Finance Bill

Rishi Sunak Excerpts

Tuesday 6th September 2016 Commons Chamber

[Rebecca Long Bailey]

I note the hon. Gentleman’s point and thank him for making it.

If I could see some real benefit to the wider economy or society in these proposals, or if times were good for everybody, perhaps I could understand the Government’s rationale for making such cuts to capital gains tax, but as things stand these proposals are not driven by the interests of the nation as a whole, but to be enjoyed only by the privileged few. I urge all hon. Members to vote with us to remove these cuts from the Bill because the provision simply has unfairness at its very core.

Speaking of policies for the privileged few, new clause 14 would require the Chancellor to publish a report giving the Treasury’s assessment of the value for money provided by entrepreneurs’ relief. When entrepreneurs’ relief was discussed in the Committee of the whole House earlier this year, the then Minister said:

“officials have for some time been developing a detailed research programme designed to identify taxpayers’ motivations for using entrepreneurs’ relief, and I expect the results to be published at some point in 2017.”—[Official Report, 28 June 2016; Vol. 612, c. 236.]

It would seem opportune, then, for the Financial Secretary to accept our provision tying her down to a deadline, given that the Department is already conducting some of the research needed. The Government do not have the best track record of publishing documents when they say they will, so a deadline enshrined in legislation would help. To help the Government in this endeavour, we have listed particular reference points. The report would specifically consider the cost of the relief, the number of individuals who have benefited from it, the average tax deduction received by an individual and the number of new business start-ups since the relief was introduced.

Analysis by Tax Research UK shows that 3,000 people benefited by about £600,000 each from entrepreneurs’ relief in 2013-14, at a total cost of almost £2 billion to the Treasury. Unfortunately, the most up-to-date figures for 2014-15 are not yet available, but I suspect that similar analysis will show the same results. As I said in my remarks about clause 82, this amounts to a large sum going into the hands of the very few, and it certainly seems like an inefficient use of public funds. Of course, Labour Members are in favour of supporting entrepreneurialism wherever we find it and we want businesses to grow and flourish in the UK. However, is simply offering a massive tax break years down the line when a business is sold the best way to achieve that? Should not the Government be providing support to entrepreneurs in the early stages of their business development? How on earth could an entrepreneur know if he or she wants to sell their business further down the line, when it is only starting off, so as to factor in the benefits of this tax relief? Let us see some evidence today. I hope that the Minster will commit to taking my comments on board.

The same principle goes for investors’ relief, which is the subject of amendments 175 and 176. Those amendments would introduce a sunset clause whereby the relief would expire in six years’ time. To extend it, the Government would have to introduce secondary legislation, but in order to do so a review of investors’ relief would need to be laid before the House. When we debated a similar amendment in the Committee of the whole House, which would have brought the relief to a close after five years, the then Minister stated that the first set of data would not be available until 2020-21. We have therefore helpfully amended our amendment to suit the Government’s timetable. I hope that the Financial Secretary will now commit to this sunset provision. Without wanting to repeat the remarks I made in the earlier debate, I think that requiring a review of the scheme’s efficacy would represent good practice—for all reliefs, indeed, not just this one.

Too often, tax reliefs are provided with the admirable aim of incentivising a certain type of behaviour, but there is no analysis—published analysis, I should say—of whether the policy is achieving the desired aim. That means that the limited resources that the Government keep telling us about might be diverted away from our public services, or limits could be put on our capital spending, for reliefs that might not even be working. I will not press amendments 175 and 176 to a vote, but I really hope that the Minister will address the merits of including such provisions when future tax reliefs are introduced.

I will touch briefly on Government amendments 149 to 151, which will ensure that the upper rates of capital gains tax will apply to carried interest gains. In short, carried interest gains refer to the profits paid to investment fund managers from the fund that are classified as capital gains rather than income for tax purposes. We support the amendments.

I am sure that all hon. Members are aware of the 38 Degrees campaign on the Mayfair tax loophole, which filled up our inboxes over the weekend. I will briefly reiterate the Labour party’s position. Clause 37 provides for a tapered system of income taxation on carried interest gains received in respect of investments that are held by a fund for less than three years. As the Minister explained in Committee:

“If the average holding period is less than 36 months, the payment will be subject to income tax. If the period is more than 40 months, the payment will be subject to capital gains tax.”––[Official Report, Finance Public Bill Committee, 30 June 2016; c. 42.]

The Labour party supports that provision, but we would have liked all carried interest to be subject to income tax. We tabled an amendment in Committee that would have removed the taper completely, thereby ensuring that all carried interest was treated at 100%—in other words, taxed as if it were income. Unfortunately, the Government did not support us, but none the less we still support the steps they have taken towards closing the so-called Mayfair tax loophole.

I will press amendment 174 to a vote, because the Labour party cannot and will not agree to a measure that benefits so few by so much. We will divide the House to prevent the unfair cut to capital gains tax from going ahead.

