can?

[Mr Gauke]

Clause 62 and schedule 10 make changes to tackle multinationals that avoid UK corporation tax through cross-border business structures known as hybrid mismatch arrangements. We are building on the new rules announced at autumn statement 2014 and extending them, not least so that they also cover overseas branches, leading the way on implementing international best practice in this area.

The changes will neutralise the tax effect of hybrid mismatch arrangements and effect the recommendations of action 2 of the G20-OECD base erosion and profit-shifting project. In addition, they will neutralise the tax effect of hybrid mismatch arrangements involving permanent establishments. That means that the measure will tackle aggressive tax planning where, within a multinational group, either one party gets a tax deduction for a payment while the other party does not have a taxable receipt or there is more than one tax deduction for the same expense. The aim is to eliminate the unfair tax advantages that arise from the use of hybrid entities, hybrid instruments, dual resident companies and permanent establishments. That will encourage businesses to adopt less complicated cross-border investment structures.

In 2013 the OECD and the G20 countries adopted a 15-point action plan to address base erosion and profit shifting. BEPS refers to tax-planning strategies that exploit gaps and mismatches in the tax rules of different countries to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but where the tax rates are low, resulting in little or no overall corporate tax being paid. The BEPS action plan is aimed at ensuring that profits are taxed where the economic activities generating the profits are performed, and where value is created.

--- Later in debate ---

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

[Rebecca Long Bailey]

I will be brief. The provision raises some seemingly technical questions on the taxation of loan relationships and derivatives—concepts that are closely linked in tax law. As with the other clauses, it requires deeper thought as the UK prepares to leave the EU. What precise changes, which HMRC has presumably observed in the financial markets, have prompted the reforms proposed in clause 63?

The role of insurance companies, particularly naive participants such as AIG before 2008, in derivatives markets must give us all pause for thought when considering how to regulate and tax them in the future. Those enormous insurance companies are involved in vital financial services for our citizens as well as extraordinarily complex financial instruments, such as credit default swaps. We must therefore be concerned that the reforms to the treatment of insurance companies are considered necessary. Will the Minister confirm what work the Treasury has done on assessing the future treatment of derivatives and similar markets and their impact on the UK economy? It is important for the future health of the UK economy that careful analysis of those markets is conducted as we prepare to leave the EU.

[Mr Gauke]

Clause 63 makes changes to ensure that corporation tax rules applying to insurance companies carrying on long-term business produce the appropriate policy results. A new regime for the taxation of life insurance companies was introduced in the Finance Act 2012 and was widely welcomed. However, putting that into practice has uncovered some specific issues that must be resolved for the regime to operate smoothly and effectively. HMRC has worked with industry to identify those issues, which relate to three main areas: intangible fixed assets, deemed income and trading losses.

Clause 63 will make minor technical changes to that legislation to ensure that it operates as intended. The cost to the Exchequer is negligible. For intangible fixed assets, clause 63 will allow debits to be set against the income for the accounting period in which they are incurred. That will bring the rules into line with those for companies that are not life insurers. For deemed income, clause 63 will prevent unused interest expenses from being set against the minimum profits charge in any circumstances. That will mean that any such charge is always fully taxed. For trading losses, clause 63 will mean that their use is no longer restricted to a company’s net position on its derivative contracts in the same period, which will bring stability into that calculation. The changes are relatively minor in nature and will have a small impact on insurers’ profits. However, they are important as they will ensure that the legislation delivers the intended policy objectives.

As I said, the Finance Act 2012 introduced a fundamental rewrite of life insurance company taxation. Such major reforms are always likely to necessitate some minor adjustments when put into practice and HMRC has worked with the industry to identify a handful of issues where the legislation does not work as intended. The changes will simply ensure the legislation operates as initially intended, which is why we are making them. Of course, all these matters are kept under review. Again, the hon. Lady raises the point about EU membership and so on. I am not sure I have much to add to what I previously said on that matter. I hope that the clause stands part of the Bill.

Question put and agreed to.

Clause 63 accordingly ordered to stand part of the Bill.

Ordered, That further consideration be now adjourned. —(Mel Stride.)

UK Economy

Rebecca Long Bailey Excerpts

Wednesday 29th June 2016 Commons Chamber

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

It is a pleasure to be debating with the Chief Secretary to the Treasury in the first of what I hope will be many such debates. I thank the Chancellor, who is no longer in the Chamber, for his kind words.

There have been some fantastic speeches in this debate, and I want to run through some of the main issues that have been raised. The hon. Member for Dundee East (Stewart Hosie) highlighted concerns about the leave campaign’s lack of a plan. The hon. Member for South Suffolk (James Cartlidge) stated that, sadly, some of the remain campaign’s predictions were coming true. I welcome the fact that he echoed the sentiments about a cross-party approach. He said that this is bigger than any leader, and it certainly is.

My right hon. Friend the Member for Birmingham, Hodge Hill (Liam Byrne), whose comments I welcome, stated that he wanted to put decency back into democracy. The hon. Member for Thirsk and Malton (Kevin Hollinrake) feared for the international house of cards that Britain’s exit could cause to collapse. My hon. Friend the Member for Ilford North (Wes Streeting), who made a fantastic speech, echoed the risks that jobs would be moved, that communities in deprived areas would struggle to obtain investment, and that “Project Fear” would prove to be “Project Fact”. The hon. Member for Bexhill and Battle (Huw Merriman) said:

“We are where we are and…we…have to lead from the front”.

I could not agree more.

The hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin) told us the terrible and harrowing story of his constituents who have left to go to France following the result of the European referendum—we hope that we can coax them back again—and he highlighted the problems faced by SMEs in trade. The hon. Member for Ross, Skye and Lochaber (Ian Blackford) made a very passionate speech. He stated that we should not kick the legs from under stability and highlighted the fact that falling markets affect the pensions of everyone. Finally, the hon. Member for North East Fife (Stephen Gethins) echoed the comments about how people from the EU have enriched his local economy. He wanted to state that their contribution was valued, a sentiment that is certainly shared by Members on both sides of the House.

As my hon. Friend the shadow Chancellor outlined in opening the debate, the decision to leave the EU poses considerable risks to the UK economy. The financial markets are in turmoil, sterling remains volatile, the UK’s triple A credit rating has been lost, and employers in some sectors have already started to discuss moving jobs out of Britain. This is very worrying, but we can turn it around. To do so, we need political and economic stability. We now need all parties to put their political interests aside and work together in the interest of their nation’s economy. I have enjoyed the tone of today’s debate, which has been broadly in agreement with that sentiment.

