Draft Double Taxation Relief and International Tax Enforcement (Algeria) Order 2015
Draft Double Taxation Relief and International Tax Enforcement (Sweden) Order 2015
Draft Double Taxation Relief and International Tax Enforcement (Senegal) Order 2015
Draft Double Taxation Relief and International Tax Enforcement (Croatia) Order 2015
draft Double Taxation Relief and International Tax Enforcement (Bulgaria) Order 2015
Draft International Tax Enforcement (Brazil) Order 2015
Rob Marris Excerpts(8 years, 8 months ago)
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Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to serve under you, Mr Bailey—the first time that I have had the pleasure, I believe. I would prefer, with your permission and that of the Committee, if we dealt with the draft orders on Algeria, Bulgaria, Croatia and Sweden together—I appreciate that that will still lead to four votes—and then, in separate debates, the draft orders on Senegal and on Brazil. Of course, the Minister might have different views on what is appropriate.
The Financial Secretary to the Treasury (Mr David Gauke)
I have no objection to that.
The Chair
I should make it clear that debate on the collective group of statutory instruments will continue for up to an hour and a half, although they will be voted on separately. There is then up to an hour and a half on the other two instruments afterwards.
Rob Marris
Do I understand it correctly, Mr Bailey, that in theory the proceedings could run for three hours? Or is it 90 minutes on each debate?
Rob Marris
On one level I must congratulate the Government on apparently negotiating extremely well for our country, but on another level I want to probe the Minister a bit.
If one looks at the four agreements with the four separate sovereign states, the agreements and the wording within them are very similar visually. Clearly, it is unlikely that the Bulgarians, for example, use our fill-in-the-blanks model—although I appreciate that negotiating such treaties is more sophisticated than that—but the format seems to be a UK one. Part of that is down to how the agreements are laid out in UK statutory instruments—the ones we are discussing today—but part of it is because the party negotiating with us apparently agreed to the format and the articles, even in that order.
There are of course some minor variations, as well as some major variations in terms of the percentage withheld and so on. There are minor variations, for example, article 16 of the Algeria order covers artistes and sportsmen. By the time we get to article 16 of the Bulgaria order—it is a common format—the reference is to entertainers and sportsmen. I am genuinely not asking the Minister why there is a difference. I am saying that there appears to be a common format.
The question asked among Opposition Members, therefore, is whether in one sense—I stress the caveat “in one sense”—our Government did too good a job in having the whip hand in negotiating with and persuading four disparate countries, four sovereign states, to adopt the UK format for a double taxation agreement. That brings into play the question, to which we will return when discussing the draft order on Senegal, of whether there was an imbalance in the power and resources of the negotiating parties.
I appreciate that that is unlikely to be the case with Sweden. It is less likely to be case with Croatia and more likely, with all due respect—it is a sovereign state—to Algeria, given its resources. I wish to probe the Minister on that imbalance. How come we have this common format that suits us? It makes things easy for us as parliamentarians, because article 16 is broadly the same in all four. We got our format, so that suggests to me that, broadly speaking, we got our content.
That is good for our country, but was there undue pressure and too much of an imbalance in negotiating power and resources in favour of our country, contrary to its heritage under this Government, the previous Government and the Labour Government before that? This country has always tried not to over-use the undoubted power and resources that we have in these sorts of bilateral negotiations.
Mark Field (Cities of London and Westminster) (Con)
I wish to make a brief contribution. I will leave it to the Minister, of course, to answer the issues raised by the hon. Member for Wolverhampton South West, but in part it is an EU convention to use this particular template, rather than an exercise of British fiscal power. One could almost ask—from my slightly different political standpoint—a somewhat different question, as I am someone who favours the idea of tax competition. I can see the advantage of having double taxation treaties, particularly given the importance of the UK as a global capital. There are a significant number of entertainers, artistes, sportsmen and others from Sweden, Croatia, Algeria and elsewhere, many of whom are constituents of mine but some may, of course, be constituents of the hon. Gentleman.
Mark Field
I should perhaps say that, in my latest role as vice-chairman of the party, I spent this weekend in a place I suspect I will never go to again, Karlstad in the middle of Sweden, attending our sister party’s party conference. I can assure the hon. Gentleman that the exports of Sweden are not limited to Abba and it has to be said that the Swedes have a great love for our country. Something that I know will impress the hon. Gentleman is that there is a great passion from the Swedes that we should stay in the European Union—
Mr Gauke
I thank the hon. Member for Wolverhampton South West for his first contribution and my right hon. Friend the Member for Cities of London and Westminster for his first and perhaps last contribution of the afternoon.
First, I will address the point about format. I understand why the hon. Gentleman raised the point but let me reassure him that all UK treaties follow to a large extent the OECD model, as is the case for most treaties throughout the world, which means that all the treaties appear very similar to each other. The hon. Gentleman would find that treaties that did not involve the UK would also look similar, so it is not so much the UK asserting a particular UK model. This is very much the international rule.
Rob Marris
Would that be the case with Algeria, which of course is not a member of the European Union and I believe is not a member of the OECD? Would it still, as far as he knows, tend to follow that common OECD format as a template?
Mr Gauke
Yes, that is very much my understanding. I confess I have not studied Algerian double taxation treaties not involving the UK perhaps as much as I might have done, but my understanding is that this model is used very broadly. Clearly there are advantages in terms of standardisation of the model for these treaties. It comes back to the point made by my right hon. Friend the Member for Cities of London and Westminster that double taxation agreements of this sort—tax treaties—help provide greater certainty to businesses. That greater certainty does help encourage foreign direct investment into countries that have treaties. The UK certainly benefits from a very extensive network of tax treaties, but developing countries also benefit from the certainty provided—the signal that a country is open for business. That is mutually beneficial.
I am aware that some critics of DTAs focus on the potential for abuse that they create, either through the creation of opportunities for non-taxation or the flow of benefits to unintended recipients, but such criticisms ignore the fact that measures can be agreed that protect against abuse, and the UK routinely agrees such measures with developed and developing countries alike. I would speak in defence of these tax treaties, from the point of view of both the UK and developing countries.
I suspect we will return to the role of the UK and the extent to which these matters are something of a compromise. I would just make the point that with any of these treaties, it is not realistic to expect any one party to a treaty necessarily to get their way on everything. These are matters on which there is likely to be some compromise.
I touched upon the fact that a lot of countries would place greater reliance on source income as opposed to residence as a test of where the taxable rights should fall. There tends to be a compromise reached, where an acceptable one can be. After all, each of the treaties before us this afternoon is the result of two sovereign Governments agreeing that it is in their mutual interest to sign it. We believe that a tax treaty can be a powerful tool for development because of the certainty it gives to international investors.
I hope those points are helpful to the Committee, Mr Bailey. I suspect I may refer to them again later this afternoon. I hope that, on those points of clarification, the Committee will support the four draft orders.
Question put and agreed to.
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Algeria) Order 2015.
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (SWEDEN) ORDER 2015
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Sweden) Order 2015.—(Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (CROATIA) ORDER 2015
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Croatia) Order 2015.— (Mr Gauke.)
DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (BULGARIA) ORDER 2015
Resolved,
That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Bulgaria) Order 2015.—(Mr Gauke.)
Draft Double Taxation Relief and International Tax Enforcement (Senegal) Order 2015
Rob Marris
I am interested to learn from the Minister that this is the 11th double taxation agreement—or DTA, as I like to call such agreements—that Senegal is entering into. I imagine that it has already been signed, and that we in the United Kingdom are now to sign it off, as it were, through our democratic processes, but the treaty raises a number of broader issues that I wish to explore. In that regard, I am indebted to assistance I have received from ActionAid, an independent charity that has existed since the 1970s and which takes considerable interest in such matters. Its broad concern, which I share, is that, on occasions, the UK might be, as I suggested in the earlier debates, exploiting its greater negotiating power. I am not saying that we are, but I wish to explore that point, with the Minister’s help.
Senegal is a much poorer country than us; it is a former colony of France and it is in Africa, obviously, and therefore not in the European Union. Will the Minister therefore take me through some information? He may not have it all, with all due respect to his great knowledge and the great assistance he has, and may wish to contact me later in writing. I fully understand that. This is not an attempt to ambush him, as he knows, or an attempt to grandstand; it is an attempt to elicit information and on the basis of that information I will make up my own mind, and my hon. Friends will make up theirs, as to whether we think the order should be accepted, in lay terms, in this Committee.
My first question is: what co-ordination was there between Her Majesty’s Revenue and Customs, the Treasury and DFID on this arrangement? There is a bit of an overlap here. We have an obligation to assist developing countries, and this Government fulfils that obligation with a commitment to spend 0.7% of GDP on international aid, which I salute. I know that it is not always easy for Conservatives to explain that commitment to their supporters, and I salute the Government for continuing the work done by the previous Labour Government and the coalition Government in saying that they think this is the right thing to do in our place in the world, in expression of our compassion and so on. However, there is an interplay with a developing country when we create a double taxation agreement between DFID and the Treasury, in this case because the double taxation may have an effect on the development of Senegal. Has DFID—of course, the Minister is not directly answerable for that Department, but he may know—or the Treasury carried out any kind of assessment on the likely development impact of the DTA within Senegal? I appreciate that he is a Minister of Her Majesty’s Government, not of the Government of Senegal, but he may have some information on that which would be helpful to the Committee.
More broadly, when the United Kingdom is understandably negotiating and discussing what may or may not—if negotiations do not work—become double taxation agreements with developing countries, presumably Her Majesty’s Government have various objectives in mind. These will primarily, of course, be objectives to the advantage of our country, the United Kingdom, but we have a history of looking at things from a broader perspective—again, something I encourage this Government to continue to do—and there can be an interplay between what one might call Treasury objectives and DFID objectives, which have to be refracted through the UK Government as a whole. I want some indication of what the UK’s objectives are when negotiating treaties with developing countries. There is a fear, which I share, that if mishandled, double taxation agreements could give too much power to multinational corporations.
We all know that some multinational corporations do not pay as much tax as many of us—including the Government, on occasion—would wish them to. The Government are disappointed at the level of tax paid by some multinational corporations, and we see that in the Finance Bill again this year—the Finance Bill No. 2, as it were. It happened in Finance Bill No. 1 in March as well; the Government brought in measures which Members on the Labour Benches broadly supported to lessen anti-avoidance that is often, but not always, carried out by certain multinational corporations.
If such organisations can do that to the United Kingdom, it crosses one’s mind to ask what they can do to a country such as Senegal that does not have the resources that are available to us, not only in financial terms but in expertise. If mishandled—I am not saying that the agreement has been mishandled; I am probing it—such agreements could be to the disadvantage of a developing country and to the great advantage of a multinational corporation which understandably—let’s face it, it is capitalism—would prefer to pay less tax, whether in Senegal, the United Kingdom or elsewhere. That is an aspect of tax competition about which I am deeply uneasy, even though the right hon. Member for Cities of London and Westminster might be less uneasy than I am in terms of his political inclinations and the constituency, in both senses of the word, which he represents. I am uneasy about that.
It could be that the agreement contains restrictions that are more disadvantageous—or less advantageous—to Senegal than they are to us. The contents of the agreement could end up de facto setting maximum tax rates for Senegal in a sense through the back door through a double taxation agreement. Again, this is something for which Her Majesty’s Government are not directly responsible, but they ought to bear it in mind when negotiating such things. Such a treaty could narrow the scope of taxable earnings within Senegal, again lessening its tax base. If mishandled, or handled in a way which I would not regard as acceptable, it could limit the sovereign discretion of a country such as Senegal to increase its own taxes, if it chose to do so. It might find that its hands were tied by a double taxation agreement which it had negotiated with a tenth, eleventh or twelfth country from a position of weakness.
As I understand it, Senegal is a developing country. Let us be clear what we are talking about here. Like many developing countries, Senegal is more reliant than we are on revenue for the Government from corporate taxes. The income tax writ in many developing countries, for all kinds of reasons that I think would be obvious to members of the Committee, does not often run deeply or widely. When people are poor and do not keep paper records, it is difficult to collect income taxes, payroll taxes and so on. It is easier to use corporate taxation to fund the state in a country such as Senegal, whereas the balance is rather different in an advanced industrial country such as ours. Nearly 50% of the population of Senegal live below the poverty line. Fortunately, the figure is far lower in our country. Similarly, we have a far higher figure for life expectancy; it is around 80 years for men and women combined. In Senegal it is around 63 years. On the human development index, my understanding is that Senegal is 163rd out of 187.
We are talking about a very poor country in world terms with low investment, currently, from the United Kingdom. Such investment is in the order of perhaps £1 million or less, although the figures are not entirely clear. I have been told that Senegalese investments in the United Kingdom are about £1.5 million at the current rate. That figure does not surprise me—just because it does not surprise me does not mean it is accurate—but I think most Members present would find that figure not surprising.
I am sure that we wish to build up bilateral trade and bilateral investments between the United Kingdom and Senegal. It is never going to be a very major trading partner of the United Kingdom but we play in the world and earn our living in the world and we wish to have these kinds of agreements and arrangements with many countries to increase bilateral trade as long as it is to our advantage and, one hopes, to their advantage. Unless it is to both countries’ advantage, ultimately that kind of relationship goes nowhere.
Will the Minister say whether the Government have done an assessment of the likely impact on trade and mutual investment between the two countries, to which the double taxation agreement would contribute by setting a climate of greater certainty for both states? Will he indicate—I appreciate that he may not be able to do so for reasons of confidentiality—which UK companies, if any, approached Her Majesty’s Government and said, “We think that a double taxation agreement would be advantageous”? That might give us a greater insight into the arrangement that is being proposed and the context in which it is being proposed.
Will the Minister also tell us whether the UK Government are aware of any analysis of the potential cost, or indeed the potential increase in revenue, to the Senegalese Exchequer that may result from the agreement? I stress that I quite understand that the Minister is answerable for Her Majesty’s Government, not for the Government of Senegal, but he may be aware of such research into the Exchequer effect in Senegal. If he is, it would be helpful if he were able to share that with the Committee. Similarly, it would be helpful if he knows and can share with the Committee briefly what effect the measure might have on the general level of prosperity in Senegal, given that for our country—and, one suspects, for Senegal, although I am not an expert on the country—trade, if handled properly, tends to increase prosperity, and double taxation is part of an overall trading agreement between the two countries. Of course, trade is not guaranteed to increase prosperity, and it has to be handled properly. We are not going to debate what “handled properly” means, but I am trying to put the matter in context.
One would hope that the agreement would have an effect on the prosperity of those whom we represent here in the United Kingdom. With all due respect to Senegal, given its size and the size of its economy, the agreement will probably not have a major effect on the United Kingdom economy, but it may have a more marked effect on the prosperity of Senegal. Some fear that it might have a deleterious effect, if, to put it somewhat in the vernacular, the big bad corporations get their way and pay less tax in Senegal. I do not say that that will be the case; it is simply something that I want to explore and get a little clarity on.
