Rob Marris
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Finance Bill (Third sitting)
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The Economic Secretary to the Treasury (Harriett Baldwin)
What a pleasure it is to serve under your chairmanship this morning, Sir Roger, after our short break. I welcome the hon. Members for Wolverhampton South West and for Leeds East to the Opposition Front Bench. I hope that they remain there for a long time. I also pay tribute to the work of the hon. Members for Worsley and Eccles South (Barbara Keeley) and for Wirral South (Alison McGovern), who worked so hard in that role before the break.
The changes made by the clause mean that banks will no longer be entitled to tax relief for compensation payments made in relation to their misconduct and mis-selling. That will protect the Exchequer from banks’ past management failures and ensure that the sector makes an appropriate contribution to restoring the public finances.
Let me start by providing some background to the tax rules in this area. Fines are generally treated as non-deductible expenses in calculating companies’ profits liable to corporation tax. That means that the fines imposed on banks as a result of their conduct have had no direct impact on UK tax receipts; in fact, they have actually benefited the Exchequer due to a change in rules enacted by the Government. That is not the case, however, for banks’ customer compensation payments. Such payments are generally treated as deductible expenses for corporation tax purposes, reflecting the fact that they are non-punitive and often the straightforward reimbursement of income on which businesses have already been taxed. As a result, compensation payments made by banks in relation to the mis-selling of financial products have, until this point, impacted directly on corporation tax receipts.
The scale of banks’ compensation payments in recent years has been unprecedented. More than £25 billion has already been paid out or provided for in relation to the mis-selling of payment protection insurance, with a further £1.8 billion paid or provided for in relation to the mis-selling of interest rate products. Crucially, the exceptional levels of banking sector compensation are persisting. New PPI provisions exceeded £2 billion in the first half of 2015 alone, with cumulative provisions now well in excess of initial market expectations and continuing to grow. In that context, the Government believe that the existing tax rules have become unsustainable. It is not acceptable that post-crisis corporation tax receipts continue to be depressed by conduct failures that in some instances took place more than 10 years ago. The clause therefore makes a change to address that.
The clause makes banks’ compensation payments in relation to misconduct and mis-selling non-deductible for tax purposes from 8 July 2015. That will apply to compensation material enough to have been disclosed in banks’ accounts, albeit with an exclusion for compensation relating to administrative errors, system failures and the actions of unconnected third parties. The changes will also capture administrative expenses associated with that compensation, but will achieve that indirectly by requiring banks to apply a 10% uplift in calculating their non-deductible compensation expenditure. That will help to ensure that the changes are proportionate. It will also ensure that the Exchequer is protected from the large-scale compensation seen in recent years, but in a way that is administrable and recognises that banks, like other industries, will inevitably make compensation payments as part of their ordinary course of business. Overall, this is a fair and workable set of rules, which is forecast by the independent Office for Budget Responsibility to increase banks’ corporation tax payments by £1 billion over the next five years.
We have already taken action to reduce the sensitivity of corporation tax receipts to losses incurred by banks during the crisis. The changes made by clause 18 now do the same in respect of banks’ past misconduct and the exceptional levels of compensation it has given rise to. This is crucial in ensuring that taxpayers get a fair deal from the banking sector, which they stood behind during the crisis. I therefore commend clause 18 to the Committee.
Rob Marris (Wolverhampton South West) (Lab)
What a pleasure it is to appear in Committee before you, Sir Roger. It has been a good many years. I thank the Minister for her kind words and pay tribute to my predecessors in this role, who worked hard, including on this Finance Bill. It is a particular pleasure to be shadowing the hon. Member for South West Hertfordshire. He and I have crossed swords in previous Committees—it is getting on for 10 years ago. I always think it is a bit like that Texas festival, South by Southwest—we are South West Hertfordshire and Wolverhampton South West. I look forward to our debate.
It will not surprise the Committee, and in particular my hon. Friends, that the Labour party thinks that clause 18 is rather a good idea. I will not detain the Committee for long, but I want to make one point and raise one issue. It was on this very day in 2008 that one of the major banks in this country was nationalised—I believe it was Lloyds bank. I remember, because I remarked in the Commons, as a then Government Back Bencher, that happy days were here again, because we were nationalising a bank on Margaret Thatcher’s birthday. It seems to go with the zeitgeist of the current Labour party leadership.
Harriett Baldwin
On that point, I am keen to explore whether the hon. Gentleman supports that leadership.
Rob Marris
Thank you, Sir Roger. As a shadow Minister, I think the Minister knows my response.
I have a question for the Minister—one that has just occurred to me, so I hope she will indulge me, as I have not had a chance to research it. The explanatory notes seem to suggest that this clause refer to banking, but the wording seems to suggest that it refers to corporation tax and deductions for compensation. All hon. Members will be aware that the largest car company in Europe—the second largest in the world—has been doing precisely what banks were doing leading up to the crash in 2008. Starting in 2009—which shows that the capitalists never learn and need regulating—the Volkswagen Audi group has been using computer algorithms and deception to con consumers. My personal view is that the Government, with the prosecuting authorities, should look at prosecuting Volkswagen executives if there is a case to answer that they obtained pecuniary advantage by deception—a breach of section 15 of the Theft Act 1968. However, my question for the Minister is this. Would clause 18, on the deductibility or non-deductibility from corporation tax of payments made by cheating companies, cover a company such as Volkswagen if it were adjudicated formally to have cheated?
Harriett Baldwin
Let me answer the hon. Gentleman’s question by agreeing that clause 18, given the way it is worded, applies only to banks. Clearly, it was introduced in response to the fact that the scale of bank compensation, to which I referred in my opening remarks, has been so significant. More than £25 billion has already been paid out, which has had a material and meaningful impact on the corporation tax receipts of Her Majesty’s Treasury. We have always been clear that we want banks to make a fair contribution to their historic costs and their potential impact on future risks to the economy.