[Rishi Sunak (Richmond (Yorks)) (Con)]

I know that when I mention the word “investor” in this House, some Opposition Members get a little a bit excited: their pupils dilate, their pulses quicken and their minds race with images of plutocrats rolling the dice of financial speculation. The reality, however, is a little different. I have spent my own career investing in businesses, and in this country private equity-backed businesses now account for almost 1 million people in employment. The latest research shows that in the run-up to the last crisis, those companies’ sales, investment in research and development, and, indeed, exports grew at a faster rate than the national average.

Furthermore, I am sure that everyone in the House would welcome more money for charities, more research funds for scientists, more scholarships for students who need them and lower insurance premiums, and that is indeed what the private equity industry delivers. The funds that private equity companies manage benefit all of us through university endowments, charitable foundations, pension funds and the floats of insurance companies. When the private equity industry does well, the pensioner, the scientific researcher and the scholar from a disadvantaged background all benefit.

This is a Finance Bill from a Government who value their investors and will not demonise an industry, and who know that no contribution, however great, should be allowed to skew the scales of social justice. The clauses that involve changes to carried interest will ensure that the rewards that investment managers receive for their efforts are taxed not only correctly, but fairly. The clauses will introduce a 40-month holding period to ensure that capital gains tax treatment is reserved for genuinely long-term investments, as it should be. I know that Members on both sides of the House support the welcome change to remove the base cost shift loophole, which allowed costs to be advantageously offset against gains. The Bill will also consolidate Government action on disguised fee income that was introduced in the last Finance Bill and ensure that fund managers are paying income tax when appropriate. All in all, the measures will raise in the order of £200 million in the next financial year.

Those new arrangements are not only fair for British taxpayers and society; they will also ensure that we remain competitive internationally. Our general treatment of carried interest, which has been the subject of much debate in this House and various Committees, is actually in line with the treatment carried out in the United States, Germany, Australia and France. All those countries agree with the notion that carried interest is capital in nature and should be treated as such. If we look across Europe, we will see that our rate for carried interest will sit in the middle of those for comparable countries: it will be a little bit above that in Switzerland and Germany, and a little bit below that in France.

The clauses reflecting changes to capital gains tax will ensure that the UK remains a pro-enterprise, pro-growth nation. Small and medium-sized businesses of the kinds that I used to invest in account for more than half of private sector employment in the UK. They are responsible for three quarters of all jobs created since 2008, yet I know from first hand that small and medium-sized British enterprises still struggle to attract enough equity capital to grow. Adjusted for GDP, the size of the UK’s venture capital market is a seventh of that of the United States. Just 3% of British companies manage to expand from three employees up to 10, which is half the rate in America.

When I hear about changes to capital gains tax rates, I think about how they will benefit all those small businesses, helping them get the capital they need to grow and to increase investment and employment. Indeed, investors’ relief and the other changes to capital gains tax included in the Bill will build on the success of the seed enterprise investment scheme, the enterprise investment scheme, the funding for lending scheme and the British Business Bank, all of which are providing British companies with the capital that is necessary for growth.

The changes will ensure that Britain remains a competitive prospect for investment without compromising Government revenue. The hon. Member for Salford and Eccles (Rebecca Long Bailey) mentioned the state of our finances and the need for revenue. I am sure that she welcomes the fact that the Office for Budget Responsibility projects that capital gains receipts will top £7 billion this year and increase to £9 billion next year, which is higher than in any other year in the past decade and a half. Rather than being a sweet deal for the rich, our capital gains tax rate actually sits in the middle of the OECD league tables of capital gains tax rates. Ten countries have rates of 0%, and our rate of 20% will sit two points above the average.

As we contemplate leaving the European Union, it will be vital that Britain’s economy remains dynamic, open and competitive to attract the investment we need and maximise the opportunities afforded to us. The clauses relating to capital gains tax and carried interest will ensure that the UK does exactly that, and I will support them later today.

[Kirsty Blackman (Aberdeen North) (SNP)]

I want to speak to the Labour party’s new clause 14 and amendment 174, which, as has been ably pointed out by the hon. Member for Salford and Eccles (Rebecca Long Bailey), would remove clause 82 and the increased nil-rate band for inheritance tax.

I will focus first on the entrepreneurs’ relief proposed by new clause 14, which makes a key point about the lack of Government transparency. When UK Governments of all colours introduce a tax change, they often do not return with the evidence to show that the policy has worked. They will implement the policy and say that it is wonderful, but they will not bring back the proof. The Minister was asked yesterday how many companies have benefited from the loan guarantee fund in relation to oil and gas, but she was unable to provide a detailed answer. I do not know whether she just did not have the answer at her fingertips or whether the Government have not actually sat down and worked it out. If Governments are going to make grand claims about what they are doing and how good their policies are, they really need to bring back their work and show it to us.