The feeling of ActionAid, which knows more about the matter than I do, is that this is one of the more restrictive treaties that the United Kingdom has signed. We debated earlier in relation to Algeria—another less developed economy in Africa that is not a member of the European Union and so on—the format of such treaties and the tendency of countries that are not in the EU or the OECD to look at the OECD template as a starting point. That seems to have happened here. Inasmuch as I am aware of them, I share ActionAid’s concerns. I do not know whether those concerns are groundless; with due respect to ActionAid, it does not believe them to be. ActionAid—and I, as a Member of the House—would like clarification on whether the agreement is less advantageous than similar agreements signed by other developing countries.
The Minister is not an expert on other developing countries, and I do not ask him to be. He is answerable, as I have said repeatedly, for Her Majesty’s Government and no other Government. However, he might have some information and examples to help us. The treaty and the articles contain the definition of a “permanent establishment.” The definition in the statutory instrument, following on from the treaty, extends less flexibility, which makes it more restrictive for Senegal than some other agreements. For example, to quote ActionAid,
“the treaty is unusual in that activities associated with a building site in Senegal conducted by a British firm will not be taxable in Senegal, nor will royalties paid to the UK for radio and TV programmes broadcast in Senegal.”
I appreciate that there are probably not very large numbers of UK radio and television programmes broadcast in Senegal, although there might be regular ones, such as Premier League football. As I understand it from ActionAid, both of those provisions have been included in about 90% of tax treaties signed by developing countries since 1970, but omitted from this one. The Minister may not have this information at his fingertips today, but with the assistance of the Treasury he will be aware of the other double taxation treaties the United Kingdom has signed with developing countries—we have dealt with Algeria already today—and there does appear to be a difference.
There is a concern that this agreement does not include a clause that allows Senegal to tax fees for technical services paid to the UK. It is suggested that Senegal wanted that provision, but it is not there. As the Minister said in the earlier debate, “In any negotiations, some things you get, some things you don’t.” He did not use these words, but it takes two to tango. I spent a lot of my working life as a negotiator as a solicitor, so I understand that there has to be give and take, but one has to be alert morally, as a rich country, to that imbalance in negotiating.
I may be wrong—I appreciate that the Minister was not present for the blow-by-blow investigations, but he might have some background information—but it appears that, in regard to technical services, we got our way and Senegal did not. If that be the case, perhaps the Minister will confirm that and indicate where Senegal, on a quid pro quo, got its way and we did not. There has to be give and take. The suggestion is that there has been some “give”, so I want to explore what the “take” might be.
As I understand it from ActionAid, the Senegal statutory rate of tax is 16%, but here it is 10% on the withholding tax—quite a large discrepancy if those figures are correct. Is the Minister aware of how that difference came about? Again, there is some “give”, so was there some “take” to balance the scales? It is feared that that will help multinational companies to lessen the tax they pay in Senegal by funding companies’ commercial operations through intra-company loans—an activity known to many of us. That has become more and more common; in fact, we discussed that in the Finance Bill Committee this year in the room next door.
Similarly, I am told that, on royalties, there is a difference between the statutory rate in Senegal of 20% and the withholding tax of 10% in the agreement. It could be that I do not understand enough about taxation. As the Minister and other members of the Committee know, I am not an accountant, but when one sees that kind of discrepancy, a lightbulb goes on and a question arises.
To sum up, there is concern that there may have been too much “give” by Senegal and not enough “take” and that that might have been driven by the imbalance in negotiating resources and power between the two sovereign states. I hope that the Minister will shed some light on that.
Mr Gauke
I thank the hon. Gentleman for his questions. I very much appreciate that he is probing the Government, as indeed is his role, and I am grateful that he indicated to me in advance that he would probe along those lines.
We do have to bear in mind that such treaties are not a zero-sum game. The hon. Gentleman did not claim that it is, but we have to bear in mind that a concession by one party to the other may well be to their mutual benefit. That is the nature of a double taxation agreement: it helps to provide greater certainty, for example, for businesses investing in a particular country. It prevents double taxation, which would act as an impediment to foreign direct investment. As we touched on in our earlier debate, that is why these treaties help to smooth the flow of investment funds and help countries to trade more closely together, which is an important source of increased prosperity. I make that general point.
More specifically, regarding the Senegal treaty that we are considering today, I hope that the hon. Gentleman will be reassured by the fact that discussions on this DTA commenced after an approach from Senegalese officials and not after lobbying by UK multinationals—not that such lobbying would necessarily be wrong. Nevertheless, the process was initiated by the Senegalese. The treaty will provide benefits for UK companies investing in Senegal, and Senegal will also benefit from such investment as its economy develops. Indeed, it is important for a country to be clearly open for business and to provide a tax regime that attracts investment rather than deterring it.
I will touch on some of the specific points that have been made. The hon. Gentleman made a point about the difference in withholding tax. The treaty reflects a compromise after extensive discussions. The balance of source state taxation versus residence state taxation reflects that compromise while providing certainty to businesses, which will encourage investment in Senegal. Cross-border trade will be enhanced, increasing taxable income in both states.
The hon. Gentleman raised a concern about UK multinationals exploiting the treaty to the disbenefit of Senegal. Of course, the Government are well aware that treaties can be exploited by some multinationals, but this treaty contains measures that will allow aggressive exploitation to be challenged by both states. Senegal has subjected this treaty to its legislative procedure, just as we are doing here now, and more widely, non-governmental organisations have acknowledged that the transparent nature of treaties is a positive factor for developing countries. I make the point again that the Senegalese Government initiated the discussions about this treaty and have agreed to the treaty.
On the economic and revenue effects of DTAs, they remove barriers to cross-border trade and investment. The effects of a specific agreement depend on the extent to which activities change as a result of it. Given the long timescales involved, the complex and shifting interactions with domestic law, the unpredictable behavioural effects and the lack of a sensible comparator, it is not possible to provide meaningful estimates of the revenue effects of DTAs, and successive Governments have never attempted to do so. I remember asking questions about the effects of a DTA when I performed the role that the hon. Gentleman is performing now, and I never received an answer. In truth, it is difficult to come up with a sensible number. Overall, however, DTAs are beneficial to the world economy and to participants in them.
A couple of other specific points were made about the Senegal treaty. The hon. Gentleman asked why it does not permit Senegal to tax supervisory activities connected with building sites, but it does allow that. The threshold for the taxation of profits arising from building sites is that the activity be carried on in the country for six months. While supervisory activities are not mentioned specifically in the treaty, the OECD commentary on the relevant provision makes it clear that supervisory activities associated with the erection of a building are included in the taxable activity of the building site.
As for why the treaty does not permit the taxation of royalties paid for radio and television programmes broadcast in Senegal, it provides that generally, royalties arising in Senegal can be taxed in Senegal at a rate not exceeding 10%. The definition of royalties includes payments for the use of, or the right to use, any copyrighted literary, artistic or scientific work, including cinematographic films. The OECD commentary on the provision makes clear that cinematographic films include material for TV broadcast. If the material to which the payment relates is subject to copyright and the payment is for the use of the copyright, Senegal may tax the payment. I hope that provides some reassurance.
Rob Marris
I congratulate the Minister on the width of his expertise on taxation in Senegal on cinematographic matters. It is most impressive.
Mr Gauke
I am grateful. It is recently acquired expertise—[Laughter]. As is my expertise on technical services paid to the UK from Senegal.
Fees for technical services fall within the business profits article of the treaty and can be taxed in Senegal if the fees are attributable to a permanent establishment in Senegal through which the work relating to the fees is performed. That reflects the view of the UK and many other states that business profits should be taxed in the country where the business is carried out. Senegal’s approach to the taxation of services differs from that of the UK. The treaty represents a compromise after extensive discussions, and the provisions governing the taxation of services follow the approach of Senegal in important respects—for example, the taxation of mobile services and insurance.
The shadow Minister asked about DFID. The UK seeks the views of UK businesses and Government Departments on agreements and treaty negotiations on an annual basis. I hope he is reassured that when it comes to overseas development, and in particular capacity building, there is a close working relationship between HMRC and DFID to improve the capability of developing countries when dealing with their tax systems. I am talking not specifically about treaty negotiations but more generally about the capacity to, for example, enforce transfer pricing legislation. A considerable amount of work is done by HMRC and DFID together to provide technical support to developing countries. I strongly support that, and I know that my right hon. Friend the Secretary of State for International Development—a former Treasury Minister—takes great interest in it as well.
There has traditionally been consensus in this country on extending double taxation agreements. The shadow Minister raises perfectly reasonable points, but I hope he is now reassured.
Rob Marris
I am grateful to the Minister for his comprehensive answer. I am reassured, and I will not seek to divide the Committee on the instrument.
Question put and agreed to.
Draft International Tax Enforcement (Brazil) Order 2015
Mr Gauke
I beg to move,
That the Committee has considered the draft International Tax Enforcement (Brazil) Order 2015.
This is a standard agreement that sticks closely to the model developed by the OECD and adopted by the UK. It will facilitate exchanges of information on request between the Brazilian and United Kingdom tax authorities and assist HMRC in its tax compliance activities to counter tax avoidance and evasion. I hope the order will have the support of the Committee.
Rob Marris
Will the Minister briefly explain why the order is so different from the other ones?
Finance Bill (Sixth sitting)
Rob Marris Excerpts(8 years, 8 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mr David Gauke)
I welcome you back to the Chair this afternoon, Sir Roger; I am delighted to see you.
Clause 47 and schedule 8 introduce new means for Her Majesty’s Revenue and Customs to recover tax and tax credit debts from debtors who refuse to pay. The changes will allow HMRC to recover debts directly from the debtor’s bank and building society accounts, subject to a number of robust safeguards. That will help to level the playing field between hard-working, honest taxpayers and those who seek to play the system and avoid paying debts that they can afford to pay. It will also help to modernise HMRC’s debt collection powers, bringing them in line with those of many other advanced economies.
I would like briefly to explain the context for the changes being introduced, as it is important to understand how this new method of enforcement will complement HMRC’s existing procedures. The UK is a very tax-compliant nation. Last year, £518 billion revenue was paid by 50 million taxpayers. Around 90% of that was paid on time. The remaining 10%—around £50 billion—was not paid on time and was perceived by HMRC as a debt. Most of those with a debt simply need an additional reminder before they pay. Others are businesses and individuals who may be temporarily struggling, unable to pay the full amount that they owe.
HMRC takes a sympathetic approach to those who are in genuine financial difficulty. That includes support through time to pay agreements, allowing people to pay their tax in instalments over a longer time period. There are others who find themselves in a vulnerable position—perhaps because they are going through a difficult time in their lives—and find it a struggle to keep on top of everyday matters such as tax. In those cases, HMRC will provide the additional support that is required. For example, HMRC has established its well-received needs enhanced support service, which offers the appropriate support, including home visits, for HMRC customers who are struggling with their obligations. However, a persistent minority do not respond to HMRC’s repeated attempts at contact and do not require additional help. It is for that group that HMRC uses stronger powers as a last resort.
We should be clear that this measure will apply to the small population of debtors who are refusing to pay what they owe, despite having significant assets in their bank and building society accounts. Almost half of them have more than £20,000 in readily available cash, but are choosing not to pay their tax and tax credit debts. It cannot be fair that some should be able to abuse the process in that way. It is not fair on the people who pay what they owe on time and it imposes costs that are borne by every taxpayer.
The changes made by clause 47 and schedule 8 will allow HMRC to recover funds directly from the bank and building society accounts of those who refuse to pay. In explaining how those changes work, I would like to address three misconceptions about this power.
First, I will address the perception that there is no independent oversight of this power, that HMRC will act as “judge and jury”, and that it cannot be trusted to use these powers responsibly. Independent oversight is embedded in the legislation and debtors will have the opportunity to appeal against the use of the power. Before the stage of direct recovery is reached, taxpayers have the right to challenge and appeal against their liabilities before they go overdue and become debts. These existing rights are unaffected by the changes, and this power will only ever apply to established debts once the appeal process has concluded.
Furthermore, if a “hold notice” is sent to the debtor’s bank or building society to hold moneys up to the value of the debt owed, there is a 30-day window before any funds can be transferred to HMRC. During this time, the debtor can object to HMRC on specified grounds. If they do not agree with HMRC’s decision, they can appeal to a county court.
I understand that some people would argue that a court judgment should always be obtained before that power is used. However, the purpose of this measure is to focus on those who seek to frustrate HMRC’s attempts to recover money owed, including debtors who rely on HMRC taking up costly and lengthy interventions before they agree to settle. These debtors owe, on average, around £7,000 in tax or tax credit debts, and almost half of them have more than £20,000 in their bank and building society accounts.
The power will also be used transparently. HMRC will publish regular statistics on its use, including the number of objections and appeals that are filed and upheld. The Government have also committed HMRC to lay a report before Parliament once the power has been in use for two years.
Secondly, I will address the concern that HMRC will make mistakes and use this power against innocent parties. This is not a measure that will be used lightly, and every case will be assessed by a dedicated team before any action is authorised. However, the Government have listened carefully to the concerns that have been raised, including by those representing vulnerable members of the public and by respected members of the tax agent community. In response to their feedback, the Government have committed that every person whose debts are considered for direct recovery will receive a guaranteed visit from an HMRC officer. This will be an opportunity for debtors to have a face-to-face conversation about their debt, confirm beyond any reasonable doubt their identity and give them another opportunity to pay.
If a payment in instalments is appropriate, that route will be offered, and if the debtor is identified as vulnerable, or needs additional support, they will be referred to a specialist unit and explicitly ruled out of debt recovery through this power.
Finally, I will address the misconception that the moment a tax bill is owed, HMRC will be able to “dip its hands” into someone’s bank account. That could not be further from the truth. As I have explained, this power is a “bolt-on” at the end of a very long process during which HMRC will take every opportunity to recover the established debt that is owed. The power will target those who are making an active decision to delay paying what they owe. Out of the 50 million taxpayers that it serves, HMRC expects to use this power in around 11,000 cases per year. It will only apply to those who have debts of more than £1,000, and a minimum level of £5,000 in funds will be safeguarded in the debtor’s accounts to cover essential living expenses.
I turn to the Government amendments. We have always been clear that vulnerable customers should not be affected by the powers. Our amendments are a result of continued collaboration with the tax agent community and the voluntary and community sector, and I put on the record my gratitude for the advice and expert insight that those groups have given to us. Through this process of open and transparent consultation, we are now able to demonstrate in legislation the strength of the Government’s commitment to protecting vulnerable customers.
Amendment 12 puts a duty on HMRC officers to consider whether debtors may be put at a particular disadvantage if this power is applied to them, and it imposes a positive obligation on officers to ensure that the power is not used inappropriately in those circumstances. Further, amendment 11 requires that HMRC affirms in writing that officers have complied with those requirements.