The hon. Gentleman asked about compensation relating to the Volkswagen emissions scandal, which, as he is right to highlight, is a complete scandal. There is currently no intention to extend this measure. It is obviously early days in terms of the full scale of potential actions regarding Volkswagen, in particular Volkswagen in the UK and where the company pays corporation tax. However, I can assure the hon. Gentleman that the Government reserve the right to act decisively through legislation such as Finance Bills when they need to take steps to protect the public finances.
Harriett Baldwin
The changes made by clauses 19 and 20 ensure that special provisions for building societies in the loss-relief restriction legislation extend to savings banks, which share many of the same characteristics. This is a very narrowly targeted change to the legislation to ensure that it applies fairly across the sector and delivers on its stated policy objectives. Clause 20 makes a change to the definition of a bank for the purposes of bank-specific tax legislation, helping to ensure that it is aligned with regulation and delivers the intended policy outcome.
Let me start by explaining the background to clause 19. When a company makes a loss for corporation tax purposes, it is entitled to carry forward that loss and offset it against taxable profit arising in future periods. Legislation was included in the Finance Act 2015 to restrict the amount of profit that banks and building societies can offset with historical losses to 50% from 1 April 2015. This is designed to reduce the sensitivity of corporation tax receipts to losses incurred by banks during the financial crisis and subsequent misconduct and mis-selling scandals. The loss-restriction legislation includes a special provision for building societies, meaning that the restriction applies only to profits they make in excess of £25 million. That reflected a concern that the smallest building societies could otherwise be disproportionately impacted by the restriction, due to the fact that they are non-profit maximisers and reliant on retained earnings to build regulatory capital.
It has been brought to the Government’s attention that this provision does not accommodate banks incorporated under the Savings Bank (Scotland) Act 1819, which share many of the same characteristics as building societies and thus have the potential to be affected in the same way. The changes made by clause 19 therefore address that by ensuring that, from its inception, the legislation applies fairly and consistently across the sector. The changes will have a negligible impact on tax receipts. The independent OBR still forecasts that the loss restriction will increase banks’ tax payments by around £4 billion across the next five years, helping to ensure a fair deal for the taxpayer.
I will now turn briefly to clause 20. The Government have taken a number of steps to ensure that banks make a fair contribution to the public finances. That includes the bank levy, a tax on banks’ balance sheet equity and liabilities. The measures also include a restriction on the amount of profit that banks can offset by carried-forward corporation tax losses.
These policies, which will have raised over £30 billion in total by 2020-21, rely on there being a suitable definition of a bank within tax legislation. That definition needs to be able to take account of the differences between retail banks, investment banks and building societies. The current definition, which is based on regulatory concepts and supervision responsibilities, has been successful at targeting tax measures in accordance with the Government’s policy objective. However, as part of the modernisation of financial regulation, there have been recent changes to the regulatory terms used. Clause 20 aligns the definition used within tax legislation with those changes, and so ensures that investment banks supervised by the FCA remain within the definition, in line with the stated policy objective. The amended legislation will continue to apply to the same population and will continue to operate in the same manner.
Clause 19 represents a narrowly targeted change to the loss restriction legislation to ensure that it applies consistently across similar institutions. It is consistent with existing policy and immaterial in terms of sector-wide tax receipts. Clause 20 is a technical change to the bank tax legislation to ensure that it remains appropriately targeted and appropriately aligned with regulation.
Rob Marris
We seem to be dealing with the progressive clauses early on in our proceedings. That suits me and my party rather well: we like building societies, and I suspect that, were we to know more about savings banks in Scotland, we would like them as well, because they are not driven solely by profit, but do wish to make a surplus. I therefore encourage my hon. Friends to support clause 19.
As for clause 20, I have to confess—and this will not be the last time—that some of the technical matters are beyond me, although I appreciate that there is considerable expertise on the Committee and I thank the Minister for her explanation of this technical change. I have one question for her about the clause. It is a troubling one, but she may be able to allay my fears; if she cannot, I will be encouraging my hon. Friends to abstain.
As I understand it, the effect of clause 20, if enacted, would be retrospective to 1 January 2014—that is, a year and a half before the Budget on 8 July 2015. As a lawyer and as a Member of Parliament, I am always acutely concerned about retrospective legislation. I know it happens in Finance Acts in particular; it is common to backdate things to the date of the Budget, for example, and, on occasion, to the beginning of the tax year of that Budget. However, this is the second Finance Bill this year—one hopes it will be the last—and it is concerning to have retrospectivity, even if the measure is a very technical one.
Harriett Baldwin
The hon. Gentleman is absolutely right that, where possible, we always try to ensure that this type of legislation has no retrospective effect. He is also right that that is an important principle that we apply in dealing with such Bills. However, I can reassure him that, as he will see from the impact assessment, there will be no change to the effect of the legislation in terms of its financial impact. The legislation will continue to apply to the same population as before and will continue to operate in the same manner. He is right to raise a general principle that we would seek to observe with regard to the Bill, but in this example, because the institutions in question are already being treated in this manner for tax purposes and for regulatory purposes, it is simply a case of the legislation catching up with the real world.
Rob Marris
Is the Minister suggesting, by talking about catch-up, that the regime has been acting outside the law for the best part of two years?
Harriett Baldwin
The wording in the legislation is being changed to reflect the way in which the system has been operating, and so the change will have no material or measurable impact. Given the regulatory changes that came into effect with the Finance Act 2012, the legislation was ambiguous, so I would describe the change as a clarification of the wording to provide certainty in the legislation to match what has been happening in the real world.