[Stephen Gethins]

I thank the hon. Lady for her comments. Will she join me in welcoming the fact that the Labour party, the Liberal Democrats and the Green party in Scotland have given the Scottish Government a mandate to negotiate with the European Union about Scotland’s continued membership of the EU, given the overwhelming vote?

[Rebecca Long Bailey]

I think that is really an issue for the Scottish Government. I am sure it will be the subject of many debates in the coming weeks, and I hope we will debate it further in this House.

On where we are now, I do not share the Chancellor’s assurances that our economy is now shockproof. He did not fix the roof while the sun was shining—quite the opposite: he sold it off. The growth we have heard about is largely built on a swelling bubble of household borrowing and an increase in poorly paid, insecure jobs. I was pleased to hear that his emergency Budget has been shelved for the time being. However, there remains a high probability that austerity measures will be introduced later in the year, imposed by a new Conservative Prime Minister who could be even more ideologically to the right than his or her predecessor. Such an approach, based on cuts and under-investment, has taken hold despite the fact that economists the world over agree that it is economic nonsense to cut Government spending when the economy may be heading towards recession. The most vulnerable will suffer, and our communities will snap under the strain of further public sector cuts. Quite frankly, people cannot take any more.

It is not hard to understand some of the reasons why vast swathes of people in this country voted so passionately in last week’s referendum—it is no wonder that people were angry with the political elite when their financial situations have worsened rather than improved. On doorsteps in my constituency, which has suffered from decades of industrial decline, I could feel the anger from those who have been left behind. They were right to be angry—angry that our hospitals and schools are in a state of crisis and starved of funding; angry that many people cannot get a home; and angry that our public services are being cut so that the safety net on which they rely is eroded. People rightly wanted something or someone to blame for that, but sadly that was confused in the rhetoric of some of the referendum campaigns. A hornets nest was stirred up with scaremongering about migration, rather than a debate on the core issue of why our economy was not working and how the EU affected that.

We must ensure that migrants living in Britain know that they are welcome, especially in the light of the racist attacks and abuse that have been reported since the referendum. I wholeheartedly echo the Chancellor’s comments that such behaviour is not British—that is not what makes Britain the great nation it is. Such disillusionment with the political establishment took root long before the EU referendum, and 1979—the year I was born—heralded the biggest change in economic thought that the country has ever seen. British manufacturing, and the secure well-paid jobs that came with it, was the envy of the world, but it had its heart and soul ripped out. In many cases manufacturing was moved overseas to cheaper labour markets, and the jobs lost were never really replaced. Communities around the country were destroyed, leaving future generations to pick up the pieces.

Following such decline there has been a failure to restructure our economy, to develop an industrial strategy to support key industries, and to make our country great. However, we are where we are, and whether people voted leave or remain, it falls on us in this House to build a country of which the British people can be proud and in which they feel safe. We need a plan to rebalance our economy and support our key industries—a proper industrial strategy to provide the secure jobs that we so desperately need, and Government investment in our economy so we can become the innovators of the world, with priority investment in those communities that have been economically neglected for years.

All Members of the House must fight for and support our economy and the people in it. The economic outlook for the UK is uncertain, and we are facing turbulent political times. As my hon. Friend the shadow Chancellor emphasised earlier, there are strengths in our economy, but we must nurture and support them at this vital time. If we do not, the future looks bleak. Labour is willing to work across the House to ensure that the people of this country are protected from whatever is to come, and we are committed to delivering an economic agenda that promotes Britain and British industry. Let us be the envy of the world once again.

Finance Bill

Rebecca Long Bailey Excerpts

Tuesday 28th June 2016 Commons Chamber

A wide range of measures is before us, and I have already spoken for long enough—for too long, some might argue. Taken together, those measures do much to support entrepreneurship, investment and economic growth. The introduction of investors relief and the reduction in the main rates of capital gains tax for non-property investments in particular are big, ambitious steps. Meanwhile, we are also being vigilant in tightening areas of capital gains tax and associated reliefs that have the potential to be exploited, and addressing any instances in which restrictions unfairly exclude justified users. I encourage Members on both sides of the Committee to support our proposals.

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

I thank the Minister for his earlier kind words, and commend him for his sterling effort over the last two days. He has fought his way through the Finance Bill with a bad back, and we wish him a speedy recovery. There will be a place in heaven for him, I am sure of that.

I want to speak about clauses 72 to 81, schedules 11 to 14, Government amendments 30 to 68, new clause 2, and the amendments that stand in my name and those of my hon. Friends. Clause 72 and schedules 11 and 12 cut the basic rate of capital gains tax from 18% to 10%, and the 28% rate to 20% on most gains made by individuals, trustees and personal representatives. Gains accruing on the disposal of interest in residential properties that do not qualify for private residence relief, and gains arising in respect of carried interest, remain subject to the 18% and 28% rates.

The Government have said that the retention of the higher rates for residential property is intended to provide an incentive for investment in business over property. Entrepreneurs relief will remain at 10 %, and will be extended to investors. I shall return to those reliefs, about which the Opposition have some concerns, later in my speech. The changes will take effect on 6 April 2016.

As the Committee will know, Labour Members have a serious problem with this policy decision, which they opposed during the Budget debate and on Second Reading. It constitutes a major tax giveaway to the tune of £2.7 billion over the next five years for the wealthiest in our society, at a time when the poorest communities are crying out for help and investment. The Chancellor had a choice to make in his Budget. He had to decide whether to use any spare cash, of which he keeps saying there is none, to help the most vulnerable, who have suffered six years of the Government’s austerity programme, or to give a tax break to those who need it the least. He chose the latter, and, in the Opposition’s view, that says it all about the Government’s priorities.

The explanatory notes state that

“the Government wants to ensure that companies have the opportunity to access the capital they need to grow and create jobs, and wants the next generation to be backed by a strong investment culture.”

Opposition Members want capital investment in our economy. Indeed, we champion it and we have been saying so for more than nine months. However, we question whether cutting the headline rate of capital gains tax will indeed trigger large-scale investment. We believe that it could simply line the pockets of some of the wealthiest.