The amendments make clear our commitment to protecting vulnerable members of society, and we will continue to work with experts to identify best vulnerable taxpayers and provide the most appropriate support.
I hope that clause 47, schedule 8 and amendments 11 and 12 stand part of the Bill.
Rob Marris (Wolverhampton South West) (Lab)
I thank the Minister for that helpful explanation. I place on record also my thanks to the ever helpful Chartered Institute of Taxation for its briefing, with which no doubt the Minister is familiar.
I understand the safeguards, which will, through the amendments, be increased: the debt must be more than £1,000; there will be a face-to-face visit from HMRC; there will be particular reference to and recording of a decision on whether HMRC thinks that the allegedly recalcitrant taxpayer is vulnerable; they must have sufficient money in their account; and there are 30 days in which to object before any money is transferred from the account to HMRC. During the 30-day period, the individual can apply for a court order to prevent HMRC from transferring money without itself seeking a court order, and HMRC must leave £5,000 in the account of the allegedly recalcitrant taxpayer.
There are still problems—for example, with those who hold joint accounts. The innocent or uninvestigated party to a joint account will have to make their objections known to HMRC. The Chartered Institute of Taxation says that
“we do question whether it is right for a totally innocent joint account holder to have to make such representations to stop HMRC accessing their money in the mistaken belief that it belongs to someone else.”
There are safeguards and reassurances, and my critique is not that HMRC would be acting as judge and jury, which the Minister, helpfully, was at pains to say would not be the case. That is not the substance of my critique; it is not why I will ask my hon. Friends to vote against the clause and the consequent schedule in a Division. I oppose clause 47 because in effect it makes one rule for the Government and one rule for everyone else.
I am aware that under what used to be called distraint, HMRC has since, I think, 1970 had powers to seize goods and chattels, not money from bank accounts. The Chancellor of the Exchequer, when mentioning the prospective clause in the Budget on 19 March 2014, said:
“I am increasing the budget of Her Majesty’s Revenue and Customs to tackle non-compliance.”—[Official Report, 19 March 2014; Vol. 577, c. 785.]
I am not entirely sure, despite the Minister’s reassurances this morning, that that has been the case. It certainly needs to be the case.
I did take the opportunity to look at the helpful consultation document on this prospective power; I congratulate the Government on having a long and thorough consultation on the power, and so they should have done because it is quite draconian and quite new. The introduction to the consultation document was written by the then Exchequer Secretary to the Treasury, the hon. Member for South West Hertfordshire, who has deservedly had a promotion. On page 2 of the document, it gives this as one reason for wishing HMRC to have the power to take money out of people’s bank accounts without a court order:
“The current processes for recovering debts…can be costly”.
In paragraph 2.31 on page 9 of the document, it repeats that rationale, saying that
“a county court judgment…can be a slow and expensive process.”
I am aware of that. I and at least two of my hon. Friends knocked around the county courts for a number of years as solicitors. The process can indeed be slow and costly, but the speed and cost of county court processes in England and Wales are in part down to the Government. The Government decide on the resources available to the court system for the administration of civil justice; we are talking about civil matters, not criminal matters. The Government of the day provide or do not provide the money and make or do not make the rules, in liaison with the judges, who write what used to be called the white book and the green book before the Woolf proposals of 1999. The Government have a big hand not only in funding the courts, but in setting the framework within which the courts and their very able staff, judges and advocates operate.
Mr Gauke
Let me say first that I am disappointed the Labour party will not be supporting the measure. I reiterate: these powers will be used at the end of an exhaustive process, whereby there will have been many opportunities for a debtor to have paid the debt and to have challenged the application of the debt to them. It is a measure targeted at individuals and businesses that are making an active decision not to pay or to delay paying the money they owe, despite having sufficient funds in their accounts and despite attempts by HMRC to contact them and encourage them to put their affairs in order. We must remember that we are talking about allowing £5,000 or so to remain in an account, so that people have the sums to make ends meet in the short term. I accept that court action is appropriate in some circumstances, but it imposes significant costs on both the debtor and HMRC.
Mr Gauke
Let me make this point first, which is not an immaterial one: whatever reforms the hon. Member for Wolverhampton South West proposes for the courts system, there are risks of people gaming the system. For example, they might believe that HMRC will not want to go to court to recover a certain level of debt. It is widely acknowledged that there has been robust engagement with interested parties, and as a Government we have listened constructively to those interested parties to make reforms. In circumstances where substantial safeguards are put in place, this is a proportionate measure.
Rob Marris
I appreciate that there can be unrecovered costs, but if HMRC takes on a court case and wins, it is not the case, as the Minister said in his opening remarks, that the costs are borne by every taxpayer, unless the paying party—the losing taxpayer—does not in fact meet that judgment debt. The costs will be paid by the debtor.
Mr Gauke
I come back to the practical operation of this power. Let us remember that the existence of this power will encourage some debtors to pay tax at an earlier stage in the process, knowing that HMRC is able to pursue them more effectively. In Committee, and on the Floor of the House, we often debate the need to reduce the tax gap. The shadow Chancellor made that point on the Floor of the House yesterday. Of course, the tax gap consists of many things, including corporate tax avoidance, which I did not specifically address in my remarks because this clause does not specifically relate to corporate tax avoidance, but these powers could apply to any debt owed to HMRC, including debt involving corporate tax avoidance. If it is determined that a debt is owed, HMRC may pursue it in that way.
Mr Gauke
The £5,000 limit applies across the board, including for businesses. This measure is used only at the end of a process and, particularly for businesses, HMRC operates a time to pay process. I dare say that members of the Committee have experience of businesses in their constituencies that have had difficulty in paying tax when it is due and that have engaged with HMRC. Very large numbers of businesses have been able to defer such tax payments because of short-term cash-flow issues and have subsequently repaid them. HMRC does a lot of that, and it works successfully.
Joint accounts have been raised with us, and they have been raised in the Chartered Institute of Taxation briefing. If joint accounts were automatically excluded from the scope of this provision, it would provide an obvious opportunity for debtors to avoid paying what they owe. If we had gone down that route, it would be perfectly reasonable for the Opposition to say that it would be easy to walk around the provisions. However, we have made it clear that we want to strike a balance between recovering money from debtors who are refusing to pay and protecting the rights of other account holders. There are safeguards for joint account holders, including third parties who have a beneficial interest in money in a debtor’s accounts. Direct recovery will only be applied to a pro rata proportion of an account’s balance. All account holders will be notified that action has been taken, and all account holders will have equal rights to object or appeal. Joint account holders will also have clear appeal routes if they feel that their funds have been wrongly targeted.
Rob Marris
I am grateful to the Minister for that explanation and apologise for not being clearer. I was not suggesting that joint accounts should be exempt from the procedure; I was using joint accounts as one more example of why the procedure should not pass into law at all.
Mr Gauke
I disagree with the hon. Gentleman, although I appreciate his point. If we are being serious about reducing the tax gap, this is an important additional measure. According to Treasury figures, which have been verified by the Office for Budget Responsibility, it will bring in something in the region of £100 million a year. It will ensure fairness between those taxpayers—the vast majority—who pay the tax that is due on time and in full, and indeed those who pay shortly after being reminded; and the small minority who persistently fail to pay the tax that is due, which they can indeed pay, and fail to engage with HMRC. The power will ensure that taxpayers are more likely to engage with HMRC and more likely to pay the tax that is due, which will fund the public services that we need and help to reduce the deficit. I will be disappointed if the Opposition, who talk a great deal about wanting to reduce the number of people who fail to pay proper taxes, oppose the measure.
Rob Marris
The Minister suggests that £100 million may be recoverable under the procedure and earlier he estimated that the measure will cover 11,000 people, so that is an average of £9,000 per person. I would suggest that such an amount makes going to court well worth while. Of course Labour wants to close the tax gap and get in revenues. Will he address my point that it is a matter of principle that the Government should not—in my words—make a mess of the courts system and then give HMRC an end run around that?
Mr Gauke
The clause will ensure that when HMRC is party to a tax-related debt, the rates of interest payable by or to HMRC are those contained in tax legislation, whether the debt follows from a court order or not. The measure amends the rate of interest on tax-related debts owed by or to HMRC under a court order or judgment to an appropriate level given prevailing interest rates.
When HMRC is party to a tax-related debt, different interest rates currently apply depending on whether the debt follows from a court order. If the debt results from a court order, an interest rate of 8% applies. In England and Wales, that rate is set out in legislation under the Judgments Act 1838 and County Courts Act 1984, which is the responsibility of the Ministry of Justice. Scotland and Northern Ireland set their own rates of judicial interest, which are also 8%.
If the debt does not result from a court order, the relevant interest rates are set out in the Taxes Acts. Different interest rates apply if tax or other duties payable to HMRC are paid late, and if tax or other duties have been overpaid, resulting in repayment by HMRC. Those rates are linked to the Bank of England base rate. They are currently 0.5% if HMRC is paying interest and 3% if interest is being paid to HMRC.
The changes made by clause 48 will ensure that the rates of interest for all tax-related debts are contained in tax legislation, whether the debt follows from a court order or not. It will affect taxpayers in litigation cases where there is a tax-related judgment debt with interest due and HMRC is either the debtor or creditor. The clause will simplify the HMRC debtor and creditor interest rates. The Government will reduce the rate of interest that applies to tax-related debts payable by HMRC under a court order or judgment to a rate equal to the Bank of England base rate plus 2%, and apply the late payment interest rate of 3% as specified in the Taxes Acts to tax-related debts owed to HMRC under a court order or judgment. The changes will apply to new and pre-existing judgments and orders in respect of interest accruing on and after 8 July 2015. The new rates of judgment debt interest in tax-related cases will compensate the receiving party for any delay in receiving the money that a court has ruled is owed to them at an appropriate level considering prevailing interest rates.
The clause ensures that the rates of interest payable on tax-related debts to which HMRC is a party are all contained within tax legislation. It also reduces the rates of interest on tax-related judgment debts owed by or to HMRC to an appropriate level given prevailing interest rates.
Rob Marris
Having so narrowly lost the vote on clause 47, I am tempted to press this clause to a Division, but I can assure the Minister I will not. However, there are similarities between the measures. My objection to clause 47 and HMRC taking money out of people’s bank accounts without a court order was that it was one rule for HMRC and one rule for everybody else. In the clause immediately following—clause 48—the Government cannot wait to do that again, and I am worried about that trend. I understand that if one wishes for consistency, one cannot always achieve it because the situation depends on the corresponding factor with which another factor is compared. In this case, the Government are saying, “We don’t like comparing the interest payable on moneys owed to HMRC pursuant to a court order,” as per the Judgments Act 1838 or the County Courts Act 1984, which I have written endlessly in pleadings—as they used to be called—over the years. They are saying “We want to compare it with an internal rate that HMRC has for debts owed to HMRC,” which are adjudicated on, but not via the court system.
There is an inconsistency if you have what I would call, for shorthand, an internal, non-court HMRC rate and an external, court HMRC rate. The bigger issue for me, however—this is where I come down decidedly for the opposite comparison for consistency to the Government’s—is that there should be consistency for the individual when faced with the court system of England and Wales, and there should be consistency in the interest rate payable on a county court or High Court judgment, regardless of who the applicant, claimant or, to use the old term, plaintiff is. Even if the plaintiff is HMRC in a tax-related case and the claimant or plaintiff wins that case—HMRC wins—the interest payable upon that judgment debt should be the same as if the winning party who successfully claimed at court that they were owed money was a private individual or a company.
As I said, I appreciate that there is a certain dilemma for HMRC, but it has put up with that dilemma since about 1838, as far as I can tell. I therefore think that it should carry on putting up with that in the interests of having one court rule for everyone, rather than one that relies on the identity of the claimant.
Mr Gauke
I note the hon. Gentleman’s remarks. I am pleased that he is not seeking to divide the Committee on this particular clause, as he did on clause 47. I argue that the measure is appropriate and proportionate. I understand that the Ministry of Justice is reviewing why there is not one court rule regarding when the Judgments Act rate of interest is reduced. I do not know whether the hon. Gentleman takes any comfort from that, but I am pleased to inform the Committee of the fact.
The clause is reasonable in respect of tax-related debts which, of course, flow both ways—there is money owed to HMRC and money owed by HMRC. There should be consistency, and provisions on the rates of interest payable to debts to which HMRC is party should be in tax legislation. Although the hon. Gentleman and I disagree about the operation of the process, I am pleased that we do not have a disagreement on the clause, which I hope will stand part of the Bill.
Question put and agreed to.
Clause 48 accordingly ordered to stand part of the Bill.
Clauses 49 and 50 ordered to stand part of the Bill.
Rob Marris
I beg to move, That the clause be read a Second time.
Hon. Members will be pleased to hear that I will not detain the Committee for long. I have to say that in recent years HMRC and the Treasury have done a pretty decent job of carrying out consultation. They have got a lot better regarding the number of issues on which they consult, and especially the timeframe allowed. Rushed consultations were carried out under the previous Labour Government and in the early years of the coalition Government, and they sometimes still happen. Sadly, all of us have probably come across such consultations in local government around the country. It is a question of not only a consultation’s terms of reference or whether something is put out for consultation at all—I do not agree with consulting on everything—but the timeframe. HMRC and the Treasury have got better at that, for which I thank the Minister.
For a number of years—this is not exclusive to the coalition Government and the new Government—there has been a lack of monitoring of tax reliefs, which are the substance of new clause 4. I understand that the National Audit Office has criticised the Government for not properly monitoring their tax reliefs. The NAO has found more than 1,300 tax reliefs, which seems an awful lot for a Government of any political colour when we want a simpler system. The NAO found that only 200 of those reliefs are properly monitored by HMRC, meaning that the vast majority—1,100—are not. We could have a long debate—we will not—about what proper monitoring means, but if I understand the NAO report properly, there are difficulties in a major area of our tax regime.
I would venture that Governments around the world have any number of tax reliefs. Other countries may have more or fewer, but we have an awful lot and they are not being properly monitored. They are integral to our tax regime in terms of not only revenue and foregone revenue, but the Government using taxation as a lever to encourage and discourage certain behaviours. We sometimes overlook that, although we debated it earlier in the context of the effect of vehicle excise duty on people’s behaviour when buying light passenger vehicles. Some reliefs are intended to encourage behaviour, such as tax relief on pension contributions, which is quite properly being lessened by this Bill, but an awful lot of relief still remains. We are talking about billions of pounds, so there should be proper monitoring.
It might be that the Minister, who is very assiduous, can reassure the Committee that there is an overarching, ongoing consultation, or even a new consultation, on our tax relief system and, as is proposed in new clause 4, on reforms, specifically in relation to tax reliefs for businesses. I referred to Governments using tax reliefs to encourage and discourage certain behaviours, and there is agreement across the House that tax reliefs have a part to play in fostering the business growth that we all want.