Mr Gauke
It is a great pleasure to serve under your chairmanship again, Sir Roger. I add my words of welcome to the hon. Member for Wolverhampton South West. As he said, we crossed swords in Finance Bills many years ago and I am delighted to see him back. I know that he will be an assiduous and thoughtful scrutiniser of the Bill and I am delighted to see him in place following his overdue promotion to the Front Bench. I also welcome the hon. Member for Leeds East to his Front-Bench position, as well as the hon. Member for St Helens North to the important role of Opposition Whip—although I note that the hon. Member for Scunthorpe is still present to provide any necessary words of guidance. Given his additional Front-Bench duties, that is to be commended. He clearly cannot keep away from Finance Bill debates—an attribute that both I and the hon. Member for Wolverhampton South West appear to share.
Clauses 21 and 22 will reduce the 45% tax on lump sums payable from a pension of individuals who die aged 75 or over to the marginal rate of income tax. These changes will ensure that individuals receiving taxable pension death benefits are taxed in the same way regardless of whether they receive the funds as a lump sum or as a stream of income. April this year marked the introduction of the Government’s radical reforms to private pensions. The historic changes included the removal of the 55% tax charge that used to apply to pensions passed on at death. Under our reforms, lump sums payable from the pension of someone who has died before age 75 are now tax-free. That was not previously the case: the recipient of the lump sum had to pay the 55% tax if the pension had been accessed. We also reformed who can take a pension death benefit.
Individuals can now nominate anyone they want to draw down the money as pension, paying tax at their marginal rate. However, for 2015-16, individuals receiving the money as a lump sum from the pension of someone who has died aged 75 or over pay tax at a special rate of 45%. These clauses meet the Government’s commitment to reduce that special rate to the recipient’s marginal rate from April 2016. That will align the income tax treatment of individuals who take the money as a lump sum with those who receive it as a stream of income.
Around 320,000 people retire each year with defined contribution pension savings. Their beneficiaries could now potentially benefit. Clause 21 removes the 45% tax charge that applies when certain lump sum death benefits are paid to individuals, and clause 22 applies the marginal rate of income tax instead. The 45% tax charge will remain in place where the lump sum death benefit is not paid directly to an individual.
For individuals who have such a payment made to them through a trust, clause 21 ensures that when the money is paid out, the individual will be able to reclaim any excess tax paid. That means that they will ultimately pay tax at their marginal rate, as though they had received it directly. For many people receiving these lump sum death benefits, clauses 21 and 22 will therefore mean a reduction in the tax payable. However, we must of course safeguard the Exchequer. These clauses will therefore ensure that people who leave the UK for a short period, receive the lump-sum death benefit and then return here will not escape UK tax charges, nor will they be able to escape UK tax charges because the member transferred their pension savings overseas in the five tax years before they died. UK tax charges will still apply in such cases, to make sure that people pay the right amount of tax.
Government amendment 13 removes potential unfair outcomes for individuals who have a defined benefit, lump-sum death benefit paid to them by removing the test against the lifetime allowance where the lump sum is subject to another tax charge. That means that any such lump-sum death benefit will be subject to one tax charge only.
Clauses 21 and 22 will make the tax system fairer and ensure that individuals who receive death benefit payments from the pension of someone who dies aged 75 or over are taxed in the same way, regardless of whether the death benefit is paid as a lump sum or a stream of income.
Rob Marris
I knew that we would hit the buffers sooner or later, but I thank the Minister for his kind words. To get it out the way, it will not surprise him to know that we support amendment 13, because taxation should not happen twice. Perhaps he might tell me at some point whether this was another difficulty spotted by Mrs Gauke, who has been known to grace this Committee in the past with her insights and specialties.
Rob Marris
The Minister says it was not.
I am uneasy, however, about clauses 21 and 22, which are twins. As I understand it—I may have misunderstood—an individual who as a beneficiary would previously have been paying tax at 45% on a windfall will in future be paying tax at their marginal rate, whether 20% or 40%. I am uneasy about that for two reasons. First, we have historically tended to impose taxes on death calculated on the estate rather than on the recipient. The inheritance tax, as you may remember, Sir Roger, became the capital transfer tax and then went back to being inheritance tax again, which is where we are now—although they are commonly called death duties. The tax payable back then was calculated on the value of the estate and the thresholds, allowances and so on relating to that. These clauses change that—perhaps the change was made in the past and I am not aware of it, which I readily concede might be the case—and tax payable will now be calculated on the tax rate of the individual beneficiary or recipient.
Secondly, this is money that has been taxed at 45%. It is a windfall. It is money that had tax relief when paid into the pension scheme and it had tax relief while that pension scheme was accumulating its funds. It now gets not tax relief, but a lowered tax rate than has hitherto been the case, dropping from 45% to 20% or 40% due to these two clauses. I am uneasy about that. My fears may be allayed if the Minister or his colleagues can clarify the matter further, but it may be that I will ask my hon. Friends to vote against these two clauses.
Mr Gauke
I am sorry that we seem to have hit the buffers quite so quickly when things were so consensual. First, there is a well-established distinction between the inheritance tax regime and the treatment of lump-sum death benefits. For example, if a spouse dies and leaves his or her estate to the surviving spouse, there is an exemption and no tax is paid. There is no equivalent provision in terms of the tax on lump-sum death benefits. I take the hon. Gentleman’s point, but I disagree with it. His argument does not go very far in terms of a direct analogy between the inheritance tax regime and lump-sum death benefits.
The hon. Gentleman argues that pensions are taxed on the basis of what tax professionals describe as EET—that is, exempt, exempt and then taxed. It is worth pointing out that under this regime, although pension savings are still taxed at the final stage, they are taxed at the marginal rate of the recipient. That does not mean that these sums essentially go completely untaxed—which I think is at the heart of the hon. Gentleman’s concern. More fundamentally, however, I would argue that we want a savings regime that encourages people to save for their pensions and a regime with a charge of 55%—as it was not that long ago—could be seen as punitive. In the circumstances that apply in this case, it is not unreasonable that there should be consistency in the tax treatment of these pension funds, regardless of whether payments are made as a lump sum or a stream of income.