The Chartered Institute of Taxation echoes those concerns, stating that

“the intention of the reduction is stated as being to drive productivity growth across the UK, but we question whether a simple reduction in rates will stimulate growth”.

The Office for Budget Responsibility’s economic and fiscal outlook document suggests that such a cut is unlikely to put rocket boosters under business investment, having not predicted massive increases over the next five years. What is more, business itself has not been calling for this measure, which was totally unexpected. The top priority for business is investment in skills and infrastructure, not cuts in the top-line rate of taxation—especially when the headline rates are frequently chopped and changed by the Chancellor in what Paul Johnson, the director of the Institute for Fiscal Studies, describes as an

“up and down rollercoaster ride”.

He also stated that

“we need a serious plan and strategy here. This is not the way to make good tax policy”.

In the current economic climate, given the result last Thursday, it is even more vital to provide as much certainty as possible to business on the rates of tax that they will pay. Given the serious risk of recession in the latter end of this year, I again make the point that £2.7 billion is a lot of money that could be put to better use. The Opposition will not support such an unfair measure, and we will oppose this clause standing part of the Bill.

Clauses 73 to 75 relate to entrepreneurs relief, which provides a rate of capital gains tax of 10% on any gains accrued when directors who own 5% or more of a company sell shares in the companies they own, up to a lifetime limit of £10 million. The clauses address some issues with the legislation that was introduced in the Finance Act 2015. According to the Government’s explanatory notes to the Bill, changes in that Act

“prevented certain abuses involving ER, but they also limited the availability of relief on some transactions where there was no abuse. The effect of the changes made by this clause are backdated to the introduction of FA 2015 in order to mitigate the disadvantage suffered by some as a result of earlier changes.”

Opposition Members have no issue with the content of the clauses, and we are pleased that the Government have tabled amendments to correct the poor drafting of the original ones. The Chartered Institute of Taxation had raised some concerns about that, so we are pleased that the Government have clarified the legislation.

However, the Opposition are concerned about entrepreneurs relief as a whole and we have therefore proposed, in new clause 11, that the Government produce a report within six months of the passing of this Bill giving the Treasury’s assessment of the value for money provided by entrepreneurs relief. The relief was estimated to cost £2 billion in 2012-13, rising to £3 billion in 2015-16. That represents a vast amount of Government revenue that is being forgone, and there appears to be no assessment of the relief’s efficacy in encouraging entrepreneurialism. We understand the rationale behind it, but as with all tax reliefs, the Government must ask themselves whether it provides value for money and whether it works in practice.

Tax Research UK’s analysis of the relief suggests that in the 2013-14 financial year, 3,000 people received tax relief to the tune of £600,000 each, at a total cost to the Treasury of £1.8 billion. Will the Minister confirm whether that is the case and tell us whether the Treasury has the relevant figures for 2014-15? That analysis also highlighted a couple of issues with the logic behind the relief itself, arguing that it is given at a time when people cease to be entrepreneurs by selling their businesses, and that it therefore does not encourage entrepreneurialism. It also argues that the relief has unfortunate behavioural consequences because by increasing the reward from sale it encourages sale far too early. The Opposition therefore feel that an assessment of the relief is in order given the vast amount of forgone Government revenue, which appears to be concentrated in the hands of a small number of individuals. I noted the Minister’s earlier comments and look forward to the results of the Government’s research, due to be published in 2017.

Finance Bill

Rebecca Long Bailey Excerpts

Monday 27th June 2016 Commons Chamber

[The Exchequer Secretary to the Treasury (Damian Hinds)]

Clauses 132 to 136 set out changes to the climate change levy, or CCL, which is a tax levied on the supply of energy to businesses and the public sector. It was introduced in 2001 to incentivise industrial and commercial energy efficiency. The Finance Act 2015 removed the climate change levy exemption for renewable electricity generated on or after 1 August 2015. A consultation was then held to seek views from industry on the appropriate length of time for the transitional period.

Clause 132 sets the length of the transitional period during which electricity suppliers can continue to exempt from the climate change levy renewably sourced energy generated before 1 August 2015. The clause provides for an end date for the transitional period of 31 March 2018. Setting a transitional period will minimise the administrative impact on electricity suppliers by giving them time to retain the benefit of renewably sourced electricity acquired before the date of the change.

Following a review of the business energy tax landscape and consultation with industry, it was announced at Budget 2016 that the Government would abolish the complex and unduly burdensome carbon reduction commitment energy efficiency scheme and move to a single tax—the existing climate chance levy—from 2019. Moving to one tax will provide a clearer price signal for business energy use, incentivising energy efficiency while reducing administrative burdens.

Clauses 133 and 134 set the main rates of the CCL from 1 April 2017 and 1 April 2018 to increase by the retail prices index. Legislating for those increases now provides certainty for businesses before the wider business energy market reforms take place.

Clause 135 will increase the climate change levy rates above RPI from 1 April 2019, to recover the revenue that will be lost from abolishing the CRC. Increasing climate change levy rates will strengthen the incentive for businesses with the greatest potential to save energy. At the same time, rebalancing the rates for different taxable commodities from 1 April 2019 will update an outdated ratio and more closely reflect the carbon content of the energy used. That will help to deliver on our commitment to achieve greater carbon savings.

Clause 136 will increase the levy discount for energy intensive sectors with climate change agreements. That will ensure that businesses in those sectors will pay no more in the climate change levy than the expected RPI increase in April 2019, thereby enabling them to maintain their international competitiveness. Those reforms will take place in 2019, providing a three-year lead-in time for businesses to adjust to the new business energy tax landscape.

Several hon. Members have in the past voiced concern over the impact of the clause to remove the climate change levy exemption from renewably sourced electricity, so allow me, if you will, Sir Roger, to repeat the reasoning for the removal of that exemption. There is no doubt that the exemption was increasingly providing poor value for money for British taxpayers. Without action, the exemption would have cost almost £4 billion over the course of this Parliament, providing only indirect support to renewable generators.

Other Government support for UK low-carbon generators demonstrates this Government’s commitment to renewable energy. Since 2010, nearly £52 billion has been invested in renewables, and that has led to a trebling of the UK’s renewable electricity capacity. There was another record year in 2015, with £13 billion invested in renewable electricity. Removing the exemption will provide better value for money for UK taxpayers, contribute to fiscal consolidation and maintain the climate change levy price signal necessary to incentivise business energy efficiency.