Mr Gauke
The hon. Gentleman will be aware that his party’s leadership is looking to eliminate what I recently heard the hon. Member for Leeds East refer to as £93 billion of “corporate welfare” to reduce the deficit and fund public services. Some of that constitutes tax reliefs or exemptions—however one wants to describe them—including £20 billion of capital allowances. Does the hon. Gentleman consider the £93 billion of “corporate welfare” to be a potential source of revenue for a future Labour Government?
Rob Marris
I thank the Minister for that question. The £93 billion figure has been much misunderstood.
The new clause is part of the probing that we want the Government to carry out on behalf of the country. My hon. Friends the shadow Chancellor and the Leader of the Opposition want to examine what tax reliefs exist—what we are spending the money on, in lay terms, although I appreciate that the process often involves leaving it in the taxpayer’s pocket. As the shadow Chancellor made abundantly clear to the House last night, he is quite rightly in the business of evidence-based policy—[Interruption.] Someone says that he is in the business of “changing his mind”. Yes, my hon. Friend is, as he made clear last night. He interprets the evidence, and evidence changes as more comes out. Like him and, I presume, other colleagues, I want evidence-based policy making.
Whether the figure is £93 billion, £193 billion or £3 billion, the fact is that the Government are foregoing billions of pounds of tax revenues. I think it would be agreed across the House that some of that will be a jolly good thing. There might be differences of opinion among hon. Members about whether a given tax relief is socially desirable, in the sense that its intention is to achieve a socially desirable outcome, and about the evidence of whether a socially desirable outcome is in fact being achieved through the tax measure. There therefore could be disagreement in two ways: first, about the outcome; and, secondly, about whether the tax relief is getting us anywhere nearer to that outcome, or near enough to it—about if we are getting bang for the buck, to use the vernacular.
New clause 4 would require a wider review of tax reliefs for businesses to encourage long-term investment. Were the review carried out and the evidence collected, it might be that my party would call for changes, and I do not rule out the possibility of increases in tax reliefs for businesses. I am not making a pledge on behalf of the Labour party, but it might be that we would think, on the basis of the evidence, that there should be greater relief for businesses regarding research and development—innovation.
On Tuesday, we discussed tax matters for small, growing, knowledge-based companies. We had that debate because the previous Labour Government set up a tax relief regime to encourage research and development. Again, I think there is generally agreement across the House—perhaps not among every right hon. and hon. Member—that encouraging research and development is a desirable goal for any Government. I think that there is also general agreement across the House—again, perhaps not from every Member—that the tax regime has a role to play in encouraging the research and development that almost all of us, if not all of us, want.
Mr Gauke
On a point of clarity, and to reassure businesses throughout the country—including, I suspect, in Wolverhampton—while the shadow Chancellor and the Leader of the Opposition talk about eliminating £93 billion of “corporate welfare”, to use their phrase, is the hon. Gentleman saying that there is no plan to remove capital allowances or R and D tax credits, which constitute sizeable elements of that £93 billion? When he says that the £93 billion “corporate welfare” estimate has been much misunderstood, does he mean by his own leadership?
Rob Marris
I said to the Committee earlier that I was not about to start freelancing on tax policy for the Labour party. That will not surprise the Minister, or other hon. Members. It might disappoint him, but it will not surprise him. He tempted me on two major areas of tax relief for business; I will repeat what I said earlier. We are in the business of trying to develop evidence-based policy, so if the review were, as we hope, to be accepted by the Government and to take place, we might say that business tax relief should be increased in certain areas. I do not rule out that possibility. We might say that it should be reduced in other spheres of activity. I do not know yet.
I cannot help the Minister any more than that, because that is the whole point—or perhaps not the whole point: the major point of having the review is to get the evidence so that all parties can review their policy. After the review, perhaps the Government would review their policy and increase or decrease tax relief for businesses in certain areas.
As to the £93 billion, it has, as I said, been much misunderstood. It may be a coincidence, or perhaps it is a borrowing—many politicians are prone to borrow—but until very recently the most successful federal election in Canada for my party’s sister party, the New Democratic party, of which I used to be a member, was in 1972 under the then leader Ed Broadbent, the honourable member for Oshawa. He was a great leader of the New Democratic party. The campaign slogan referred to “corporate welfare bums”, and it was about large corporations—often multinational—having unfair tax breaks. It was very successful.
There is a tradition in capitalist democracies of corporate welfare. [Interruption.] Yes, there is, and I think we should be honest about that. Sometimes we socialists would support that, to encourage certain activities. I gave the example of research and development; but, yes, there is corporate welfare. Some of it, I suspect—but do not know—is unjustified. I will not know unless we can gather the evidence, and the Labour party will endeavour to gather the evidence as best we can, but it would help if the Government would put resources into doing so by accepting new clause 4, as I hope they will.
Mr Gauke
I thank the hon. Member for Wolverhampton South West for the thoughtful way in which he put his case, injecting, to some extent, scepticism into claims of £93 billion of corporate welfare that might be easily available to reduce the deficit and fund public services, as some of his colleagues have perhaps been inclined to suggest in recent weeks.
Having welcomed some of his remarks I will, I am afraid, disappoint the hon. Gentleman by urging my hon. Friends to oppose new clause 4. The Government are committed to supporting investment and growth through the tax system, which is why we provide businesses with a range of tax reliefs and allowances. The Treasury and HMRC keep all tax policies under review and routinely consult on changes as part of the policy-making process. However, a general consultation on the system of tax reliefs would not be appropriate, since each relief has been designed in a particular way to address a specific issue.
The new clause raises questions about the impact of tax reliefs on investment and growth. The Government recognise the importance of supporting growth and investment through the tax system. In fact, we have designed tax reliefs to do exactly that. For example, through the annual investment allowance, businesses can offset the first-year costs of plant and machinery against their corporation tax liabilities. That supports investment by reducing its cost to businesses. Small businesses in particular benefit from that; 85% of the total value of the annual investment allowance goes to small and medium-sized enterprises.
To support further investment, the Government are raising the permanent level of the AIA to £200,000—its highest permanent level ever. Similarly, R and D tax credits, which the hon. Gentleman referred to, are an incentive to invest in research and development. A recent HMRC study found that each £1 of tax forgone through tax credits stimulates between £1.53 and £2.35 of additional R and D investment, which fosters innovation and helps the economy to grow.
Looking forward, the Government remain committed to supporting investment and growth. We will publish a business tax road map by April 2016, setting out our plans for business taxes over this Parliament. That will provide businesses with the certainty they need to plan for long-term investment.
Rob Marris
I am somewhat reassured by the Minister’s remarks about the framework document in 2010, for which I thank him; I hope that we will see another framework document soon. I am also somewhat reassured about the “road map”, as he calls it, that will be published next year, and the consultations that he referred to. For example, he referred to the annual investment allowance increase in the Budget this year. From memory, when I spoke in the House on the Budget on 8 July I praised that increase in the allowance.
However, the Minister went on to say that he was concerned that if he accepted the new clause it would call into question and create uncertainty about many tax reliefs that are working effectively. With due respect to him, to some extent that assumes what he is trying to prove, by saying that things are working effectively when Opposition Members are asking for an investigation to be carried out holistically—to use the everyday term that is used these days—into the business relief part of the tax regime. The risk is that the Government’s consultations, which I have previously spoken positively about, will become somewhat piecemeal in their approach.
We would like an overarching investigation, because tax reliefs—whether the 1,300 overall, or the smaller number within that 1,300 that apply to businesses—may produce what in chemical terms would be called the cocktail effect. In fact, some such effects have been addressed by provisions in the Bill. That is where a tax measure is put into place and then it is found that it contradicts an existing tax measure. Not surprisingly, those contradictions are often resolved in favour of taxpayers, which is understandable, but correspondingly that is at the expense of revenue for the Exchequer.
A piecemeal approach is not what we need. The new clause is part of our desire to have evidence-based decision making, a holistic approach and zero-based budgeting, to which we are committed. I will not press the new clause to a Division, but I urge the Government to avoid being piecemeal. I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
Mr Gauke
On a point of order, Sir Roger, before we conclude I would like to take a moment to make one or two remarks and thank a number of people. I am pleased that the first Finance Bill of this Parliament has received excellent scrutiny from members of the Committee. Inevitably, more focus has been placed on certain clauses than on others, but debate has been insightful and wide-ranging throughout. I am pleased that the Committee has reached consensus over much of the content of the Bill, including measures that will support businesses and tackle avoidance and aggressive tax planning.
Most impressively, the Committee has displayed unparalleled efficiency, with debate on all clauses concluded in just six sittings. Having done every Finance Bill since 2006, Tuesday afternoon’s session was perhaps my favourite, on the basis that it lasted only 17 minutes.
I thank you, Sir Roger—through you, I also thank Mr Howarth—for your guidance and your wisdom in steering both new and experienced Committee members through what can be a complex process. The hon. Member for Wolverhampton South West is of course both new and experienced. I also thank my hon. Friend the Member for Wyre Forest for his brief unexpected spell as Chairman during the debate on corporation tax, and his guidance at that time was invaluable.
I thank all members of the Committee for their contributions and non-contributions. I thank Members on the Government side for their patience, forbearance and, above all, attendance. I also thank the Members from the SNP and from the Labour party where, for understandable reasons, there has been something of a changing of the guard over the course of the Bill. For me, it is surprising that Front Benchers change from decade to decade, but they perhaps change more frequently when a party is in opposition.
I put on record my thanks to the hon. Member for Worsley and Eccles South (Barbara Keeley) for the work that she undertook from the Labour Front Bench at the beginning of the process. I was delighted to see the hon. Member for Wolverhampton South West in his place. I say delighted, but I was slightly apprehensive, knowing that he is an extremely assiduous Member. It is very difficult to get much past him, and I welcome him to the Front Benches, as I do the hon. Member for Leeds East.
Earlier this week, the hon. Member for Wolverhampton South West compared our encounter to the South by Southwest festival—SXSW—given that we both represent seats that are in the south-west of their particular areas. He is clearly more familiar with trendy festivals than I am. Though I admit that the Finance Bill Committee can occasionally resemble Glastonbury in a wet year—a confused crowd struggling through a vast expanse of mud while someone at the front is shouting loudly—I am pleased that on this occasion, proceedings have been far more harmonious. For that, we have to thank the usual channels: my hon. Friend the Member for Central Devon, who has worked with quiet efficiency with both the hon. Member for Scunthorpe and now the hon. Member for St Helens North. I am particularly grateful for the assistance I have received from my hon. Friend the Economic Secretary, who led on the banking measures.
Finally, I thank the representative bodies and interested parties that have submitted to the evidence to the Committee. I thank our Clerk, Mr Hamlyn, the Hansard Reporters and the doorkeepers, who have ensured the smooth running of the Committee, the HMRC and Treasury officials, and the Office of the Parliamentary Counsel, without whom none of this would be possible. I am sure all hon. Members will join me in looking forward to Report and other stages of the Finance Bill in due course.
Rob Marris
Further to that point of order, Sir Roger. I will briefly add my thanks to many. First, I thank my colleagues who were previously members of the Committee, most notably but not only my hon. Friend the Member for Worsley and Eccles South. I thank the staff both within and outside the House, most explicitly the Treasury staff, who were very astute in assisting the Minister to remember the details of certain matters.
I thank all members of the Committee on both the Government and Opposition sides for their assiduous attention to our proceedings. I thank the Economic Secretary, who was the first Minister I went up against, as it were. I also thank the Financial Secretary, who I went up against a lot more. As Members will know, he has done this a lot more than I have. This is my seventh Finance Bill Committee, but he is probably up to 11 or 12 now, because in years—such as this—there is more than one Finance Bill. I salute his tenacity.
In terms of the speed of proceedings, this is not like Glastonbury; it is more like the South by Southwest festival, which takes place in Texas, where mud is much less frequent and one just makes breezy progress in the sunshine, in a collective and collegial manner. Finally, I thank the two Chairs, Sir Roger and Mr Howarth. I will always remember the Committee, because if I have the honour to lead or contribute for the Opposition officially in future Committees, this will always be the first one in which I was able to do so. Thank you for your chairmanship.
The Chair
All of that is absolutely fascinating and, of course, completely out of order, because none of it is a matter of order for the Chair. As we are rambling on out of order, I thank Members on both Front Benches for their appreciation, which I extend to our Clerk, Matthew Hamlyn, to the officers and staff of the House, without whom none of us could do the job we are required to do. It is much appreciated.
I thank the Committee very sincerely indeed for the courtesy and conduct of the proceedings. Not all Committees are like this, but it has been amicable and sensible. The fact that it has been considered so well and so expeditiously is a credit to all Members present. I hope that those of you who were doing this for the first time have found the process exhilarating and that you will enjoy many more Committees under my chairmanship.
Bill, as amended, to be reported.
Finance Bill (Fifth sitting)
Rob Marris Excerpts(8 years, 8 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mr Gauke
Clause 37 makes changes to ensure that the correct amount is used when calculating taxable profits when trading stock is transferred between related or connected parties. Clauses 38 and 39 are concerned with the same issue. Clause 38 makes similar changes to those in clause 37 but for cases where a trade ceases; clause 39 does likewise for cases where intangible fixed assets are transferred to a related party.
A number of situations can arise when trading stock is sold or transferred outside the course of trade. The stock can be transferred to a separate business run by the same person, or sold to a business run by a family member. The intention of the tax system is that the stock should always be brought into account at its market value when calculating the taxable profits from the trade—a well established principle that originated in a court judgment many years ago and was subsequently brought into legislation.
Some situations have been identified, however, in which the full market value of stock may not be brought into account. This can occur when transfer pricing rules take precedent over market value rules. Transfer pricing rules aim to identify and bring into account an arm’s length price for the stock. In many situations that will be the same as the market value, but that is not always the case. Where the transfer pricing rules apply, the market value rules are turned off; as a result, there is a risk that the transfer pricing rules will give an amount below market value when calculating profits for taxation, which was not the intention of the legislation. Similar issues have been identified where stock is valued when a trade ceases, and also where intangible fixed assets are transferred between related or connected parties.
Clause 37 is fairly simple. It removes the rule that states that if the transfer pricing rules apply the market value rules cannot also apply, so that where the transfer pricing rules apply in a way that does not give the full market value, the market value rules can be applied, adding the extra amount needed to bring the total up to market value. The true market value will therefore be brought into account when calculating taxable profits. Similar changes are made by clause 38 for cases where a trade ceases, and by clause 39 for cases where intangible fixed assets are transferred to a related or connected party.
Clause 37 removes an unintended consequence whereby two pieces of tax legislation do not, on occasion, work together properly. The changes will ensure that the correct amount is brought into account for tax, as intended by the legislation.
Rob Marris (Wolverhampton South West) (Lab)
As I understand it, all three clauses are anti-avoidance measures designed to clear up conflicting legislation on market price and transfer pricing. Transfer pricing has occasionally been used by companies immorally—not illegally, but immorally—to pay less tax, effectively, by not using the market price. As the three clauses are anti-avoidance measures, I invite my hon. Friends to support them.