I do not know whether I have succeeded in persuading the hon. Gentleman of the case for this, but I would argue that these provisions make our tax system fairer. They ensure that individuals receiving taxable pension death benefits are taxed in the same way, regardless of whether they receive the funds as a lump sum or as a stream of income. I therefore hope that clauses 21 and 22 can stand part of the Bill.
Amendment 13 agreed to.
Clause 21, as amended, ordered to stand part of the Bill.
Clause 22 ordered to stand part of the Bill.
Clause 23
Pensions: annual allowance
Question proposed, That the clause stand part of the Bill.
Rob Marris
I regard the amendments as technical changes that smooth the transition periods for the input year and tax year. I have to say that I am delighted by the clause. Many years ago, I was a lone voice in Parliament calling for a restriction of tax relief on pension contributions. As the Minister quite rightly said, it cost almost £18 billion a year in 2001 and that figure has shot up.
When I asked the Department for Work and Pensions—in 2003 or 2004—what evidence there was that tax relief on pension contributions encouraged people to save for a pension, the DWP had no such evidence. To me, that was shocking for a tax relief that then cost £18 billion a year. In a sense, the Government were spending, through forgone income, to encourage a pattern of behaviour when there was no evidence that they were encouraging such behaviour. I salute this Government for grasping that nettle.
The other reason I oppose pension tax relief—the Minister generously adverted to this today and clarified for the Committee—is that it has hitherto been incredibly regressive. When I raised this matter 10 or 12 years ago, it was even more regressive. The proportion being claimed by higher and additional rate taxpayers is now down to two thirds; it used to be about 90%. It was astounding to me that a Labour Government—a socialist Government in name—would continue with a tax measure that did not do what it was designed to do and which favoured the very well-to-do. We then had my hon. Friend Ruth Kelly, then Member for Bolton and, I think, Financial Secretary to the Treasury, introducing the nonsense of the annual allowance. It was completely bodged, as the Finance Bill Committee at the time, on which I sat, pointed out to her.
I still think there is a question mark over the whole concept of pension tax relief system for pension contributions, but this measure is progressive and, I have to say, it is somewhat to my surprise that the Government and their predecessor have now grasped the nettle twice. I urge my hon. Friends enthusiastically to support the clause.
Question put and agreed to.
Clause 23 accordingly ordered to stand part of the Bill.
Schedule 4
Pensions: annual allowance
Amendments made: 14, in schedule 4, page 99, line 43, leave out “227B(2)” and insert “227B(1)(b) and (2)”.
Amendment 15, in schedule 4, page 100, line 10, leave out “section 227ZA(1)(b)” and insert
“each of sections 227ZA(1)(b) and 227B(1)(b)”.
Amendment 16, in schedule 4, page 100, line 14, leave out “section 227ZA(1)(b)” and insert
“each of sections 227ZA(1)(b) and 227B(1)(b)”.
Amendment 17, in schedule 4, page 103, line 3, at end insert—
“Exceptions in certain cases where individual is deferred member of scheme
(6A) Subsections (3) to (5) do not apply, and subsections (6B) and (6C) apply instead, if—
(a) because of section 238ZA(2), a pension input period for the arrangement ends with 8 July 2015,
(b) another pension input period for the arrangement ends with a day (“the unchanged last day”) after 5 April 2015 but before 8 July 2015, and
(c) section 230(5B) or 234(5B), when applied separately to each of—
(i) the pension input period for the arrangement ending with 8 July 2015, and
(ii) the pension input period for the arrangement ending with 5 April 2016,
gives the result that the pension input amount in respect of the arrangement for each of those periods is nil.
(6B) The pension input amount in respect of the arrangement for the post-alignment tax year is nil.
(6C) The pension input amount in respect of the arrangement for the pre-alignment tax year is the amount which would be the pension input amount in respect of the arrangement for the pre-alignment tax year if—
(a) the pension input period ending with the unchanged last day were the only pension input period for the arrangement ending in the pre-alignment tax year, and
(b) subsections (3) to (5) were ignored.”
Amendment 18, in schedule 4, page 103, line 4, after “Modifications”, insert “in some other cases”.
Amendment 19, in schedule 4, page 103, line 44, at end insert—
“Modification where last input period ends before 9 July 2015
(11A) If the last pension input period for the arrangement ends after 5 April 2015 but before 9 July 2015—
(a) the time-apportioned percentage for the post-alignment tax year is treated as being nil, and
(b) the time-apportioned percentage for the pre-alignment tax year is treated as being 100.”
Amendment 20, in schedule 4, page 103, line 46, at end insert—
“() subsections (6B) and (6C) do not apply,”.
Amendment 21, in schedule 4, page 104, line 7, after “period”, insert
“(for this purpose treating that remainder as a single pension input period if not otherwise the case)”—(Mr Gauke.)
Schedule 4, as amended, agreed to.
Clause 24
Relief for finance costs related to residential property businesses
Mr Gauke
I beg to move amendment 22, in clause 24, page 36, line 23, leave out
“a property business carried on by a company”
and insert
“calculating the profits of a property business for the purposes of charging a company to income tax on so much of those profits as accrue to it”.
Mr Gauke
Clause 24 makes changes to ensure that all individual residential landlords get the same rate of tax relief on their property finance costs. This change will make the tax system fairer. Landlords with the largest incomes will no longer receive a more generous tax treatment. The distortion between property investment and investment in other assets will be reduced, and the advantage landlords may have over those who work hard to save for a deposit in order to own their own home will be minimised.
Let me begin by setting out the problem that the clause remedies. Landlords are able to offset their finance costs, such as mortgage interest, from property income when calculating their taxable income, reducing their tax liability. At present, the relief they receive from this is at the marginal rate of tax. That means that landlords with the largest incomes benefit the most from the relief, receiving relief at the higher or additional rates of income tax—40% or 45%—whereas landlords with lower incomes are able to benefit from relief only at the basic rate of income tax, which is 20%. In contrast, owner-occupiers of properties do not get any tax relief on their mortgage costs, and finance cost relief is also not available to individuals investing in other assets, such as shares in public companies. That creates a distortion between property investment and investment in other assets.