The Government’s consultation with industry showed that the current business energy tax landscape was too burdensome and complex. Clauses 132 to 136 demonstrate the Government’s commitment to simplify and improve the effectiveness of business energy taxes in order to meet our environmental targets.

Amendment 183 stands in the name of the hon. Member for Salford and Eccles (Rebecca Long Bailey) on behalf of the Opposition. If I may pause for a moment, I want to take this opportunity to congratulate her on her elevation today. It is an extremely well-deserved promotion and we wish her all the best in her new role. On this occasion, however, I am afraid that her amendment has slightly less merit. It would require the Chancellor to publish a report detailing the impact of the climate change levy in reducing carbon emissions within 12 months from the passing of the Finance Bill, but such a review is unnecessary.

Following a hearing on the 2015 summer Budget, the Chancellor wrote to the Treasury Committee on the impact of the removal of the CCL exemption. He made it clear that the exemption would not directly affect our commitment to reduce carbon emissions. In addition, the Department of Energy and Climate Change already intends to publish a consultation on a simplified energy and carbon reporting framework later this year. That will be accompanied by an impact assessment, which will examine the removal of the carbon reduction commitment and propose adjustments to reporting requirements.

The impact of ending the exemption from the climate change levy for renewable electricity has been discussed at length over the course of debates. It has been confirmed to Parliament in writing by the Chancellor that removal of the exemption will not impact on the UK’s ability to meet its carbon budget targets. I therefore urge the hon. Lady to withdraw the amendment, but should she be minded not to do so, I urge the Committee to reject it.

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

I thank the Minister for his kind comments and for being a fantastic duelling partner in these debates. He has been nothing less than respectful and I have enjoyed debating with him.

I rise to speak to clauses 132 to 136, which make various changes to the climate change levy, and to amendment 183, which stands in my name and those of my hon. Friends the Members for Hayes and Harlington (John McDonnell), for Feltham and Heston (Seema Malhotra), for Wolverhampton South West (Rob Marris) and for Leeds East (Richard Burgon).

Clause 132 relates to the removal of the exemption for electricity from renewable sources. Since the climate change levy’s inception in 2001, electricity from renewable sources has been exempt when supplied under a renewable source contract agreed between an energy supplier and its customer. In Budget 2015, the Chancellor announced that that exemption for renewable electricity would be removed from 1 August 2015 and that there would be a

“transitional period for suppliers...to claim the CCL exemption on any renewable electricity that was generated before that date.”

Following an informal consultation, which received 18 responses, the Government announced that the transitional period would end on 31 March 2018, legislated for in this Finance Bill.

The House will be aware that we, along with several Government Members, opposed the removal of that exemption in the Finance Act 2015, and we maintain that position. We will therefore abstain on the clause, but I would like the Minister to address one particular point. In answer to written questions, the Government have refused to publish a summary of responses to the informal consultation, as they contained “commercially sensitive information”, and they refuse to publish an average of suggested timescales. Will the Minister give us an assurance that the length of the transitional period was, in fact, in line with the recommendations of the respondents?

Clauses 133 and 134 will increase the main rates of the climate change levy in line with inflation in April 2017 and again in April 2018. It has been standard practice to increase the rates in line with inflation in each year’s Finance Bill since 2007 and, as the explanatory notes set out, wider changes to the CCL from 2019 are being legislated for in this Bill, so it makes sense to make provision for the next two years at the same time.

Those wider changes are the subject of clause 135, which significantly increases the main rates of the climate change levy to recover Exchequer revenue lost from the abolition of the carbon reduction commitment. In doing so, the ratio of electricity to gas is rebalanced somewhat to 2.5:1, and it is the Government’s intention to rebalance the ratio further to 1:1 by 2025, to reflect the fall in gas prices and the expected increase in consumption as a result.

The following clause increases the CCL discount available to energy intensive businesses subject to climate change agreements, to compensate equivalently for the increase to the main rates. The CCL discount for electricity will increase from 90% to 93%, and the discount for gas will increase from 65% to 78% from 1 April 2019. That provision mitigates a knock-on effect from clause 135.

Our amendment to clause 135 would require the Government to conduct a review of the impact of the climate change levy on carbon emissions. The review will have particular reference to the removal of the exemption for electricity generated from renewable sources, the abolition of the carbon reduction commitment and the reporting requirements for companies and public sector bodies.

Draft Building Societies (Floating Charges and Other Provisions) order 2016

Rebecca Long Bailey Excerpts

Tuesday 14th June 2016 General Committees

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

It is a pleasure to serve under your chairmanship, Ms Buck, and to debate with the Minister for the first time, especially on such an important issue. I share her sentiment that the draft order is technical and uncontroversial. I understand that our counterparts in the Lords spent only 13 minutes discussing it. She will be pleased to hear that I do not propose to take much longer.

As the Minister eloquently stated, the draft order is simply required as a result of the Financial Services (Banking Reform) Act 2013, which repealed the restriction on building societies to create floating charges. That came directly as a result of changes in insolvency law by virtue of the Enterprise Act 2002, which removed the ability of a creditor to appoint an administrative receiver pursuant to a floating charge. There were exceptions, of course—for example, certain large financial transactions and holders of floating charges created before the relevant sections of the 2002 Act came into effect.

The previous position for building societies was, as the Building Societies Association has stated,

“contrary to the mutual model of ownership”,

as it would allow an administrative receiver to be appointed over the whole or a substantial part of a company’s property should a floating charge be enforced. A receiver is usually appointed to enforce the terms of a floating charge only, and as such has limited access to any other assets held by the relevant company. The draft order will therefore allow the appointment of a receiver in relation to a floating charge if enforcement becomes necessary, so ensuring, as we have heard, uniform provision about receivers for banks, building societies and other companies.

The Building Societies Association informs us that the changes we are discussing recognise the landscape and reality that building societies are operating in and that secured funding is an accepted and flexible funding tool that is far more commonplace and necessary now than when the Building Societies Act 1986 was passed. However, it has confirmed that it is interested in seeing further changes to the 1986 Act. First, it suggests an increase, reflecting inflation, in the payment amount a society can make from a deceased person’s savings account, subject to evidence and a statutory declaration that the person claiming funds is entitled to do so. Secondly, it suggests an amendment in the requirement for mutuals to produce a strategic report as part of their annual report, so that those are exempt from Financial Conduct Authority promotion rules. It has raised those matters with the Treasury directly, and I would therefore be grateful if the Minister updated the Committee.