Question put and agreed to.
Clause 37 accordingly ordered to stand part of the Bill.
Clauses 38 and 39 ordered to stand part of the Bill.
Clause 40
Carried interest
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clause 41 stand part.
New clause 2—Tax treatment of private equity fund managers’ pay—
‘(1) The Chancellor of the Exchequer shall, within six months of the passing of this Act, publish and lay before the House of Commons a report setting out proposals for amending the law to ensure that no element of the remuneration paid to an investment fund manager may be treated as a capital gain, and that such remuneration shall be treated for tax purposes wholly as income.
(2) For the purposes of this section, an “investment fund manager” is a person who performs investment management services directly or indirectly.’
Roger Mullin
I fully agree; indeed, I look forward to the Minister’s response in that regard. This may have been a missed opportunity that the Government now recognise and will want to correct.
Let me make another comparison. In my own constituency, my wonderful constituency manager, Lynda Holton, pays about the same effective tax rate as many fund managers who earn 100 to 200 times more than her. [Hon. Members: “Pay her more!”] When I was on the phone to her this morning, she did want me to say “my underpaid constituency manager”. And she is underpaid, but of course I am a devotee to the rules of the Independent Parliamentary Standards Authority in this regard. Surely it cannot be right that people on much more modest incomes have effective tax rates that are higher than those for some of the highest paid people in our society. I am prejudiced in favour of the simplification of tax as well as justice in tax. For both those reasons, I hope that the Government will respond positively to our new clause.
Rob Marris
Sir Roger, I did understand your explanation. As you know, I am new and old—a retread—and I found it very helpful; thank you.
Clauses 40 and 41 are essentially anti-avoidance measures, so hon. Members on the Opposition Benches welcome them. I welcome the fact that there will be no base cost shifting—something that is discussed in the pubs and clubs of Wolverhampton every night of the week; we are very keen on that. However—there is on occasion a “however”—we do not think that clauses 40 and 41 go far enough, because the carried interest is still treated as capital gains. It seems to us that treating carried interest as capital gains is a bad idea and the Government should not permit it. It certainly appears to be a tax loophole—again, not illegal, but immoral—and we think that it should be closed. I have considerable sympathy with the spirit and wording of new clause 2, which was spoken to very eloquently by the hon. Member for Kirkcaldy and Cowdenbeath.
Chris Philp (Croydon South) (Con)
Will the hon. Gentleman join me in welcoming the fact that the current Government have increased the tax rate on these kinds of capital gains from the 18% that it was at under the last Labour Government to 28% today? Would he also like to explain why, during its 13 years in office, the Labour party took no action in this area?
Rob Marris
Looking round the room, I think that one hon. Member, the Minister, will remember that I was not a member of the last Labour Government when I was previously in the House—[Interruption.] I was “supportive” says an hon. Member from a sedentary position; we will get on to that—[Hon. Members: “Ah!”]. The Minister is well aware of this. I am aware that Alistair Darling, when Chancellor of the Exchequer, cut the capital gains tax rate to 18%. I said at the time that I thought that that was wrong and I have to say now that I think that it was wrong. Furthermore, I have to say, bearing in mind the time at which it took place, that it is shocking that I do not recall in the debate on that change any debate about how it would affect positively many right hon. and hon. Members who at that time, within the rules, owned second properties in London, on which they would accrue a capital gain, and on that capital gain, they would pay a lower rate of 18%. The hon. Member for Croydon South is absolutely right to say that it was the wrong thing to do. Putting it up to 28% is a step in the right direction, but on these measures and these activities of investment fund managers, they should pay income tax on what most people, including me, would regard as income.
As I have said, I have considerable sympathy with new clause 2. I shall listen with great interest when the Minister speaks at greater length about the new clause—he said he would and it would be helpful. Having heard his side, I and my hon. Friends will make up our own minds. We are not only swayed by the arguments for equity, equality and justice; we also bear in mind, as the hon. Member for Kirkcaldy and Cowdenbeath mentioned in speaking to new clause 2, the OECD’s recommendation that such incomes should be treated as incomes and be subject to income tax, not treated as capital gain and subject to capital gain tax. To those of us who are not taxation experts, it appears that calling it a chargeable gain is a manoeuvre to lessen the tax paid by those who benefit from that form of remuneration.
Mr Gauke
I will respond to the remarks, not necessarily at length. The comments from the hon. Members for Kirkcaldy and Cowdenbeath and for Wolverhampton South West were pithy.
I shall deal straight away with the question of carried interest. Carried interest is a reward for a manager that is linked to the long-term performance and growth of the funds they manage. It is therefore capital in nature and should continue to be charged against capital gains tax. That has been the approach followed by Governments of both major parties for many years, and it is consistent with what happens in many other jurisdictions.
My hon. Friend the Member for Croydon South was right to say that capital gains tax was 18% when the Labour Government left office. If I remember correctly, it was possible for private equity managers to benefit from taper relief, so there was often an effective rate of 10% for many years under the Labour Government. There at least seems to be a consensus in the Committee that that was not the right approach. We believe we were right to take steps to change the capital gains tax rate, as we did at the beginning of the previous Parliament, but I would still argue that, as is the case in many jurisdictions, it is perfectly reasonable to treat carried interest as essentially a capital gain issue rather than an income issue. Of course, if any part of a manager’s rewards payments are properly regarded as income rather than capital, they should be charged to income tax. That is what drives the Government’s approach. We have launched a consultation to ensure that rewards that should be charged to income tax are always taxed in that way.
I will just pick up a couple of points made by the hon. Member for Kirkcaldy and Cowdenbeath. He is correct that national insurance is not chargeable on capital gains; it is payable only on earned income. However, it is not the case that entrepreneur’s relief can be accessed by investment managers, as the activity of the underlying fund is investing, not trading. Entrepreneur’s relief therefore does not apply in those circumstances.
If I were so inclined, I could quote extensive comments from the likes of Ed Balls, when he was a Treasury Minister, in support of the capital gains treatment of carried interest, and that was a period when the gap between income tax and capital gains tax was much greater, but I will spare the Committee that this morning. I am not sure that Ed Balls is a particular hero of the hon. Member for Wolverhampton South West, but our approach on carried interest is consistent with that of other countries and previous Governments.
We are determined to ensure that the rate at which private equity managers pay tax is never lower than their cleaners pay. That was the case under previous Governments, but it is not the case any more. Nor is it acceptable that what should be charged as income is in fact charged as capital gains. The Government have taken action on those points. I hope that provides reassurance to the Committee and I urge the hon. Member for Kirkcaldy and Cowdenbeath not to press new clause 2.
Mr Gauke
My hon. Friend makes a good and important point. In thinking through the impact of the policy advocated by some Opposition Members, we need to understand the international implications and the implications for the UK’s competitiveness. Clearly, any assessment of the revenue effects would have to take account of what are likely to be significant behavioural responses. Claims of large revenue sums may be based on a static analysis, without an understanding that there is also a competitiveness point.
Rob Marris
The Minister mentioned Ed Balls. I think the Minister was on a Committee in the position that I am now in when Ed Balls was trumpeting the fact that London had become the financial centre of the world and had surpassed New York because of light-touch regulation. Some of us on the Labour Back Benches pointed out to him that that was a bad move that might end in tears. Sadly, our warnings were more than fulfilled in 2008, with the Lehman Brothers meltdown and what happened in this country. I caution the Minister not to go along with the argument made by the hon. Member for Croydon South that people will go offshore and so on. We should not have had light-touch regulation and we should be careful about regulation now.
Mr Gauke
Again, I think we can find some consensus. I will not dwell on this, Sir Roger, because we will depart from the business before us if we start to discuss the failures of the regulatory system in the run-up to the financial crash in 2008. However, that is why we have undertaken substantial reform of financial regulation in the UK.
We should want a competitive and thriving financial sector in this country, but we must ensure that it does not pose systemic risks for the UK economy as a whole. That is the challenge that the Chancellor has referred to as the British dilemma in having a major financial centre, with many benefits to us. It is important that the City thrives. Some of my ministerial colleagues and I have visited the City—I do not know whether everyone can say that. However, we must ensure that we have a regulatory system that does not impose greater risks on the overall taxpayer. There is a question of judgment here, and ensuring that we have a thriving private equity industry is something we should welcome.
Mr Gauke
The clause reforms vehicle excise duty to support uptake of the cleanest cars. It also addresses the current system’s unfairness and sustainability challenges. The reformed VED will apply to cars first registered from 1 April 2017 onwards. The reformed tax will raise the same revenue as today, but the changes will ensure that revenues are sustainable in the long term. It supports creation of a new roads fund, so that from 2010 all revenue raised from VED in England will go into the fund, which will be invested directly back into the English strategic road network.
I will set out why the Government believe the current system needs changing. VED for post-2001 cars is currently banded according to carbon dioxide emissions for both first-year rates and annual standard rates. The current CO2 bands are out of date. They were introduced in 2008, when average new car emissions were 158 grams of CO2 per kilometre. Today they are 125 grams of CO2 per kilometre, so owners of many ordinary new family cars such as the Ford Fiesta now pay nothing or next to no VED, and by 2017 owners of nearly three quarters of new cars will pay only £30 a year or less. That has weakened the incentives for people to purchase the cleanest cars.
Clearly that level of revenue is unsustainable. It also creates unfairness. The average VED across all UK motorists is £166, whereas the average VED on a brand-new car is only £85, which will fall to £62 by 2017. Therefore, families who can only afford older cars are increasingly shouldering more of the tax burden than those who can afford to buy a new model every few years. Evidence from studying car purchase decisions across Europe suggests that the first-year rates of VED are the most effective in influencing people’s choices to buy efficient cars. VED annual standard rates are less effective, as people place little weight on future costs, so basing VED annual standard rates on CO2, as the current system does, has little impact on environmental outcomes, causes significant unfairness and makes revenues unsustainable.
Changes made by the clause maintain first-year VED rates based on CO2, but five new VED bands in the nought to 100 grams of CO2 per kilometre range will be created. The new bands will distinguish between zero-emission cars, plug-in and hybrid vehicles and efficient, conventionally fuelled cars. The very cleanest zero-emission cars that produce no air pollutants will pay nothing; rates on the most polluting cars will be increased. The changes strengthen the incentive to purchase the cleanest cars and incentivise continued improvement by manufacturers. For all subsequent years, the new VED system moves to a flat standard rate of £140 for all cars except zero-emission cars, which pay nothing. There will be a standard rate supplement of £310 for cars worth more than £40,000 to apply for the first five years on which the standard rate is paid.
These changes improve fairness for all motorists, strengthen environmental signals and sustain revenues in the long term. No one will pay more in tax than they do today for the car they already own. For cars in the new system, around 95% of motorists will pay less than the average £166 they pay today. The change will put revenues on a sustainable path, but the total car VED burden will not increase. The change updates and strengthens incentives to purchase the cleanest cars and particularly incentivises the uptake of fully zero-emission cars. Their uptake will drive the greatest reduction in carbon emissions reductions as well as air pollutants.
I would like to say a few words about new clause 5 before the hon. Member for Wolverhampton South West has a chance to speak on it. New clause 5 would require the Chancellor of the Exchequer, within two years of enactment, to undertake a review of the impact of introducing a flat rate of VED on the automotive sector, on emissions and on revenue. The new clause calls for such a review within two years of Royal Assent, but hon. Members should note that that would be only approximately eight months after the reforms actually came into effect.
The new clause is not necessary. The Chancellor already announced in the summer Budget that we will do precisely that kind of review as necessary, to assess how the arrangement works in practice and to ensure that the reforms continue to incentivise the cleanest cars. Adopting a flat annual rate of VED while strengthening support for the cleanest cars ensures the change is a fair, simple and sustainable solution able to provide long-term certainty for the UK car market.
Clause 42 strengthens incentives to purchase low-emission cars over efficient conventionally fuelled cars. It sustains VED revenues, allowing for the creation of the roads fund, and it will improve fairness for UK motorists. I stress that the proposed new clause is entirely unnecessary.
In conclusion, clause 42 reforms VED for cars first registered from 1 April 2017. It ensures the tax keeps pace with technological change, is fairer, simpler and sustainable in the long term, and it allows for the creation of a new roads fund, which will ensure our national road network gets the multibillion pound programme of investment it needs. I therefore urge that the clause stands part of the Bill, and hope to persuade the hon. Member for Wolverhampton South West not to press new clause 5.
Rob Marris
With your permission, Sir Roger, I will start by addressing clause 44 in the group, lest I forget it. Have I understood that correctly?
The Chair
No, this is clause 42. I had my rented teeth in when I read it out. I fully understand the hon. Gentleman’s confusion. Clause 42 and new clause 5 are to be debated now. The next batch includes clauses 43 and 44.
Rob Marris
Thank you for that clarification; I did not want that clause to be overlooked. I was doing quite well on the bicycles, and I thank the Minister for his clarification at the start of this session. I hope we can now make similar progress. I will be really motoring on clause 42. I think VED goes back to 1889. I want to thank my researcher Imogen Watson, who has done a sterling job in assisting me with the Bill, particularly clause 42.
I find the Minister’s explanation somewhat unconvincing. The first part of his explanation about equality and the fact that, if left unchanged, by 2017 75% of vehicles would be paying £30 or less VED a year, and that the average for vehicles is £166, but the average for new cars is £85. He seemed to jump from that to a suggestion that, because the banding based on CO2 introduced by the previous Labour Government was successful, we should now abandon it.
I fully understand the revenue arguments for that. That scheme was predicated on giving a tax break to car purchasers, whether individuals or companies, for buying a car that is less polluting—no vehicle is environmentally friendly. The scheme has been successful, as the Minister’s figures attest, but the Government now propose to abandon it.
I can see an argument for looking again at the vehicle excise duty scheme to protect Government revenue, and I can see an argument, particularly in the light of the admitted outrageous behaviour of the Volkswagen Group, for reconsidering whether CO2 should be the sole gas used in the metric for setting the vehicle excise duty that takes into account the pollution produced by a light passenger vehicle when in use. We could, for example, look at nitrogen oxides, commonly called NOx, as another component of pollution in a tax regime to dissuade purchasers of light passenger vehicles from buying vehicles that, through the tailpipe emissions of noxious gases other than CO2, cause hundreds of deaths in this city every year and thousands around the country. Clause 42 does not do that. It sticks to carbon dioxide, which, of course, is a key greenhouse gas, is bad for our climate and is produced in great quantities by light passenger vehicles around the world.
Where I differ significantly from the Minister—I will invite my hon. Friends to vote against clause 42 in a Division on this—is that he said today, unless I misheard, that the rates on the most polluting cars will be increased under the new regime, but that depends on the calculation. I remember what the Minister said about some research indicating that it is the first year of vehicle excise duty that has a particular impact on the purchasing decision. However, it may surprise the Committee to hear that I am an avid reader of The Daily Telegraph on Saturdays.