Clause 24 will reduce the inequity by restricting finance cost relief to the basic rate of income tax—20%—for all individual landlords of residential property. It will unify the tax treatment of finance costs for such landlords, including individual partners of partnerships and trusts. The change will ensure that landlords with the largest incomes no longer benefit from more generous rates of relief.
The Government recognise that many hard-working people who have saved and invested in property depend on the rental income they get, so the clause is being introduced in a proportionate and gradual way. The restriction will be phased in over four years from April 2017, ensuring landlords have time to plan for the change.
The Government have tabled five amendments to the clause. Amendment 22 ensures that all companies are excluded from the restriction, even when carrying on a property business in partnership. Amendments 23 to 26 ensure that where a trustee’s finance cost deduction is restricted, basic rate relief is available to trustees with accumulated or discretionary income.
Only one in five individual landlords are expected to pay more tax as a result of this measure. The Government do not expect the change to have a large impact on either house prices or rent levels due to the small overall proportion of the housing market affected. The Office of Budget Responsibility has endorsed this assessment. It believes that the impact on the housing market will be small and, taking account of the other measures in the Budget, has not adjusted its forecast for house prices. By April 2020, only 10% of individual landlords will see a tax bill increase greater than £500.
The clause will make the tax system fairer. It will restrict the amount of tax relief landlords can claim on property finance costs to the basic rate of tax, thus ensuring that landlords with the largest incomes no longer receive the most generous tax treatment. It will also reduce the distorting effect that tax treatment of property has on investment and the advantage landlords may have in the property market over owner-occupiers.
Rob Marris
The amendments, as far as I can tell, are technical measures to smooth things out. As ever, these things come out in the wash, whether it is Mrs Gauke or someone else who spots them.
It is likely that I will ask my hon. Friends to support the clause but I want to probe the Government on it. As the Minister knows, this is one of the higher profile clauses in the Bill and has attracted a rather large postbag. Some landlords—not all—are concerned.
I appreciate that any landlord among the one in five paying more tax under the provision has almost two years from 8 July to April 2017 to sell the property if they wish to do so, so that they are not boxed in with de facto retrospective action, which can happen if there is only three months in which to sell. I salute the Government for giving that transition time.
I am surprised to hear that only one in five landlords will be affected, but the Government and the OBR have done their research. I am concerned that the measure will do nothing for house prices, which is perhaps a debate for another day. Would that it would bring down house prices, which are far too high around the country. Those prices might well get higher when pensioners, under the Government’s freedoms, buy not Lamborghinis but houses with the money freed from their pension funds.
Mark Garnier
I have a small amount of sympathy with the view that house prices are too high, but is the hon. Gentleman genuinely advocating that the principal method of saving for most people in this country should be reduced in value? The effect on households would be astronomically catastrophic if one were to start reducing house prices. Is that part of his policy?
Rob Marris
Yes, I would like house prices to come down; they are far too high. For most people, property is not an asset that is any good to them until they die—in which case, of course, it is no good to them. The house I live in is worth roughly eight times what we paid for it 30 years ago. That is almost entirely a windfall, though some of it is due to improvements we have made. I will not take long on this, Sir Roger, because I know you do not want us to be too diverted, but were my wife and I to move, we would have to pay an equivalent sum for something else. Yes, house prices are far too high but they will come down when the Government do their bit by increasing the supply of houses.
Meanwhile, returning to clause 24, this is the issue on which I wish to probe the Minister. I may have misunderstood these technical matters because I am not an accountant, but I believe the buy-to-let income accruing to the landlord is counted as income for income tax purposes. There will therefore be some landlords—perhaps the Government have figures—who, before this change, when their non-buy-to-let income, perhaps from a job, was added to their buy-to-let income were standard rate taxpayers, but who will become higher rate taxpayers after the change is made. Therefore, that group may end up paying considerably more tax.
It is not simply a question of landlords who are already 40% taxpayers because of other income being levelled, as it were, to 20%, which is what I understand the clause is designed to do. That is understandable. However, it would actually be promoting people—pushing them into a higher rate tax bracket—and therefore they would be losers. Does the Minister have any figures on that “in between” group—a rather maladroit phrase, but the Minister will understand what I mean—who will be pushed up. I hope that, now he has the piece of paper, he will be able to elucidate that point for the Committee. As I say, my inclination is to support the measure, but I am concerned about that cohort who may be suddenly treated in a slightly different way, which may mean that the figure of one in five the Minister quoted is somewhat low.
Rob Marris
I welcome the continuation of a Labour scheme from 2007 in clauses 25 and 26, and the refinement of the scheme. I congratulate the Government on securing approval from the European Commission, which has been in question for some time. That is also a replay—we will get on to this—of what happened in 2010 with farming.
I am pleased that the employee limit will be raised—to 500, I think the Minister said. That is helpful. I thank the Minister for the teaser he gave us on two occasions for the amendments to be tabled on Report, which we look forward to with excitement. I am pleased that the EIS and VCT schemes are not to be used to take over existing businesses, because that would undercut their whole raison d’être. However, in the light of that, I am a little concerned about what the Minister said about using the schemes for replacement capital. Prima facie, that is not what the schemes are intended to do, which is to kick-start and help to grow knowledge-based, innovative industries—hence the exclusion, for example, of farming. That replacement capital, of course, would keep such a business going, but in a sense it is not new money, because it is, as its title suggests, replacement capital. I am concerned about that point. We must focus on the tax relief and why it is being given.