To conclude, as the Minister has illustrated, the changes proposed in the draft order complement the Government’s commitment to ensuring that mutual bodies are enabled to compete on a level playing field with banks. That is something the Opposition certainly support and that my hon. Friend the Member for Wolverhampton South West (Rob Marris) raised when we discussed the appropriate clause on diversity in financial services during the consideration of the Bank of England and Financial Services Act 2016. We look forward to returning to such matters in the near future, particularly upon final publication of the Competition and Markets Authority’s report into retail banking this summer. However, for the moment, we will contain our excitement and support the draft order.

Oral Answers to Questions

Rebecca Long Bailey Excerpts

Tuesday 7th June 2016 Commons Chamber

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

Recent figures showed a 9.6% drop in the value of new construction project starts recorded in the so-called northern powerhouse to the end of 2015. Interestingly, despite the Chancellor’s rhetoric on investment, much of the public capital invested thus far has been delivered by the EU. Does he therefore disagree with the Minister with responsibility for the northern powerhouse, the Under-Secretary of State for Communities and Local Government, the hon. Member for Stockton South (James Wharton), who said recently that Brexit will not affect Greater Manchester’s vision and access to funding?

[Mr Osborne]

As the hon. Lady well knows, I certainly believe that Britain is stronger in the European Union, and that it helps the northern powerhouse, but I make this observation: investment projects in the north of England are up over 100% in the last two years, which is in striking contrast to other areas. To give a sense of scale, investment projects in London are up 7% in the last two years. That is welcome, but in the northern powerhouse, they are up 127%. We are rebalancing the economic geography of this country. I am sure she will welcome the fact that the north of England now has the highest employment rate in the country’s history, and that we have seen the fastest falls in unemployment in the north of England.

Oral Answers to Questions

Rebecca Long Bailey Excerpts

Tuesday 19th April 2016 Commons Chamber

[Damian Hinds]

The tariffs are designed to make sure that there is a reasonable and appropriate return to investors. They have to be adjusted periodically when costs come down. Of course, one of the great parts of the success story of solar is the fact that costs have come down by about two thirds since 2010.

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

According to the Solar Trade Association:

“Government will be spending just 1% of new expenditure under the Levy Control Framework supporting solar power…yet mainstream analysts expect solar power to dominate future energy supply.”

With that in mind, will the Chancellor promise to do much more to ensure that Britain becomes a market leader in the industry, or are we going to let China take the lead yet again?

[Damian Hinds]

Britain does have a leadership position in the industry, but we need a balance. We need a portfolio of energy sources and to recognise the importance of baseload power. That is why the development of new nuclear is also so important.

Scotch Whisky Industry

Rebecca Long Bailey Excerpts

Wednesday 9th March 2016 Westminster Hall

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

It is a pleasure to serve under your chairmanship, Mrs Moon, and it is a pleasure, as always, to debate opposite the Exchequer Secretary to the Treasury. I congratulate the hon. Member for Argyll and Bute (Brendan O’Hara) on securing the debate. In his opening speech, he eloquently explained why the Scotch whisky industry is so important to the Scottish and UK economies and why his constituency is the centre of the whisky universe.

I thank hon. Members for taking part in the debate, which I have really enjoyed. I feel as if I have had a bit of a history lesson. A few points that I was not aware of before include: that Talisker was Robert Louis Stevenson’s favourite drink; that Arran has the purest water in Scotland; and that Alexander Fleming’s advice was to drink whisky, which I now take as medical advice. Other fantastic things have been mentioned but I will not go into detail because we are pushed for time.

There was a consensus across all contributions that, beyond doubt, the Scottish whisky industry contributes significantly to the UK economy. A number of hon. Members raised points about excise duty. Of course, we all look forward to hearing what the Chancellor has to say about that next week and whether the Minister is willing to leak any information on that.

The Scotch Whisky Association, which supplied a very useful briefing in preparation for the debate, estimates that the industry added more than £3.3 billion directly to the UK economy and more than £5 billion indirectly in 2014. That makes the Scotch whisky industry arguably larger than the UK’s iron, steel, shipbuilding and computer industries, and about half the size of the UK’s pharmaceutical and aerospace industries in terms of gross value added. It is important to note that the industry just keeps growing. The 2014 figures mark an increase of 1.6% on the previous year’s estimates of GVA.

The contribution of the industry is equally impressive when one considers the number of people it employs. In Scotland, 10,800 people are directly employed in the industry, with salaries totalling almost £530 million. Across the whole of the UK, both directly and indirectly, the association estimates that 40,000 jobs are supported. Any industry that provides employment to so many should indeed be recognised as an important UK industry.

Nor is that significant only in Scotland. The impact on the wider UK supply chain is also important, as we have heard in many of the speeches today. Of the nearly £2 billion spent by the industry, 90% remains within the UK. The latest input-output data published by the Scottish Government, and industry estimates, show that about three quarters of the goods and services purchased outside Scotland are sourced from the rest of the UK, and that they are worth about £330 million to the suppliers. That is particularly significant in relation to capital expenditure worth about £140 million, much of it on items such as machinery and vehicles that support the wider industry.

Constituencies such as mine, with its history of manufacturing and other traditional industry, stand to benefit from the Scotch whisky trade, despite our distance from Scotland. We have heard Yorkshire’s point of view in the debate, and I think there is agreement on that point. Greater Manchester has a longstanding and proud brewing and distilling sector of its own—not to mention a blossoming boutique sector, in which I am becoming an expert. Whisky distilling, along with much of the drinks sector, is effectively a manufacturing industry itself, and the debate should be set within the wider one about the need for an industrial strategy.

One of Scotch whisky’s distinctions is that it is famous the world over, and is one of the largest contributors to UK exports. Scotch whisky exports were worth £3.9 billion in 2014—1.4% of total UK exports. That represents 80% of Scotland’s and 25% of the UK’s total food and drink exports. Scotch whisky’s trade surplus is the second highest for any goods exported from the UK, and it has been estimated that the UK’s overall trade deficit would be 16% higher without Scotch whisky exports. I think that that fact has also been alluded to today. However, it must be noted that, while the £3.9 billion is significant, that figure marked a decline of 7%—the largest since 1998.