Rob Marris
The motoring column in the Morning Star is not quite as good as that in The Daily Telegraph, but then it is a big capitalist publication with lots of assets.
Few, if any, Opposition Members will be aware of this, but all Government Members who are avid readers of The Daily Telegraph on Saturdays will be aware—[Interruption.] It appears that Opposition Members are avid readers of all newspapers; my colleagues are so well informed. In the motoring section is Honest John, who answers queries from members of the public. He is so successful that he has a team of three others to help him. He responds to queries on car purchases, what tyres to use, and certain technical stuff that, frankly, I do not really understand.
Rob Marris
Handbrake turns if not U-turns. I suspect that Honest John has considerably more expertise than anybody in this room, and he is always clear that manufacturers aim to produce a car that will last at least seven years. Certain models last longer, and we all know that Jaguar Land Rover engines will last a lot longer than seven years because they are made in Wolverhampton and because they are a high-quality product. But the fact is that from 2017, assuming clause 42 is agreed to, the vehicle excise duty payable over seven years will not increase for the most polluting cars. It will decrease.
Rob Marris
It may be nice for the hon. Gentleman, but it will not be so nice for his great-grandchildren when they reap the havoc from climate change. That Audi emits 181 grams of CO2 per kilometre. Under the new scheme, assuming it is still on sale in March 2017, the car will move up from band I to band J, yet those emissions will receive a discount, as it were, of £60; the current seven-year cumulative duty would be £1,700 but under the new scheme it will be £1,640. The change is not huge, but it is a 3.5% change in the wrong direction.
A petrol Infiniti Crossover, of the Nissan luxury brand, which as far as I know is not made in this country, produces an antisocial 265 grams of CO2 per kilometre. It is currently in band M and liable for a seven-year duty of £4,130. Under the new regime, the charge will be £1,290 less, at £2,840—a 31% drop because of the interaction between the new vehicle excise duty regime and the £40,000 cost threshold, above which a different regime applies. That is a 31% drop in vehicle excise duty over a seven-year period for one of the most polluting light passenger vehicles currently on sale in the United Kingdom.
Now let us look at a Jaguar XF, which currently costs just under £50,000. It is now in band F because its CO2 emissions are 144 grams per kilometre, and costs £1,015 over seven years in vehicle excise duty. Under the new regime, if a car costs less than £40,000, it will move up—up being less polluting—to band H and cost £1,040 over seven years, an increase of £25, or £3.57 a year, as my wonderful researcher, Imogen Watson, tells me. But as for the Jaguar XF, fine vehicle as it is, no doubt with an engine made in Wolverhampton, because its price tag is over £40,000—and remember: its CO2 emissions are 144 grams per kilometre, which is still high, but nothing like the Infiniti’s 265 grams per kilometre—it will cost an extra £310 per year for the first five years, meaning that over seven years the duty will go up to a total of £2,730, an increase of £1,715 or 169%.
Now, I have nothing against the Infiniti—as far as I know I have never been in one—and Nissan is a fine manufacturer, but its luxury model emits 265 grams of CO2 per kilometre, and yet there will be a 31% drop in duty for it over the seven-year cumulative period, whereas the Jaguar is much less polluting, at 144 grams per kilometre, but its duty will increase by just under 169%. That cannot be right.
I urge the Government to think again. They should think about the pulmonary diseases from which thousands of people are dying already. Much—not all, but much—of that illness is arising because of vehicles, including light passenger vehicles. The Government also need to think again about the mixture of bad gases, to put it in lay terms, used as the metric for calculating vehicle excise duty. I also urge them to think again about the CO2 based regime they are proposing from 2017 onwards, because it cannot be that the successor to the greenest Government ever, which is a phrase that hon. Members have no doubt been waiting for me to utter, are moving in the wrong direction by jettisoning what has been—I will try to be dispassionate, although it was my Government who introduced it—a vehicle excise duty regime that has been extremely successful in lessening considerably the CO2 emissions from the fleet of light passenger vehicles in the United Kingdom.
I take the Minister’s point that the way in which new clause 5 is worded means that the review would happen eight months after the new clause would come into effect if the Government do not withdraw clause 42, as I hope they will. If he were to say a little more about the Chancellor’s remarks regarding a review of the impact and effect of clause 42, something to which he adverted in his remarks, I might be reassured and so not wish to press new clause 5 to a Division at the appropriate time. I therefore hope for some reassurance from the Minister; although, capable as he is, he can only rely on what the Chancellor of the Exchequer has said in that regard. I urge Members to vote against clause 42 if the Government do not withdraw it, as it will be bad for the economy, bad for the environment and bad for our children.
Christian Matheson
I feel I ought to add my congratulations to my hon. Friend on his research. He seems to be doing an impressive job. I was also impressed by the recommendation he gave about Honest John in The Daily Telegraph—I might cancel my Saturday subscription to the Morning Star and take the Telegraph instead.
My hon. Friend makes an important point. It is entirely legitimate to build environmental considerations into the taxation system if we want to change people’s habits in order to protect the environment, and the clause gives the impression that the Government are once again rolling back from their pledge to be the greenest Government ever and falling into bad old ways.
There is a way out. Perhaps the Minister should take a pause on the clause, as my hon. Friend suggested, because so much of it is predicated on emissions standards that have been thrown into turmoil by one company, which was not a British company—I do not believe that a British company would partake in such skulduggery. We cannot be absolutely sure that emissions standards across the industry are as they should be, because manufacturers in certain areas have been telling us, shall we say, statements that lack 100% veracity.
It is not only that motorists have been hoodwinked. The Government have potentially lost revenue as a result of emissions figures being massaged, with lower figures given. What are the Minister’s intentions, either through the Bill or perhaps more appropriately through another mechanism, on claiming back any revenue lost as a result of the Volkswagen scandal? The state has lost revenue as a result, so taxpayers have been hoodwinked as well as individual motorists, and although the Bill might not be the right mechanism for this, there must be a role for the Government in chasing down such manufacturers. Perhaps the Minister should not push through new measures linked to emissions standards until he and his colleagues in the Department for Transport are sure that a fair taxation system can be based on those standards. The Minister may wish to heed my hon. Friend’s good advice.
Rob Marris
I take the Minister’s point about retrospection, which I referred to in my remarks. He may remember—although others will not—that at one point Alistair Darling, the Labour Chancellor of the Exchequer, did suggest a retrospective VED regime, and I led the Back-Bench rebellion among the Labour ranks and got him to drop it because it was unfair. I tried unsuccessfully in years gone by, under a Labour Government, to get swingeing increases in VED for the most polluting cars. In those days nine of the 10 most polluting light passenger vehicles were not 4x4s, as is commonly thought, but luxury brands such as Maserati. There was only one 4x4 in the top 10.
The Minister understandably referred to the deficit, which remains enormous under this Government, as it did under the previous, coalition Government. My hon. Friend the Member for City of Chester gave the Government a way out, because they do not propose to introduce this measure for another 18 months.
The Government should not be lowering the seven-year total vehicle excise duty on the most polluting cars and raising it considerably on the least polluting cars. I take the Minister’s point about the research to which he is privy regarding the effects of VED being most keenly felt, and therefore the biggest lever revenue-wise for the Government, on the year of purchase rather than in subsequent years. However, the two are not contradictory. It is not an either/or, particularly as the Government have, transparently and helpfully, put forward proposals for a change in regime in 18 months’ time. That is helpful for our debate and that helps prospective car purchasers take into account the change in regime. The clause could be changed on Report if the House so wants.
The Government could introduce a revised regime that protects Government revenue and which would address point about the deficit, to which the Minister reasonably adverted, and the Opposition’s concerns about the seven-year cumulative total dropping markedly—a 31% drop. That could be done by having a high first-year VED that influences purchasing decisions, as the Minister assures us is the case—I have no reason to doubt that; I do not know one way or the other—and dropping the crazy notion of a £140 flat rate thereafter, except for very expensive vehicles that cost more than £40,000, or those on the protected rate of £130.
The Minister and our society, but not purchasers of certain types of vehicles, can have our cake and eat it. We can have the first-year high vehicle excise duty to dissuade purchasers from wrecking the environment even more by buying a very polluting vehicle and we can have a continuing non-flat rate with progressively higher vehicle excise duty each year for more polluting vehicles. We can have both. That would protect revenue and help to lessen the damage to our environment. Again, I urge the Government to rethink, if not the whole scheme, then at least the £140 flat rate and the £130 protected rate for year two onwards. That would square the circle as the Minister seeks on revenue protection and pollution.
Question put, That the clause stand part of the Bill.
Mr Gauke
Clause 44 makes changes to ensure that the aggregates levy will no longer be due on less environmentally damaging sources of aggregate, including waste from slate, and ball and china clay production. It ensures that exemptions found lawful by the European Commission are reinstated, with retrospective effect from 1 April 2014. Finally, it changes the former shale aggregate exemption to reflect the European Commission’s decision that part of the exemption provided unlawful state aid.
The Government believe it is right that the aggregates levy is used to encourage more efficient quarrying by shifting demand towards less environmentally damaging sources of aggregate. The levy was therefore designed with exemptions for recycled aggregates and by-products of other industrial processes, such as slate or ball and china clay waste. However, following legal action from a UK trade association, the European Commission launched an investigation into several of the aggregates levy exemptions on state aid grounds. During the investigation, the Government were required to suspend the aggregates levy exemptions, which were removed by the Finance Act 2014. The Commission announced on 27 March 2015 that it had found all the exemptions lawful except for part of the shale exemption, namely for shale aggregate that is not produced as a by-product of untaxed materials.
Clause 44 will restore in full the exemptions that were suspended on 1 April 2014, except for the shale exemption. It repeals the removal of the levy exemptions in the 2014 Act, so that they are reinstated with effect from 1 April 2014, the date from which they were originally suspended. Businesses were able to stop paying the aggregates levy on materials covered by the reintroduced exemptions from 1 August 2015. They can also reclaim levies that they have paid on such materials since the exemptions were suspended. To provide clarity to businesses, details of the repayment process have been published by HMRC in a Revenue and Customs brief, ending the uncertainty that businesses such as slate quarries in Wales and ball and china clay quarries in south-west England have faced since the start of the Commission investigation. We estimate that some 120 businesses will be able to claim repayment of the levy for reinstated exemptions.
Clause 44 will also change the former shale exemption, with only the part of the exemption found lawful by the Commission being reinstated. A new exemption process for shale will be introduced so that only shale used for construction purposes, which includes shale aggregate, and shale produced as a by-product of other taxed materials will be taxable under the aggregates levy.
To conclude, clause 44 will reinstate the aggregates levy exemptions found lawful by the European Commission with retrospective effect from 1 April 2014 and change the former shale exemption in line with the Commission’s decision. It will restore the environmental aim of the levy to shift demand towards less environmentally damaging sources of aggregate by exempting such materials once again.
Rob Marris
It may surprise hon. Members to know that aggregates are dear to our heart in Wolverhampton, which was the site of the headquarters of Tarmac, as was, which grew to be one of the biggest aggregates companies in the European Union. I am pleased that the coalition Government were able to persuade the European Commission that the 2002 regime introduced by the then Labour Government was not unlawful state aid and that the decision made in March this year went in favour of our country. It is unsurprising that HMRC now wants to sort out the shouting, it being all over bar the shouting for the 120-odd companies that were caught up while that investigation was ongoing. The clause is an entirely sensible way of going about that, so I invite my hon. Friends not to oppose it.
Question put and agreed to.
Clause 44 accordingly ordered to stand part of the Bill.
Clause 46
International agreements to improve compliance: client notification
The Chair
Before I call the hon. Member for Wolverhampton South West, I have to remind hon. Members that unless and until the recommendation of the Chairman of Ways and Means is adopted by the House—it has not happened yet—the Chairman has no power to suspend the sitting at 1 o’clock. It is therefore up to the Government Chief Whip to move the Adjournment at the time that he feels appropriate; and if he does not do so, you do not get any lunch.
Rob Marris
Clause 46 is a step forward. I congratulate, with one cheer, the Government on that, but it is a small step. The common reporting standard comes in, I think, from 2017. The Government are talking now about another amnesty. How many amnesties can we have? Hon. Members will remember the CD of information on tax evaders that leaked out of Switzerland and was used constructively by several other countries in Europe to clamp down on those of their citizens who had illegally squirrelled away money in Switzerland. My recollection is that we had some kind of amnesty in the United Kingdom for such citizens and, lo and behold, when the Swiss papers—the Swiss bank records—were finally opened several months later, the money had all gone walkies and the amount that the Chancellor of the Exchequer got in was far less than he had been proudly trumpeting would be recovered by HMRC because of that information.
I fear that the same may happen in this case. The clause is a step forward. As for the regulations, which are being consulted on, I say to the Minister that I have not seen it anywhere—it may be somewhere—that this advice should be given in writing and recorded in writing by the financial adviser. That would be a step forward, but a greater step forward to protecting the Revenue from this offshoring avoidance, if not evasion, would be, as I said to the Committee two days ago, to have much more pressure from Her Majesty’s Government on transparency, on beneficial ownership and on the tax havens around the world, which assist aggressive tax avoidance and sometimes assist, perhaps unknowingly, with tax evasion. Many of those tax havens, whether Crown dependencies or otherwise, have a relationship with the United Kingdom. We have considerable leverage there and, in terms of what is disclosed publically, Her Majesty’s Government—both this Government and the previous, coalition Government—have not used that leverage as decisively as we on the Labour Benches would wish.
This externalising of costs to financial advisers, although understandable and welcome, is an externalising of costs, so the financial adviser has to remind the client of the penalties for undertaking certain types of financial transactions. Meanwhile, the number of staff at Her Majesty’s Revenue and Customs, who are one of the lines of defence against aggressive tax avoidance, is being slashed by one quarter, as I understand it, from 70,000 to 52,000 in the period 2010 to 2016. I would be delighted if the Minister could tell me that I have got that figure very wrong—I may have got it wrong slightly around the edge. If he could tell me that the number of HMRC staff is in fact being increased as part of a Government measure to increase markedly the number of staff who can help to crack down on aggressive tax avoidance and illegal tax evasion, I would be delighted, but I fear that he will not reassure me that there has been a major increase in staff. So, although the clause is a step in the right direction, it is nibbling around the edges. A much stronger and more effective way forward would be to have a larger number of properly trained HMRC staff investigating and applying pressure, and the legislation that already exists.
Mr Gauke
I welcome the support for the clause, even if the enthusiasm for it was somewhat limited. I will not dwell at length on the wider issues raised by the hon. Member for Wolverhampton South West, but it is worth pointing out that we have been a world leader in our pursuit of tax evaders. It is a driving force behind the implementation of the common reporting standard, to which all overseas territories and Crown dependencies have signed up. It is also worth pointing out that HMRC has the option to prosecute where it deems that suitable and where it is in the public interest. We are also currently consulting on tougher penalties, including new civil and criminal offences.