I am pleased about clause 27. It concerns a scheme brought in by the last Labour Government—and happily continued by the coalition Government and, now, the current Government—to encourage investment in cases of market failure, and it shows that people will look for loopholes. The Minister adverted to market failure, which is also helpfully mentioned in the explanatory notes. Indeed, let me take this opportunity to pay tribute to those who compile the explanatory notes. I am sure it is a big team and they do an excellent job; the notes are very helpful. [Hon. Members: “Hear, hear!”] Would that this Government and their predecessors were a little more alert to market failure on a broader canvas—for example, in the energy industry. That is one of the things my party is very keen on: using the levers of the state to address market failure.
This small scheme, which is being continued from the Labour scheme in 2007, is of course to do with market failure, but when it comes to farming, it shows just how cunning these tax accountants are at coming up with loopholes. As I understand it, there was no loophole for the three years before 2010. Then the European Union made a ruling on certain aspects of state aid, which meant that a company could not be wholly or mainly a UK company in terms of its operations. Lo and behold, we have a few companies—I think that the Minister’s noun was “handful”—who exploit this to carry on farming activities outside the UK, claiming tax reliefs through EIS and VCT. Had they been carrying out farming activities within the UK from the inception of the scheme in 2007, they could not have claimed that tax relief. Wow, are they cunning! They have been getting with away with it, doing something quite legitimate and lawful, as I understand it—it is avoidance, not evasion—for five years.
Of course, some aspects of farming are very knowledge-based and innovative, but that is not what these schemes are focused on, and this example underlines how vigilant we all need to be as parliamentarians about these cunning tax avoiders. The Minister and his colleagues spent years in opposition decrying my Government for an increasingly long tax code, as shadow Ministers used to call it—although that is an Americanisation, just as they pronounce leverage the American way, rather than using the proper English pronunciation. We will come to the issue of our tax legislation being so long and complicated later, but this is just one minor example of where we have to introduce anti-avoidance provisions because these experts are so cunning with their tax avoidance. I am therefore very pleased about clause 27.
Mr Gauke
I thank the hon. Gentleman for his support for these clauses. He essentially raised two points. First, he raised his concern about whether replacement capital was consistent with the rationale behind these schemes. Let me provide what I hope is some reassurance. The intention is for replacement capital to be available only where there is significant new investment in the company. That will be subject to state aid approval, but there are circumstances where it may be necessary as part of any new investment for there to be some re-organisation of capital. That is what we are getting at in this clause. Our intention is to come forward with secondary legislation on this point, and I look forward to the opportunity to debate this with the hon. Gentleman in detail when we do so.
I welcome the hon. Gentleman’s support for clause 27. It is always disappointing when a technical flaw is found in legislation, especially after a few years. It came to light only recently and we are correcting it as quickly as we can. It arises from a fairly obscure interaction between the main scheme rules and the definition elsewhere in the Taxes Act. Very few cases of farming outside the UK have received tax reliefs under the schemes.
On that point, the most information I can provide to the Committee is this. HMRC does not keep a record of tax reliefs by reference to the activities of the company. However, HMRC’s operational staff can recall seeing no more than half a dozen or so applications a year, most of which were rejected because the company failed to meet all the requirements. The number of cases that have received relief is small, as I said earlier. Given those points of clarification, I hope the Committee is happy with these measures, and I hope they stand part of the Bill.
Question put and agreed to.
Clause 25 accordingly ordered to stand part of the Bill.
Schedule 5 agreed to.
Clause 26 ordered to stand part of the Bill.
Schedule 6 agreed to.
Clause 27 ordered to stand part of the Bill.
Clause 28
Travel expenses of members of local authorities etc
Question proposed, That the clause stand part of the Bill.
Mr Gauke
My hon. Friend makes a good point. It is not my purpose to reopen the debate on pensions and local councillors, however tempting that might be, but I am grateful for my hon. Friend’s intervention.
The clause will support councillors in the vital constitutional role they perform by exempting travel expenses paid by their local authorities from liability to income tax, and I hope it will stand part of the Bill.
Rob Marris
I do not propose to spend a long time on this. I have never been a councillor but it would be seen as navel gazing for us as elected representatives to spend a long time on this clause. The Opposition support the clause because we want to encourage democracy and so that democratic parties can get the best candidates, and this measure is all part of that spectrum.
I would like the Minister to clarify one point. He referred to journeys by public transport. I apologise that I was not concentrating enough when he made that reference. My understanding from the Chartered Institute of Taxation is that this change would not cover travel by public transport. If public transport travel is not covered, will the Minister please explain why? Will he also say whether, for example, a mayor who travelled by bicycle might claim these expenses?
Mr Gauke
I am grateful to the hon. Gentleman for his support for the clause. It is always good to see a consensus on supporting democracy. As I said earlier, the provision does apply to public transport, so the hon. Gentleman can be reassured that there is nothing that would discourage people using public transport. The provision will apply to public transport or where a councillor uses their own vehicle.
Mr Gauke
I am afraid that I do not think that the travel expenses regime will apply to bicycling. I sense that the hon. Gentleman has his first campaigning issue to get his teeth into as a Front Bencher.
Question put and agreed to.
Clause 28 accordingly ordered to stand part of the Bill.
Clause 29
London Anniversary Games
Question proposed, That the clause stand part of the Bill.
Mr Gauke
I can give one good example: we applied the same exemption for the Glasgow 2014 Commonwealth games. That is an example of the Government’s willingness to do that. Again, that was part of maintaining the Olympic legacy and ensuring that we could get top athletes to compete in the Commonwealth games. The hon. Gentleman raises a fair point and I hope he accepts that I have given a fair answer to it. I hope the Committee agrees that the clause should stand part of the Bill.
Rob Marris
My hon. Friend the Member for City of Chester raised a point that I wished to raise. The Minister’s reply was not entirely clear. My hon. Friend’s question, as I understood it, was whether such ad hoc arrangements would continue to be ad hoc, or whether they would be systematised into our tax rules on a general basis, so that we can continue to attract world-class athletes and other competitors, indeed to other parts of the country as well as London.