It has been suggested by commentators that that fall in exports might be due to the political and economic situation in export markets. For example, David Frost, the Scotch Whisky Association’s chief executive, suggested that

“economic and political factors in some important markets held back exports in 2014 after a decade of strong growth”.

Similarly, the drinks analyst at the market intelligence firm Euromonitor has highlighted the fact that the

“fall in exports to Singapore was linked to Beijing’s clampdown on gift-giving”,

noting that direct exports to China fell by 23% to £39 million. He also said that Scotch was losing out to types of whisky like US bourbon, which are targeted at a younger market. Political volatility in Russia and Ukraine is also reported to be having an effect on exports of Scotch

“with the value of direct sales there down 95% from £25 million to £2 million in a single year”.

In that context, we would be interested to hear from the Minister what steps the Government are taking to ensure that our key export industries are able to cope with volatilities in the global market. What help are they giving the industry in its ambassadorial role abroad? For example, DEFRA’s Great British food unit was created to promote British food and drink—such as Yorkshire Tea, the hon. Member for Brigg and Goole (Andrew Percy) will be pleased to hear—across the world. Could the Minister confirm whether Scotch whisky is currently included in the Great British food unit and, if so, how the initiative has helped the industry?

It is important to highlight the wider context of UK manufacturing. Frankly, I am concerned that this Government’s industrial strategy is inadequate across the board, as the problems with the steel industry have illustrated all too starkly. That is why we have been calling for a proper industrial strategy, in the context of a wider economic policy focused on investment, not cuts. Scotch whisky is one industry that by its nature cannot be outsourced abroad but, in other ways, it will face many of the same challenges as we see across the UK in other manufacturing sectors.

The last time the Scotch whisky industry was discussed in Westminster Hall, the then Economic Secretary to the Treasury, now the Education Secretary, stated that Her Majesty’s Revenue and Customs would

“shortly be launching its spirit drinks verification scheme.”—[Official Report, 8 January 2014; Vol. 573, c. 138WH.]

The scheme was designed to preserve the industry’s reputation by requiring every business involved in the production of Scotch whisky to be verified as producing a genuine product. The introduction of the scheme was broadly welcomed at the time, but it might be useful for the Government to provide an update on its operation to date. Is the Minister satisfied that it has been implemented in full?

The UK should be proud of the Scotch whisky industry, which contributes enormously to employment and boosts UK exports at a time when the trade deficit remains large. I therefore hope that the Minister can respond to the issues that I and other hon. Members have raised, so that we can continue to back this important global industry.

DRAFT Tax Credits (Income Thresholds and Determination of Rates) (Amendment) Regulations 2016

Rebecca Long Bailey Excerpts

Thursday 3rd March 2016 General Committees

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

It is a pleasure to serve under your chairmanship, Sir Alan, and to debate such an important issue with the Minister.

As all hon. Members here will be aware, the Chancellor deviated—shall we say?—from his original plan for sweeping cuts to tax credits after ferocious opposition from Opposition Members and from some Members of his own party and, of course, after defeat in the House of Lords. However, we are now discovering that the deviation is not quite what we had hoped for; arguably, most of the cuts have been delayed and others are still going ahead.

As we have heard, the regulations seek to cut the income rise disregard, which is the buffer zone that protects families from incurring financial hardship as a result of repaying tax credits in the event that they earn slightly more than anticipated in any given year. It is an element of leeway in the system that allows a household’s income to rise a certain amount in a financial year without affecting the household’s tax credit award for that year.

A household’s tax credit award for the year ahead is based on income in the previous financial year. HMRC finalises the tax credits at the end of the year to reflect the actual income during the course of that year. If income was higher than predicted, the Government deem that to be an overpayment—effectively a debt that must be repaid—which will be automatically deducted from the claimant’s tax credit award for the next year. If the debt is greater than the award the Government will seek to recover it, in some cases potentially using private debt collectors. It is not unreasonable to expect people to repay any tax credits if they earn more than anticipated. However, the Government’s proposed approach to recover such sums appears to present a number of issues, which I hope that the Minister will carefully consider before reaching any conclusions on whether to recommend that the Committee pass the regulations.

Many families will see a change in income for various reasons over the course of a year. A member of the household may find a job or increase their working hours, exactly as the Government encourage them to do. The income rise disregard ensures that a small rise in income is not immediately clawed back, leaving low-paid families in sudden debt. It is important to make it clear that that does not mean that a household’s tax credit award remains unchanged for the following financial year, but simply that they do not have to repay any overpayment that may have occurred as a result of income rising by a small amount during the financial year just ended. The coalition Government had already cut the disregard from £25,000 to £10,000, and then halved that to £5,000 as recently as 2013. Today’s regulations will halve it again. The number of families breaching the limit has gone from 13,000, when the Tory-led coalition took office, to nearly 350,000 in 2013-14—the last year for which figures have been provided.

I ask the Minster to explain the rationale behind the £2,500 threshold. For example, has this figure been determined pursuant to an evidence-based review of all tax claimants’ increases in earnings over a specified period, resulting in a median threshold? Sadly, I do not believe that is the case. I understand that the figure is simply a return to the figure used at the inception of the income disregard in 2003. Although this figure was deemed reasonable at the time, it became immediately obvious to HMRC and the Treasury that it was too sensitive to small fluctuations in hours worked and, as such, was difficult for HMRC to manage efficiently. It also caused disproportionate hardship to many families.

Leaving the management of the overpayments system to one side for a moment, the Opposition are seriously concerned about the impact of the reduced figure of £2,500 on low-income families. The Government have stated that they champion the strivers who want to work hard and get on, but cutting the income rise disregard to such a low level means that people on lower pay are particularly vulnerable to being hit with an overpayment debt should they get a new job, work more hours, or earn a small pay rise or promotion. We are therefore concerned that the change could create a disincentive for people on low pay to take on more hours or move into full time work through fear of being hit with an overpayment debt.

The proposed reduction presents a real dilemma to families, especially those with members in jobs in which additional hours are less stable, such as zero-hours contracts, or where overtime might be offered from time to time. There might be a stark choice for these families: either work a few more hours from time to time and risk future repayments being imposed on the basis of a predicted salary, or simply decline the offer of extra work and ensure stability in long-term financial planning.