The common reporting standard will give HMRC access, for the first time, to data about accounts held by UK residents in over 90 countries, which will make a significant difference to HMRC’s ability to crack down on tax evasion. We are also toughening up the penalties for those engaged in tax evasion. HMRC has been consulting on new criminal offences for corporates and individuals and on new penalties, including applying to the underlying asset for individuals and enablers. The Government will report on the outcome of the consultations shortly. Disclosure facilities are one of a number of approaches—we are also introducing tougher sanctions against those who abuse the rules—and the disclosure facilities have brought in more than £2 billion in tax.
Rob Marris
Can the Minister say briefly what the Government are doing about disclosure of beneficial ownership?
Mr Gauke
The UK is introducing a central register that is publicly available. We are leading the way on that; I am not aware at the moment of any other jurisdictions elsewhere that are pursuing that. We believe that we should set the benchmark, so I am pleased that we as a country are leading the way.
The hon. Gentleman mentioned HMRC resources and so on. He referred to headcount. He will be aware of the dramatic reductions in headcount that occurred under the last Labour Government. In the last Parliament, we invested more than £1 billion in HMRC to tackle evasion, avoidance and non-compliance between 2010 and 2015. We made more than 40 changes in tax laws, closing loopholes and introducing major reforms to the UK tax system. I think most people would agree that it is much harder to avoid and evade taxes now than it was five years ago. Over this Parliament, up to 2020-21, we will be investing more than £800 million in funding in HMRC for matters relating to evasion and general non-compliance, which will help HMRC tackle evasion.
We have a proud record. It is not purely about staff numbers, although as it happens, enforcement and compliance numbers were not reduced in the last Parliament; the reductions in head count were generally within personal tax. It is not simply about headcount; it is about making use of technology and information and acting efficiently. We have a proud record on that front and we will continue in that vein. The clause is part of that process.
Question put and agreed to.
Clause 46 accordingly ordered to stand part of the Bill.
Finance Bill (Fourth sitting)
Rob Marris Excerpts(8 years, 8 months ago)
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The Financial Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to serve under your chairmanship once again, Mr Howarth. Welcome to what may prove to be a briefer sitting than you were anticipating. I hope that that does not upset your plans too much.
The hon. Member for Wolverhampton South West raised a concern that the clause might permit aggressive tax planning or tax avoidance by multinational companies, and that a consequence could be lost revenue to the Exchequer. Let me reassure him. We believe that the clause will have a negligible impact on the Exchequer, but it will simplify the UK tax system. To some extent, if the existing rules were designed to deal with tax avoidance, they were not going to be able to do that effectively anyway because companies could put in a European economic area or UK-linked company.
We do not think the clause opens up a particular vulnerability in any event, but the hon. Gentleman made an important point about ensuring that our tax system is fit for purpose in a world in which multinational companies have choices and can structure themselves in particular ways. That is why the UK was keen to encourage the OECD to look at the international tax system as part of the base erosion and profit shifting project. That project reported recently; it was debated by G20 Finance Ministers at Lima last week and recommendations have been taken on board. As my right hon. Friend the Chancellor of the Exchequer has made clear, the UK will implement the BEPS recommendations.
There is an important point, but I do not believe that it is relevant to the clause. The Government remain determined that the international tax system should ensure a closer alignment between economic activity and taxing rights. That is the key to the BEPS reforms, which is an agenda we are keen to push forward.
Rob Marris (Wolverhampton South West) (Lab)
There is a difference between something that affects those currently trading in a particular way and the actions that a group of companies might take in the light of a changed tax regime. Is the Minister confident that a change of behaviour through company restructuring following the changes in the clause is unlikely because there will not be much of a loss of revenue from linked companies and so on, and there will not be a change in behaviour that will lead to such a loss in the future?
Mr Gauke
Clauses 35 and 36 make changes to prevent the offsetting of UK losses and other surplus expenses against tax that should be paid by UK companies in accordance with the reformed controlled foreign companies rules. That will improve the effectiveness of our CFC regime in countering aggressive tax planning by UK multinational groups while maintaining the competitiveness of the UK corporation tax regime.
The CFC rules are designed to protect the UK corporate tax base from the artificial diversion of UK profits to low-tax jurisdictions. The rules were extensively reformed in 2012 during the previous Parliament as part of the corporate tax road map, which provided the protection necessary for a more territorial corporate tax base while ensuring that the rules operate in a way that reflects modern global business practices.
A CFC charge arises on a UK company in relation to CFC profits that have been diverted from the UK. Under the CFC rules, UK losses and other surplus expenses could be set against profits taxable under the CFC rules, which can reduce or eliminate the amount of UK tax actually paid on those diverted profits. The Government believe that tax should be paid on profits diverted from the UK. These changes will ensure that that happens.
The changes made by clauses 35 and 36 will remove the ability of a UK company to reduce or eliminate its CFC charge by offsetting UK losses and surplus expenses against that CFC charge, which will improve the effectiveness of the CFC regime in deterring the diversion of profits from the UK by ensuring that those profits are taxed. The changes made by clauses 35 and 36 apply to corporate entities, not individuals. They will apply with effect from 8 July 2015 to UK-resident companies that hold an interest in a CFC on which a CFC charge will arise. The changes will mainly affect large UK multinational groups with overseas subsidiaries. The changes will raise an estimated £860 million in additional tax receipts over the next six years.
The reform of the CFC rules in 2012 was an important part of corporation tax reform. These clauses ensure that the CFC rules work as intended by preventing UK losses or other surplus expenses from reducing or eliminating the amount of UK tax paid on diverted UK profits. The changes are in line with our broader corporate tax policy objectives, which seek to balance competitiveness and fairness.
Rob Marris
It is a pleasure to serve under your chairmanship, Mr Howarth. I do not think I have had the pleasure since taking a five-year sabbatical.
Rob Marris
I will endeavour to conduct myself in a way that produces that result.
I wish I had thought of clauses 35 and 36 myself. They contain great anti-avoidance provisions, for which I again salute the Government. I understand that they seek to ensure that the CFC legislation operates as intended. There is one sting in the tail—I may have misunderstood—but clause 35 addresses loopholes that have been exploited since the introduction of provisions in the Finance Act 2012. That does not instil great confidence in the creation, drafting and passage of that legislation. The more so with clause 36, which—again, I may be mistaken—attempts to close a loophole or dissuade companies from a course of conduct with their tax affairs pursuant to rules that were introduced by the Finance Act 2015. If that be the case, I am concerned that the House is repeatedly battling against aggressive tax avoiders. If it be the case that we are amending legislation introduced about six months ago to close a loophole, we are not doing as well as we should be and might be on countering the actions of aggressive tax-avoiding companies, which is a goal shared on both sides of the House. Although the different ways one might do that may be the subject of debate, the goal that companies should pay their fair share of tax is a shared goal. Again, we can debate what is a fair share of tax, but loopholes appear to be popping up all over the place at very short notice, which is a concern.
Mr Gauke
I again thank the hon. Gentleman for supporting the content of these clauses. I have general and specific points to make in response to his comments. He is right that there is a consensus across the House that aggressive tax avoidance should be tackled. Although he was on sabbatical for the previous Parliament, he will be aware that measures designed to deal with that matter were brought forward in the previous Parliament. A lot of the work that needed to be done in the context of large multinationals is essentially of a multilateral, international nature, and we have pursued that agenda through the BEPS project, which I mentioned a moment ago, so there has been a determination on that front.
We brought in measures over the previous Parliament, as have previous Governments, to address what could be described as loopholes in domestic legislation. Her Majesty’s Revenue and Customs has also been very effective in collecting more tax from large businesses. The position of tax administration at HMRC has ensured that those revenues are collected.
If I were to argue against the provisions for a moment, I could say that a UK company can set its losses against UK profits, so why can it not also set its losses against profits that have been diverted from the UK? We are not persuaded by that argument, hence the measures in front of us. The provisions are consistent with our wider policy of protecting our corporation tax base against the diversion of UK profits, which is consistent with our approach to the diverted profits tax, for example. It is right to take action, but it is also right to ensure that we get the balance right between fairness and competitiveness. As evidence has emerged of particular practices that companies pursue, it is right to make adjustments as and where necessary ensure that legislation reflects those twin objectives of fairness and competitiveness.
Rob Marris
Can the Minister indicate when the Government will push forward hard on what they have said that they will do on transparency of beneficial ownership of companies in tax havens and so on? Anecdotally, there is quite some evidence of tax avoidance, which the introduction of that transparency could lessen. The Opposition want it and the Government say they want it, but it appears to be slow in coming.
Mr Gauke
The hon. Gentleman takes me into wider matters, but I am happy to respond even though it takes me a little way from clauses 35 and 36. The UK is leading the way by introducing a central register of beneficial ownership. That issue relates more to tax evasion as opposed to tax avoidance. We are encouraging other jurisdictions, including overseas territories and Crown dependencies, to move in the same direction as the UK.
On the subject of transparency and tax avoidance, the hon. Gentleman will be aware that one of the earlier recommendations from the BEPS project was on the introduction of county-by-country reporting information that goes to tax authorities. To ensure that we made progress on that front, we debated it before the conference recess. Such a measure would be more helpful and beneficial to tax authorities than a different arrangement. They could more easily assess a multinational’s tax affairs around the world and understand whether significant profits located in a low-tax jurisdiction might be indicative of a need for a closer look at the tax affairs of that multinational company.
Returning to the clauses before us, the hon. Gentleman referred to the interaction with the loss restriction rules that were introduced in a previous Finance Bill this year. The measure amends the rules restricting the use of carried forward losses introduced in the Finance Act 2015 to put it beyond doubt that those rules apply to arrangements involving CFCs. The measure is in addition to and, I would argue, complementary and consistent with the previous legislation. It puts it beyond doubt that that anti-avoidance measure applies to CFCs.
I hope those points are helpful to the Committee. We are determined to ensure that the UK is a competitive place in which to do business. The reforms of the CFC regime that we introduced in the last Parliament have helped the UK to attract additional business and more headquarters have been located in the UK. It is also right to ensure that those reforms do not go beyond what we intended and leave open opportunities for tax avoidance. The clauses are evidence of our determination to address that matter and I hope they will stand part of the Bill.
Question put and agreed to.
Clause 35 accordingly ordered to stand part of the Bill.
Clause 36 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Mel Stride.)
Finance Bill (Third sitting)
Rob Marris Excerpts(8 years, 8 months ago)
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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.)
Draft Scottish Rate of Income Tax (Consequential amendments) Order 2015
Rob Marris Excerpts(8 years, 9 months ago)
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Mr Gauke
It is a pleasure to respond to the two speeches we have heard. First, on HMRC’s ability to identify Scottish taxpayers, which will be fundamental to the introduction of a Scottish rate of income tax, HMRC will use its own data to determine a person’s status. To give individuals an opportunity to respond, HMRC will encourage them to make it aware of changes of address. HMRC is also looking at the best ways to check the information against other sources, and at the costs associated with the activity. Scottish Government officials have been involved in that process for some time and are consulted about key decisions.
It is worth pointing out that the latest risk register reflects a growing confidence in the effectiveness of HMRC’s plans to identify Scottish taxpayers. As Scottish taxpayer status is determined by main place of residence in the UK, HMRC will use the addresses it holds in its records to identify taxpayers who live in Scotland.
Rob Marris (Wolverhampton South West) (Lab)
It is a pleasure to appear before you for the first time, Mr Bailey, and to have the opportunity to ask a question of the Minister. It was probably 2006 when we last crossed swords on a Treasury matter in Committee, with the Finance Bill of that year.
With regard to Scottish residence, I am not accountant, as the Minister knows, but there used to be a withholding tax for money earned in the United Kingdom by certain foreign residents, such as pop stars or sportspeople. Would the order affect the withholding tax for money earned in Scotland by such a foreign resident?
Mr Gauke
Let us not detain the Committee too long on that ancient history. However, it is great pleasure to respond once again to an intervention from the hon. Gentleman.
The Scottish rate of income will apply to Scottish residents. In the circumstances that the hon. Gentleman sets out, where somebody is not a Scottish resident, the UK rate of income tax will apply. I hope that provides clarity.
I should point out that there is no definitive list of Scottish residents, but HMRC has been and will continue checking its address data against third-party information, for example the Scottish electoral register, to check accuracy. HMRC expects to contact Scottish taxpayers later in 2015, well in advance of the introduction of the Scottish rate in April 2016.
Work on making changes ready for the Scottish rate of income tax is well advanced. It is on schedule and will support further devolution. While it is clearly vital that the public have all the information necessary to understand the Scottish rate of income tax before it comes into force, all the customer research that HMRC has commissioned shows that the timing of information is equally important. If guidance or information highlighting the changes is provided too early, it will not be at the forefront of busy people’s minds.
UK employers and pension providers are amending payroll software to take into account the introduction of the Scottish rate of income tax from next April. Technical guidance on Scottish taxpayer status was published for consultation in June and will be published in its final form, along with a raft of more general support and guidance, later this year. HMRC will write to those whose records show that they are a Scottish taxpayer later this year and tell employers and pension providers which of their employees or pensioners are Scottish taxpayers. I reassure the Committee that progress towards the introduction of the SRIT appears to be well in hand.
Mr Gauke
I do not accept that point. In the course of a year, the establishment of the Smith commission and the bringing forward of legislation to devolve income tax much more fully to Scotland has been remarkably fast-paced. Indeed, the point that the hon. Member for Worsley and Eccles South raised was that it involves, in some cases, really quite complicated changes. Institutions such as insurance companies need to be able to make changes to ensure that it works effectively. Yes, there are times when we need a run-in period to introduce measures, but in reaching a consensus and making progress towards a very substantial transfer of power, I am pleased to say that the Government are delivering on the promises made before the Scottish referendum.
Rob Marris
Perhaps the Minister could confirm whether I have misunderstood, which I may have done, that since the Scottish Parliament was set up, the devolved Administration have had the option of a 3p in the pound income tax change. As far as I am aware—the Minister can correct me on this—successive Administrations of different political colours have not exercised that choice. Does he agree that chomping at the bit to deal with income tax now therefore seems a little strange?
Mr Gauke
I do agree with the hon. Gentleman. Powers have been in place with the Scottish variable rate for many years and have not been used. We now have the additional powers of the Scottish rate of income tax. If the Scottish National party is so keen to make use of those powers, I look forward to hearing what it will do with the Scottish rate of income tax. We have gone even further in providing devolution consistent with the Smith commission, and maybe it is time that the debate moved on from which powers are devolved to how those powers will be used.
Tax Credits (Working Families)
Rob Marris Excerpts(8 years, 11 months ago)
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Shabana Mahmood
No, I do not agree, and there is a difference between eliminating support from working people in the Budget tomorrow and charting a course that would look more like long-term reform of working tax credits to deal with some of the issues relating to clustering at 16 hours, which Members have spoken about previously. However, that should not be done before tackling the underlying factors that are driving people into low-paid employment and keeping them stuck in that employment.