I echo what my hon. Friend said. As I am sure all hon. Members know, the Olympic games were revived in Much Wenlock, just down the road from Wolverhampton South West, in the late 19th century. We want to encourage such events and we want more to be held outside London, so it seems logical for the Government to look at systematising the tax relief, rather than giving it on an ad hoc basis, with the uncertainty that that brings. Do the Government have any plans to investigate whether there should be—or indeed should not be—such a permanent tax relief?
Mr Gauke
I hope to provide a little more clarity. In my previous answer, I wanted to make the point that we are not London-centric in granting relief. Indeed, as I said, we granted relief for the Glasgow Commonwealth games.
As for providing an overall exemption, we allow tax exemptions for sporting events only if they are a condition of a bid to host an international mobile and major world-class sporting event. We see the clause as part of the legacy of the Olympics, which is why we have made this decision. Any potential exceptions to the rule will be considered on a case-by-case basis and we will continue to take that approach, but we are of course determined to ensure that we attract major sporting events to this country. We are currently hosting the rugby world cup, although unfortunately England are no longer participating in it, and there will be major football finals in Cardiff in forthcoming years. We believe that the current policy of providing exemptions when world-class events request them as part of the bid conditions is the right approach, and we intend to continue with it.
Question put and agreed to.
Clause 29 accordingly ordered to stand part of the Bill.
Clause 30
R&D expenditure credits: ineligible companies
Question proposed, That the clause stand part of the Bill.
Rob Marris
The research and development tax credit scheme has been successful. It was, of course, introduced under a Labour Government. The coalition Government’s decision in 2013 to extend research and development tax relief to large companies was welcome. Historically, probably since the turn of the last century more than 100 years ago, this country has not invested enough in research and development. That is one reason why we have poor productivity—another is Government policy, of course. That trend needs to be reversed.
Mr Gauke
The clauses and the schedule make wide-ranging changes to the corporation tax rules for company debt—referred to as loan relationships in the statute—and derivatives. These changes bring the rules up to date, making them simpler and easier for companies to use and at the same harder to misuse or manipulate.
It may help the Committee if, before I explain the changes in detail, I provide some background. The rules on loan relationships are almost 20 years old. They are based on the straightforward idea of taxing company debt on the basis of commercial accounts. The rules operate without difficulty for many, particularly for smaller companies with simple financing arrangements, but they also have to cater for commercial situations that can be highly complicated. The Government have frequently received comments on the complexity of the rules. At the same time, the loan relationships and derivatives regimes have frequently been targeted by tax avoiders. Often, the reaction to those attempts at avoidance has been to close loopholes by very specific, narrowly focused changes to the law. That approach has generally been successful, but it has not deterred avoiders from finding new ways to get round the rules or abuse them. It has also added to their complexity. In addition, over the years there have been changes to the accounting standards that underlie the tax rules, and further significant changes are being made at the moment.
Those factors mean that the time is ripe for a general review of this part of the tax code. Indeed, an article in Tax Journal in December 2014 noted that such a review was “long overdue and necessary”. At Budget 2013, the Government announced a consultation on a package of proposals to modernise the legislation. The clauses and schedule before the Committee today are the outcome of that consultation.
We are making extensive changes. I will explain briefly the most significant elements of the package. First, we are aligning taxable amounts more closely with commercial accounting profits, so taxation of loans and derivatives will now be based on amounts recognised in accounts as profits or losses, similar to the way trading profits are calculated. In contrast, up to now the tax rules for loans and derivatives have looked at amounts recognised anywhere in accounts—in equity or reserves, for example. A transitional rule will ensure that this change is broadly tax-neutral and that nothing is taxed twice or not at all. A recent article in Tax Journal described the change as “a hugely welcome simplification”. Alongside it, we are making further changes that will reduce the occasions when taxation does not follow the accounting treatment.
We are introducing new corporate rescue provisions, which will benefit companies that are in genuine financial difficulty and looking to restructure their loans to avoid insolvency. The rules will make it easier for such companies to agree arrangements with creditors without incurring a tax charge. The change has been warmly welcomed and will help companies to stay in business, to continue contributing to the UK economy and to preserve jobs. For example, in its February 2015 client newsletter, Allen & Overy noted:
“These exemptions received a uniformly positive welcome.”
I described how, although they effectively close down avoidance schemes as they come to light, the existing narrowly focused rules have not stopped attempts to target or use company loans and derivatives in tax avoidance arrangements. Because of that, we are strengthening the protection for the Exchequer by introducing new regime-wide anti-avoidance rules, which will deter and block arrangements of any kind that are entered into with the intention of obtaining a tax advantage by way of the loan relationships or derivatives rules. Unlike many existing anti-avoidance provisions, the new rules do not focus narrowly on specific situations or types of avoidance, so it will be harder to sidestep them.
It is important that the rules do not interfere with genuine commercial activity, so we have worked closely with interested parties to ensure that they will prevent avoidance without affecting legitimate business transactions. A number of existing anti-avoidance rules will now be redundant, so we are repealing them, which will be a welcome simplification.
Consultation has continued since the Bill was introduced and has identified the need for Government amendments to schedule 7 to deal with a potential unintended outcome. The amendments do not represent any substantive change of policy, but simply bring forward the date at which the corporate rescue reliefs that I described a few moments ago become available. The Bill currently provides for those reliefs to be available from the date of Royal Assent, but we have recently been made aware in consultation that a small number of companies have entered into transactions on the basis that retrospective relief would be available from 1 January 2015, as was envisaged in earlier draft legislation published in December 2014. As a result, they would not qualify for relief and so would be in danger of becoming insolvent, with possible loss of jobs.
As a rule, the Government do not legislate to take account of the fact that taxpayers have acted on the basis of unenacted legislation, but I am mindful that in this case the whole purpose of the corporate rescue reliefs is to avoid unnecessary insolvencies and preserve businesses and jobs, so the amendments reset the commencement date to 1 January 2015.