[Dawn Butler (Brent Central) (Lab)]

Is my hon. Friend aware of the extent of the impact assessment that the Government have undertaken on these new limits?

[Rebecca Long Bailey]

My hon. Friend will hear throughout my speech that I consider that to be a significant issue, which I hope the Minister will address today.

I want to make the Minister aware that our concerns are exacerbated by what can only be described as the Government’s continued silence on the potential impact of these cuts. To date, I am not aware of the publication of a specific impact assessment for these regulations or of an equality impact assessment. The fact that the Government have provided minimal information is reflected in an exchange between the Government and the Lords Secondary Legislation Scrutiny Committee on 28 January. The memorandum submitted by the Treasury stated:

“Next year there are expected to be 800,000 claimants with a reduced award as a result of their income increasing—none will be cash losers”.

But that did not provide an answer to the question posed by the Committee:

“Can you…give an indication of how many people will be affected by the change…and what the financial impact on those people is likely to be?”

I feel equally starved of information in the light of the responses I have received to my own written parliamentary questions. Since the autumn statement in which this cut was first outlined, I have tabled numerous written questions to ask for the details of its impact. I requested the modelling or case studies the Treasury undertook when formulating the policy; the impact on some example claimants; the total numbers likely to be affected; the estimated average change in tax credit award as a result of the change; and the evidential basis for the statement in the memorandum submitted to the other place that there would be no cash losers from this reduction.

I am saddened to inform the Minister that I have not received any satisfactory answers to my questions or to my requests for the case studies used to formulate this policy. I would have expected such case studies to have been undertaken as a matter of course, in the interests of acting prudently, before even drafting the regulations. It should simply have been a case of passing on the information used by the Government as their evidential base for making the suggested changes to the income disregard in the first instance. The Minister may be able to provide such evidence today—I would wholeheartedly welcome that—but from the information I have been able to glean so far, the only example provided was someone who earned £1 over the new disregard. I must flag up to the Minister that the Government have yet to confirm whether they have conducted an equality impact assessment.

I have no doubt that the Minister will understand my feelings of exasperation. Will he confirm today that a proper impact analysis and an equality impact assessment have been carried out in formulating the policy, or are the Government unaware of what the impact may be? The Minister will be pleased to know that from time to time I endeavour to be helpful to him in solving such conundrums. I have commissioned a bit of evidence-based research into the matter from the Library, and it is indeed illuminating. Its analysis of a household with one working adult on the current national minimum wage, over the age of 25 and with two children, demonstrates that, if that adult’s working hours were increased from 16 to 30 and then to 35 over successive tax years, the new disregard would be triggered and an overpayment incurred. That would then lead to their net income actually going down in at least one year, despite working more hours and earning more pay. Indeed, they would have lost £1,000 of income in at least one year, compared with the same situation under the current disregard. The Government’s claim that there are no cash losers would not be of much comfort to that family. Indeed, it would be interesting if the Minister expanded on what the Government mean by no cash losers, because that case study seems to demonstrate that there will be circumstances in which claimants who are increasing their pay could actually end up with a lower income for at least the year in question. That is just one example, of course, but an entirely plausible one.

Unfortunately, we still do not know the Government’s estimate of the maximum amount a family could lose. It would be helpful if the Minister provided that figure today; if not, perhaps he will say why it cannot be provided. He will no doubt appreciate that my hon. Friends and I are not prepared to allow legislation to be enacted that will affect 800,000 working people, without first knowing the potential impact on those people and without evidence that the Government have carried out due analysis.

To return to the management of the overpayments system, the Government have claimed that the updated real-time information system for pay-as-you-earn will make HMRC more sensitive to changes in income throughout the financial year, so that tax credit payments can be adjusted quickly, avoiding a build-up of debt. However, evidence suggests that the system is no more sensitive than it was in 2003-05, when the overpayments were recognised by all sides as excessive, peaking at £1.9 billion. The then Conservative Opposition were highly critical, and for our part, we recognise that there were problems with the initial introduction of the system. Unfortunately, it seems that while we have learnt the lessons, this Government want to make their own mistakes. Perhaps the Minister can reassure me that those fears are unfounded.

Since the coalition Government slashed the disregard to £5,000, the total value of overpayments has rocketed and again exceeded the £1.9 billion that caused the initial crisis. That does not suggest to me that HMRC is any more efficient at adjusting tax credit awards now than it was then. Cutting the disregard by half again adds further administrative burden for HMRC at a time when the Government are closing HMRC offices and reducing staffing levels across the country.

Campaigns such as Child Poverty Action Group have highlighted that people on lower pay tend to see fluctuations in their income from month to month. If the RTI does in fact prove to be effective, that could create huge administrative issues on its own, as people have their tax credit awards stopped, cut and restarted from month to month. Indeed, Mark Willis from Child Poverty Action Group has said:

“It doesn’t really matter what someone’s monthly income is... You always need an accurate estimate of annual income when you’re making these in-year changes. And no-one can really accurately predict the future, especially as we’re often talking here about people with fluctuating earnings”.

The impact on low-paid workers is particularly stark when compared with the money spent on the Chancellor’s tax cuts for the extremely wealthy. For instance, those selling a stake in a business of up to £10 million now pay only 10% capital gains tax on their profits—a tax relief worth £3 billion a year, around three times the amount estimated and dwarfing the savings made by the cut to tax credits. The bulk of this money goes to a very different group of people. The latest analysis suggests that the full £1.8 billion went to just 3,000 individuals who enjoyed a multimillion pound bonanza from selling shares—an incredible £600,000 each.

In conclusion, the Opposition are not sufficiently satisfied that the Government have considered, or indeed carried out adequate analysis of, the impact of the regulations. If indeed they have, I would ask that the information is shared and the passage of the regulations through this House paused until such time as Members have had the opportunity to review such information.

We are further concerned that setting the income rise disregard at such a low level makes people on low pay more vulnerable to accruing an overpayment debt simply by doing what the Government are asking of them. That is a disincentive for those in low-paid jobs to work harder and earn more, and is a punishment for doing so. Quite simply, working people have already suffered enough under this Government, and we will therefore oppose the regulations.