Rob Marris (Wolverhampton South West) (Lab)
My hon. Friend is making a powerful case. She touched on a point mentioned in the motion: dealing with the causes of high social security spending, not just the effects. One such cause to which she adverted and that can be found in the motion is housing costs. We have shockingly high housing costs all around the country, caused by huge housing shortages. Can she indicate what the Labour Front-Bench team thinks should be done to address high housing costs?
Shabana Mahmood
In the end, it is about building more houses. That is something that this Government have singularly failed to do over the five years during which they have already been in office. In view of what is being briefed ahead of the Budget tomorrow, it does not seem to me that they are going to come forward with a game-changing plan when it comes to house building in our country.
Tax credits and child poverty are inextricably linked. The same Resolution Foundation study of 2012 found that there was a clear inverse link between spending on tax credits and child poverty rates. The latest households below average income figures show that progress in tackling child poverty has ground to a halt since this Government came to office, with 2.3 million children remaining in relative poverty and 2.6 million in absolute poverty.
The Work and Pensions Secretary spent most of last week trying to distract from the Government’s record on child poverty, first by trying to claim a win on child poverty on the basis that the figures were not as bad as some suggested they might have been—in itself indicative of a shocking complacency—and then by changing the definition of child poverty. The reality remains that too many children in our country struggle with a poor and difficult start in life that directly impacts on their life chances as adults. If not dealt with early, this means that we will all face higher costs further down the track. As I mentioned, the IFS says that cutting £5 billion-worth of tax credits tomorrow will push a further 300,000 children into relative poverty. Tax credit cuts will do nothing to address child poverty; they will simply add to it.
Government Members would have us believe that by cutting tax credits, wages will automatically rise to compensate workers, but that is simply not going to happen. Employers will not give everyone a pay rise on the day the Chancellor cuts tax credits. As I said, the national minimum wage would have to rise by 25% overnight to compensate a lone parent working 16 hours a week for the loss of tax credit, and the wage of a worker on average earnings of £22,000 a year would have to rise by 6% overnight. That would require employers to raise pay overnight by twice the amount by which the Office for Budget Responsibility has said that they will raise pay over a full year, and we know that there is not a chance in hell that that will happen.
Mr Gauke
In 2014, the UK was the fastest-growing economy in the G7 and it looks likely that that will also be the case in 2015. [Interruption.] The hon. Lady talks about wages, but they are up 2.7% in the last year. As I said, living standards have risen by 3.9% on the year, despite the fact that we are still living with the consequences of the deepest crash and the biggest deficit, which we inherited from the Labour party.
Rob Marris
Does the Minister not recognise a contradiction in his position? If the economy is as strong as he suggests, there is no need to cut tax credits. If, on the other hand, as Labour Members think, the economy is not nearly as strong as he and his colleagues are making out, we need tax credits because of poverty.
Mr Gauke
The economy is growing strongly, but we are still recovering from the deepest crash. We inherited the biggest peacetime deficit in our history, and we must take difficult decisions to address it. We took difficult decisions in the previous Parliament, which were opposed by the Labour party, and we still have more to do. The Labour party might wish to learn that, if a Government or a political party cannot face up to those challenges, they will not win the trust of the British people.
Ian Blackford
I must say that I find it remarkable that the hon. Gentleman has asked such a question. I have spent much of the past 10 minutes talking about the need for sustainable economic growth, because that is how we can reduce the deficit, not by punishing the poor in this country. That is what he fails to accept.
Ian Blackford
I will make some progress and then I will give way.
The SNP firmly believes that we need to do far more to tackle poverty, and addressing inequalities is at the heart of the Scottish Government’s programme for Scotland. We challenge the UK Government to commit to a more ambitious rise in the minimum wage, and to follow the Scottish Government’s lead in paying all staff the living wage.
The UK Government have already cut tax credits. In 2012, the eligibility threshold for child tax credit changed from a family income of £41,000 to £26,000 for lone parents and to £32,000 for families with two children. The number of hours that couples with children had to work in order to be eligible for working tax credit went up from 16 hours a week to 24, with one parent having to work at least 16 hours. As a result of those changes, 11,370 Scottish families lost working tax credits worth up to £3,870 per year and 73,300 Scottish families lost child tax credits worth about £545 per year.
More than 500,000 children in Scotland benefit from tax credits. Two thirds of the £2 billion expenditure on tax credits in 2013-14 went to low-income families with children; only 5% went to households without children. That is why we are alarmed. Any removal of tax credits will clearly lead to an increase in child poverty. It is simply inhumane to consider such a move.
In a speech last week, which was widely interpreted as a statement of intent to gut tax credits, the Prime Minister said:
“There is what I would call a merry-go-round. People working on the minimum wage having that money taxed by the government and then the government giving them that money back—and more—in welfare. Again, it’s dealing with the symptoms of the problem: topping up low pay rather than extending the drivers of opportunity—helping to create well paid jobs in the first place.”
Those comments suggest that the Tories are planning to target child tax credits and working tax credits, which provide support to low-income working people.
Although we agree that we need to take urgent action to tackle low pay and raise wages, removing the vital support that tax credits give cannot be the answer. The SNP has set out a range of policies that aim to boost low incomes and drive wage growth. We have proposed raising the minimum wage to £8.70 by 2020, raising the incomes of the lowest-paid in our society and reducing dependence on tax credits.
The Scottish Government are the first living wage-accredited Government in the UK, and we are actively promoting the living wage by encouraging companies to sign up to our Scottish business pledge. We challenge the UK Government to follow suit and guarantee that all their staff will be paid the living wage.
We want to see a £600 increase in the work allowance of universal credit, which determines when people entering work begin to have their benefits reduced. That would support people on low incomes and boost the income of a worker who receives universal credit by £390.
Removing much need financial support for those on low incomes, in the form of tax credits, simply cannot help make work pay. The SNP wants to make work pay, but we must do so by raising incomes and tackling low pay.
Scotland Bill
Rob Marris Excerpts(8 years, 12 months ago)
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Alex Salmond
I am never knowingly undersold. I accept what the hon. Gentleman has said. I was trying to moderate the figures slightly, in case the Committee found them incredible. However, they do tell us where we should be turning in the context of “distortion of competition”.
I am delighted that Members from the north of England have accepted that this tax should be devolved, and I am delighted that they have accepted the economic argument behind the direction in which the Scottish Government are moving. I think that the tax should be reduced at airports in the north of England as well, because they have substantial capacity that would increase revenue for us all. I am glad that their amendment did not become the basis of this conversation, because if the Scottish Government had opposed the devolution of part of APD to Northern Ireland, no progress would have been made. We are now on the verge of having APD devolved to Scotland, and I say to Members representing north of England constituencies that they should take the attitude that this should be the example for further devolution of a sensible policy which not only benefits one part of the country but looks at the economic opportunities in all parts of the country.
Unfortunately, I arrived for this debate at the end of the VAT fiddle discussion. I hope when the Minister replies on APD that, instead of his wholly disappointing and negative attitude to the embezzlement of VAT from the Scottish police service, he will return to the style of grace and imagination with which he usually so adorns the Dispatch Box, and this time recognise the opportunity for Scotland, and indeed the north of England, of making sure that this disgraceful tax is reduced and economic activity is increased.
Rob Marris (Wolverhampton South West) (Lab)
I do not share this cosy consensus. The hon. Member for Dundee East (Stewart Hosie) made it very clear in his usual honourable way—I have sparred with him many times—that if APD is devolved, the Scottish Government, if controlled by the SNP, will cut it markedly and have the goal of abolishing it. He helped the Committee by quoting the Prime Minister to the effect that there would be—these are my words, not the Prime Minister’s—a “beggar my neighbour” attitude downwards on APD. Call me old-fashioned, but I think environmental laws should be state-wide and international, and I consider APD to be an environmental law, which is why I voted for it years ago.
As ever, the SNP has been totally open with the House: it wants to see the number of airline passengers increase throughout the UK. That is an environmental step backwards. Fortunately, we have environmental laws internationally through the EU, for example on waste disposal and air quality, something on which the UK is, to coin a phrase, falling foul at present.
Mr MacNeil
Following the hon. Gentleman’s argument, does he want to increase the rate of APD or is he saying the Tories have got it at just the right rate?
Rob Marris
Yes, I would increase the rate of APD.
I was a Member of the House when the Climate Change Act 2008 was debated—there are several other such Members present, although we are a minority. There is in that Act a target which I think is UK-wide—I stand to be corrected on that—for an 80% cut in the UK’s CO2 emissions by 2050. I did not vote for that because I thought it was, to coin a phrase, hot air and, sadly, in the years since that Act has been passed, I have been proved right, as we see tonight.
Alex Salmond
The hon. Gentleman is not correct. Climate change legislation is devolved and the Scottish Parliament has its own Act in which the targets are even more ambitious and well on the way to being met.
Rob Marris
I am grateful to the right hon. Gentleman for that. Can he inform the Committee how on earth Scotland and the Scotland Parliament are going to meet those figures if they are intent on increasing the number of airline passengers?
Alex Salmond
Because, as one of the hon. Gentleman’s hon. Friends alluded to, one direct flight is better than two indirect flights.
Rob Marris
The right hon. Gentleman will know that the whole history of airline travel hitherto has been that it increases exponentially. It has done so, and if allowed to do so, will continue.
So I do not share this cosy consensus. I am not part of the airline and airport love-ins. As Members will know, airlines and their passengers already get a huge subsidy because of the low price they pay for airline fuel—kerosene. Members ought to bear this in mind when debating APD: no doubt the figures are lower in Scotland, but across the UK in any given year half the population do not fly. I believe that hon. Members have a completely distorted view of this matter. I suspect that I am one of the very few Members of this House who does not fly; I have not flown for years. I suspect that every other Member has a distorted view, based on self-interest. [Interruption.] It is not me who is causing a huge amount of environmental degradation through flying. The greenhouse gases emitted by aeroplanes at high altitude are far more damaging than the same amount of greenhouse gases emitted at sea level. Air travel is the most polluting form of mass travel.
In that context, I regret that the Government are devolving air passenger duty. Yes, I would increase it. The UK Government will live to regret this measure, because we are clearly heading towards the abolition of air passenger duty in Scotland and, eventually, through a process of “beggar my neighbour” downwards, across the rest of the United Kingdom. That will be another nail in the coffin of the doomed and uneconomic HS2 railway line. People will continue to fly south from Scotland and the north of England, and vice versa, rather than using the HS2 line. It is already uneconomic and, with the abolition of air passenger duty, it will become even more so.
Ian Murray
I do not want to detain the Committee for long, but let me just pose a few questions on what has been said about air passenger duty and the aggregates levy. I shall start with air passenger duty. Prior to the election, Opposition Members wrote to the Chancellor of the Exchequer asking what impact a rate of air passenger duty that was higher in Scotland than in England would have on regional English airports and Scottish airports. Will the Minister tell us what the Government’s movements have been on that impact assessment?
Hon. Members were berating my hon. Friend the Member for Wolverhampton South West (Rob Marris) a moment ago, but he has raised an incredibly important environmental issue. The issue has been raised directly by the Committee on Climate Change, which reported recently that Scotland had missed its climate change target by 4.5%, the third time in a row that it had missed an annual target. The report also asked the Scottish Government to assess the impact of carbon on the economy in relation to the slashing of air passenger duty. I cannot ask the Scottish Government this question directly from the Dispatch Box, but can the Minister tell me whether an environmental assessment has been carried out on the raising or lowering of the duty?
On the aggregates levy, will the Minister tell us what progress has been made on resolving the legal issues relating to state aid and when we can expect the levy to be devolved to the Scottish Parliament?
Rob Marris
Is it the Government’s view that the existence of APD has had any effect on the number of airline passengers flying to and from the UK, and within the UK, in each year since it came in? Do the Government think the existence of that tax has lessened the numbers, had no effect on them or, paradoxically, increased them?
Mr Gauke
I should put it as neutrally as I possibly can. We do not believe that the behavioural effects are as great as those set out in the PwC report, which is why we believe APD does raise revenue. There is a consensus—not a universal consensus—that it is right that we move on APD. On the point about regional airports, we will come back to that later in the summer.
May I also pick up the point on the aggregates levy? The hon. Member for Edinburgh South (Ian Murray) asked about the likely progress on legal matters. The European Commission was forced to reconsider its 2002 decision that the exemptions from the levy did not provide state aid following legal action by the British Aggregates Association. It announced its decision in March, finding that the levy as a whole was lawful, as were most of the exemptions. The Government are currently informally consulting trade associations on draft legislation to reinstate those exemptions—for example on slate and clay—found lawful by the Commission in March 2015.
With those points of clarification, I hope that the clauses before us can stand part of the Bill.
Question put and agreed to.
Clause 16 accordingly ordered to stand part of the Bill.
Clause 17 ordered to stand part of the Bill.
Schedule 1 agreed to.
Clause 18 ordered to stand part of the Bill.
New Clause 1
Independent Commission on Full Fiscal Autonomy
‘(1) The Secretary of State shall appoint a commission of between four and eleven members to conduct an analysis of the impact of full fiscal autonomy on the Scottish economy, labour market and public finances and to report by 31 March 2016.
(2) No Member of the House of Commons or of the Scottish Parliament may be a member of the commission.
(3) No employee of the Scottish Government or of any government Department or agency anywhere in the United Kingdom may be a member of the commission.
(4) The Secretary of State shall appoint as members of the commission only persons who appear to the Secretary of State to hold a relevant qualification or to have relevant experience.
(5) The Secretary of State shall not appoint as a member of the commission any person who is a member of a political party.
(6) Before appointing any member of the commission, the Secretary of State must consult—
(a) the Chair of any select committee appointed by the House of Commons to consider Scottish affairs, and
(b) the Chair of any select committee appointed by the House of Commons to examine the expenditure, administration and policy of Her Majesty’s Treasury and its associated public bodies.
(7) The Secretary of State may by regulations issue the commission with terms of reference and guidelines for the commission’s working methods, including an outline definition of the policy of full fiscal autonomy for the commission to analyse.
(8) The Secretary of State must lay copies of the report of the commission before both Houses of Parliament, and must transmit a copy of the report of the commission to the presiding officer of the Scottish Parliament.
(9) Regulations under this section must be made by statutory instrument, subject to annulment in pursuance of a resolution of either House of Parliament.” —(Ian Murray.)
This New Clause requires the Secretary of State for Scotland to establish an independent commission of external experts, appointed in consultation with the Treasury Select Committee and Scottish Affairs Select Committee, to publish a report by 31 March 2016 setting out an analysis of the impact of the policy of Full Fiscal Autonomy on the Scottish economy, labour market and public finances.
Brought up, and read the First time.