In conclusion, the provisions support the Government’s aim of promoting a tax system that is efficient, competitive, predictable, simple and fair. They bring the tax system for corporate debt and derivative contracts up to date and make it simpler. They make it easier for companies to restructure debt to avoid insolvency and they make it harder for tax avoiders to get around or take advantage of the rules. I therefore commend clauses 31 and 33 and schedule 7 to the Committee.
Rob Marris
These are welcome anti-avoidance measures, although I must say that they are of such complexity that I do not understand them and, with respect to my hon. Friends, I suspect that few of them do either. I am pleased that the Government have listened to the consultation and changed the commencement date to 1 January 2015, which was something on which I was lobbied.
The provisions indicate how difficult it is to simplify our tax regime—something with which the Minister will have struggled in the past five and a half years since he got into government. It is easy to argue from the Opposition Benches for a simplified tax regime, and of course I would argue for that as well. Clause 31 looks simple: it is 11 words long—now that is nice and simple. However, those 11 words incorporate schedule 7, which is, at 43 pages, the longest schedule I can recall seeing appended to any Bill. I would like some further reassurance from the Minister, if he is in a position to give it, that a 43-page schedule simplifies our tax regime.
Mr Gauke
The clause removes corporation tax relief in relation to purchased goodwill and certain other customer-related intangible assets. The changes ensure that companies will no longer be able to reduce their corporation tax profits by claiming relief for the cost of purchased goodwill written off in the company accounts. Clause 32 applies to all acquisitions made on or after 8 July 2015. Companies that have completed acquisitions before 8 July 2015 will not be affected.
In accounting terms, purchased goodwill is the balancing figure between the purchase price of a business and the net value of the assets acquired. Goodwill can therefore be thought of as representing the value of a business’s reputation and customer relationships. Customer-related intangible assets include the types of assets associated with the goodwill of the business or the business’s reputation, such as customer lists, customer information and unprotected trading names or marks.
The Finance Act 2002 introduced a new tax regime for companies’ intangible fixed assets commencing on 1 April 2002. The treatment of intangible assets generally follows the accounting treatment set out in the legislation, which treats goodwill like any other type of intellectual property such as a trademark, patent, design right or copyright. However, in reality goodwill is simply the difference between the purchase price of a business and the business’s net asset value. It represents the premium a buyer will often pay to acquire an established business, compared with buying business assets and commencing a new business. It is therefore different from other, separable, intangible assets such as websites and patents.
The existing rules allow the buyer to claim annual corporation tax relief for the cost of the goodwill. That relief reduces corporation tax profits, as the cost of the purchased goodwill is written down in the company accounts or is given on a fixed-rate basis of 4% per annum. That advantage is not generally available to companies that undertake mergers and acquisitions by purchasing the shares of the target company, nor is it available to new start-up businesses or to businesses that grow organically. The current rules can therefore distort commercial practices and lead to manipulation and avoidance. For example, relieving the cost of a business acquisition can affect the price payable in anticipation of the available tax relief.
The changes made by clause 32 will withdraw amortisation and fixed-rate relief for all goodwill and customer-related intangible asset acquisitions that occur on or after 8 July 2015. Instead, relief will be given if and when those assets are subsequently sold or otherwise disposed of. The clause will treat any loss arising on such a disposal as a non-trading loss. That is to limit how such losses can be relieved. Existing cases—companies that acquired goodwill or other relevant assets before 8 July 2015—will not be affected.
In conclusion, clause 32 removes the financial advantage for structuring a merger or business acquisition so that goodwill can be recognised by the buyer. It levels the playing field for mergers and acquisitions, and brings the UK in line with international standards. I hope the Committee will agree to its standing part of the Bill.
Rob Marris
This seems to be a sensible measure to level the playing field, although it may have an effect on businesses that are not incorporated and where there could be no question of shares being substituted. The change builds on the excellent 2002 legislation on the taxation of intangible assets, and Opposition Members should support it.
Question put and agreed to.
Clause 32 accordingly ordered to stand part of the Bill.
Clause 34
Group relief
Question proposed, That the clause stand part of the Bill.
Mr Gauke
Clause 34 makes the tax system simpler by removing differences in the treatment of consortium link companies based in the UK and other jurisdictions. The current rules state that, for corporation tax group relief to be available between a group and a consortium, the company that links the two must be located in the UK or the European economic area. Where the link company is in the EEA but not the UK, there are other requirements.
The changes made by clause 34 remove all requirements relating to the location of the link company so that relief may be given regardless of where it is based. The change simplifies the tax system by putting consortium relief on the same footing as normal group relief. That supports the Government’s ambition to continually improve the UK’s international ranking as a place to do business.
Rob Marris
With due respect to the Minister, I would like a little more clarification, because I do not think this is simply a simplifying measure. I may be wrong, but it appears to change the nature of the game. As I understand it, it removes the requirement for all link companies to be either in the UK or the EEA; a link company could therefore be in Canada, Hong Kong or Indonesia, for example. That seems quite a big change and more than merely a simplification.
Will the Minister explain a little more—touching on more than just simplification—why it is desirable for the tax regime of UK plc to be so flexible about the headquarters and location of link companies, when most, if not all, hon. Members present would recognise to a greater or lesser extent that the UK has a particular problem with companies disappearing to, or setting up in, tax havens overseas. I am concerned that the clause, if implemented, would increase opportunities for companies and groups of companies to take advantage of tax havens, to the disadvantage of UK plc, those we represent and companies that are playing morally by the rules, as opposed to companies such as Facebook, which, we heard this week, appears to be adhering to UK legislative rules, but to its considerable financial advantage. That suggests that the UK legislative rules adhered to by the Facebooks, Starbucks and Googles of this world are not sufficiently tight. I am concerned that clause 24 goes in the wrong direction on that issue.
Ordered, That the debate be now adjourned.—(Mel Stride.)