Finance Bill (Fifth sitting)

Roger Mullin Excerpts

Thursday 15th October 2015 Public Bill Committees

[The Chair]

Before I call Mr Mullin, let me explain for the edification of not only new Members but some who are longer in the tooth that the lead amendment—the one that is first on the selection list—is always called first and moved after its introduction. No other amendment is moved at that time. It is not a question of saying, “I would like to move this.”

New clauses are always taken at the end of a Bill, so while they are debated in the context of the subject matter of the Bill, they are moved—if moved at all—at the end of the Bill. So there will be no occasion yet, as Mr Mullin will wish to know, to move the new clause. However, he is absolutely entitled to speak to it, as I am about to invite him to do.

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

Thank you very much, Sir Roger, for that clarification, which I am sure we all enjoyed. I wish I had fully understood it. [Laughter.]

“I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it’s within the tax laws, so that they were regularly paying virtually no income tax. And I don’t think that’s right.”

Those were the words of the Chancellor of the Exchequer in April 2012. He was right then, but he needs to do more about it now. We still find such loopholes continuing for the highest remunerated investment fund managers in the country. It may be a mere coincidence that some of them are significant donors to the Conservative party.

I recognise that the Government have moved a little way, but as is attested by page after page of technical explanation notes relating to these matters, we wait to see whether these modest proposals close or create further loopholes. I note the telling sentence in the explanatory notes, which says:

“HMRC will monitor the impact of these provisions”.

That is good. To ensure that we as legislators are fully informed, I am sure that our new clause, which calls for appropriate reporting, will be considered, notwithstanding the Minister’s recent comments.

The few thousand people who work in private equity firms are remarkably well remunerated. In the words of Stephen Feinberg, the head of PE firm Cerberus Capital in 2011:

“In general, I think that all of us are way overpaid in this business. It is almost embarrassing.”

The average European firm’s managing directors can expect to receive about £8 million in total personal compensation and the largest firms pay out even more. Even more junior directors and principals can expect to receive just over £1 million. Those figures will be relatively conservative for London, which has some of the highest paid private equity executives in London.

In some cases, executives have been able to bring tax rates on their carry-down even further by claiming entrepreneurs’ relief. As has been indicated already, private equity fund managers currently shrink their tax bills by arranging to pay 28% capital gains tax, rather than 45% income tax on their carried interest. Carried interest is in effect their remuneration for managing other people’s money and should therefore be taxed as income tax. The fund managers’ ability to pay capital gains tax instead of income tax also allows them to avoid paying national insurance contributions on a major part of their income.

Support for our measure comes from many quarters. Of particular interest to me is the fact that in May 2014 the OECD—not renowned for radical tax positions—released a raft of recommendations to tackle rising income inequality. Those include:

“Taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements, and stock options”.

The injustice in all this can be seen through a simple comparison. A senior matron in a local hospital or a middle manager in a local further education college on £47,000 a year will have an effective tax rate of about 32.2%, yet a senior private equity executive receiving about £8 million will pay, at most, 29.4%.

[Christian Matheson (City of Chester) (Lab)]

Does the hon. Gentleman agree that this is an excellent early opportunity for the Conservative party to put words into action by showing that it is, as it claims, the party of ordinary working people, as opposed to, for example, the political wing of the City of London?

[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.

--- Later in debate ---

[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.

[Roger Mullin]

To clarify, we do not intend to press the new clause or any of our earlier measures to a vote at this stage, but we will return to them on Report, when we will also take account of the remarks the Minister just made, which I will want to challenge.