Equitable Life

Rebecca Long Bailey Excerpts

Thursday 11th February 2016 Commons Chamber

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

I congratulate the hon. Member for Harrow East (Bob Blackman) on securing this important debate today and on the articulate way in which he described the events that many of our constituents have faced. He touched on many of the issues that I will highlight in my speech. And of course it is always a pleasure to stand opposite the Exchequer Secretary to the Treasury, the hon. Member for East Hampshire (Damian Hinds).

I would also like to thank the various Members who have spoken today. I will not go through them one by one as I know we are pushed for time, but there were several emotional contributions that I would like to highlight. My hon. Friend the Member for Great Grimsby (Melanie Onn) told the story of the lady in her constituency who lost £40,000 and got only £12,000 back. The hon. Member for Romsey and Southampton North (Caroline Nokes) said that she had noticed a decline in the number of constituents visiting her to discuss this issue and that, sadly, it was because many of them had either passed away or given up hope.

The fate of Equitable Life and those who invested in it has been debated in this House for more than 15 years by Members on both sides. I commend the work of the Equitable Members Action Group, which I will call EMAG for the sake of expediency. I would also like to thank the many Members of this House who have campaigned tirelessly on behalf of their constituents to ensure that this issue is not kicked into the long grass. It is difficult not to sympathise with the anguish and worry that many of those investors have experienced. Many have seen their nest eggs disintegrate, and they feel cheated. Over the years, it has become clear that, despite all the efforts to review the issue, there is no one universally agreed strategy to compensate them. It has therefore been difficult to establish a course of action that will truly put the matter to bed.

Along with many other Members, I appreciate the action that the Government have taken to compensate those who were disproportionately affected by this sorry affair. However, as we have heard today, concerns remain about the management and assessment of compensation payments. More than 90% of Conservative Members in the last Parliament signed the following pledge:

“I pledge to the voters of this constituency that if I am elected to Parliament at the next general election, I will support and vote for proper compensation for the victims of the Equitable Life scandal and I will support and vote to set up a swift, simple, transparent and fair payment scheme—independent of government, as recommended by the Parliamentary Ombudsman.”

The Prime Minister, the Chancellor of the Exchequer and the Exchequer Secretary to the Treasury signed that pledge to provide proper compensation for those affected by the events at Equitable Life. It would be helpful to ascertain whether the Minister feels that the pledge has been fully met today.

The assessment of compensation payments—and the amount allocated by the Government—is not a simple matter. At the time of the second ombudsman’s report, EMAG estimated the losses incurred by policyholders investing after 1990 at £3.2 billion if they remained with Equitable Life and at £4.6 billion if they had invested elsewhere. In comparison, the 2010 Chadwick report assessed the loss at £500 million on the basis of assessing maladministration. There is therefore a clear difference between the principles used to calculate the EMAG estimates and those used to calculate the Chadwick estimates. All those figures are of course different from the £1.5 billion and the subsequent £500 million top-up offered by the Government. EMAG states that, according to its own calculations, the outstanding figure is between £2.6 billion and £2.8 billion.

I should also like to address the administration of the scheme generally. The National Audit Office reported in 2013 that the scheme had faced a number of administrative issues. The NAO appreciated, as do I, that the task of setting up the scheme was a difficult challenge. It was a complex operation undertaken in quite a short period of time. However, it noted that the scheme had significant issues with tracing the identity of some policyholders, as the data provided by Equitable Life were out of date. Following the publication of the findings, the Public Accounts Committee undertook its own report into the administration of the scheme and concluded that the Treasury had

“not used all information available to trace as many policyholders as possible”.

In April 2013, the NAO reported that only 35% of payments had been made and the PAC quoted that the Treasury estimated that it may not trace 17% to 20% of policyholders. As of 30 December 2015, the scheme had issued payments to 915,453 policyholders, representing 88% of those eligible—only a slight improvement since the PAC’s critical findings. Given that the scheme closed for new claims on 31 December 2015, will the Minister tell us how many of the remaining 12% of eligible policyholders were found? At the time, it was also recommended that the Treasury and National Savings and Investments would

“work with the Equitable Members’ Action Group to explore options for utilising data to contact policyholders who have not yet received payment”.

Will the Minister confirm, therefore, that the recommendations of the PAC with regard to that were acted on and that all reasonable steps were taken to contact eligible policyholders?

The NAO and the PAC also found that some policyholders were dissatisfied with the responses to their queries and complaints. They included policyholders receiving duplicate requests for the same information and generic responses in relation to specific queries. Will the Minister outline what steps were taken to ensure that customer service has improved since the reports and that it will remain at an adequate level for those policyholders who are still in receipt of annuity payments from the scheme?

The next concern I wish to raise with the Minister is the amount of money it has cost to administer the payment scheme. National Savings and Investments, an executive agency of the Treasury, was tasked with operating the scheme. It originally outsourced to Siemens, whose contract was then bought by Atos. The PAC expressed concern in 2013 that the Treasury was not achieving value for money in the contract with Atos to deliver the scheme. The contract was based on time and materials, and it is argued that there was a vast amount of waste of taxpayers’ money as a result. The total budget for administering the scheme was set at £57 million. In 2013, National Savings and Investments estimated that the cost would go £4 million over budget. Will the Minister confirm whether the payment scheme was delivered on budget, and, if not, by how much it overspent?

Finally, the PAC recommended that the Treasury undertake a lessons-learned exercise, as it felt the failures of previous Government compensation schemes had not been addressed when setting up the Equitable Life payment scheme. The Government accepted that recommendation and confirmed that they would produce two reports: one in November 2013; and a final report, to be shared with the PAC, the NAO and the Major Projects Authority in early 2016. Will the Minister take this opportunity to update the House on the progress of the second lessons-learned report?

On the subject of lessons learned, it is, above all, incumbent on us to ensure that future such scandals do not take place. Will the Minister tell us, therefore, what measures the Government have put in place to stop this happening again? In particular, pension fund providers and their fund managers continue to resist calls for transparency of costs and performance, so are the Government taking any steps to ensure that they inform pension scheme members of the true costs of investing? What plans do the Government have to review the governance arrangements for pension funds? Will he confirm that governance committees are currently without a fiduciary duty to their members in contract-based pensions and have they given any consideration to changing that?

It is clear that that although some progress has been made to address the anguish and loss caused by this matter, a number of questions remain. I look forward to the Minister’s response.