Finance (No. 2) Bill

Sarah Olney Excerpts

Committee of the whole House
Tuesday 18th April 2023 Commons Chamber

[Sarah Olney (Richmond Park) (LD)]

I rise to speak on behalf of the Liberal Democrats to new clause 7, tabled in my name, which would require the Government to produce an impact assessment of the effect of changes to small and medium-sized enterprise research and development tax credits on the UK tech industry and on long-term economic growth.

The Conservatives’ constant flip-flopping on tax and investment rules and their badly targeted incentives have not achieved the growth they promised, or are promising. Just last week, the International Monetary Fund predicted that the UK economy would contract by 0.3% this year, making us the worst-performing major economy. Prolonged weakness in business investment and productivity are a major barrier to economic growth, and if the Government want to boost innovation and drive long-term sustainable growth, they need to implement effective and well-designed policy on tax and investment.

The Federation of Small Businesses calls research and development tax credits for SMEs the most effective industrial policy of the last 10 years, enabling small businesses to develop cutting-edge products and foster competition and innovation within industry. The Government’s decision to dramatically slash R&D tax credits has therefore come as a blow to thousands of businesses. The Chancellor’s new policy of targeting tax breaks at research-intensive firms has been celebrated by the life sciences industry, but many other industries will fall outside the 40% intensity threshold. The Institute of Directors has also warned that targeting tax credits at research-intensive firms could lead to less innovation across the economy more widely.

We need to incentivise companies across all sectors to innovate, and particularly to encourage those that have not habitually been innovators. The manufacturers’ organisation Make UK has warned that further damage has been caused by the Conservatives’ chopping and changing on tax credit policy, which leaves businesses struggling to keep up and weakens business confidence. On Second Reading I urged those on the Treasury Bench to reconsider their policy and to reinstate the R&D tax credits for SMEs in full, and I am disappointed to see a lack of movement in that area.

The Liberal Democrats would introduce the kinds of incentives that have been proven to boost productivity, such as tax breaks for training to ensure that employees can continue to develop their skills, both for their own benefit and for the benefit of their employers; allowances for digital investment, to enable businesses to invest quickly and early in the newest digital tools in order to make productivity gains; and, most importantly, encouraging proper, ambitious, bold investment in energy efficiency. Whether for switching a fleet to electric cars or installing solar panels, reducing demand for energy is essential not only for decarbonising our industrial sector, but for bringing down production costs.

The need for targeted incentives for energy efficiency has been underlined by the ongoing energy cost pressures that businesses are experiencing, and the Conservatives’ decision to slash energy support for businesses by 85% will force countless shops, pubs and restaurants to pass increased costs on to their consumers, further fuelling inflation. The Liberal Democrats have repeatedly called on the Government to do more to tackle rampant inflation by supporting businesses with their energy bills. Amidst Government inaction, last month the rate of inflation in the UK jumped to 10.4%, driven largely by the cost of food and alcohol in hospitality venues. I urge the Government to look again at their policy on energy support and tax incentives offered to business, to tackle inflation, to stimulate economic growth and to drive productivity across all sectors.

[Kirsty Blackman]

The hon. Lady is making an important speech on new clause 7. I did not mention this in my speech, but we will support the new clause if it is pressed to a Division today.

[Sarah Olney]

I welcome the Scottish National party’s support for our new clause.

I ask the Government to accept the Liberal Democrat amendment proposing an impact assessment on the changes to R&D tax credits. It is essential that this policy is kept under review and its impact on the UK’s tech industry and long-term economic growth is monitored if we are to ensure that the UK becomes the powerhouse of technical innovation it so badly needs to be if we are to drive the productivity we need to increase growth across all economic sectors.

[Caroline Lucas]

I rise to speak in support of new clause 10, which stands in my name and addresses the decarbonisation allowance first announced by the Chancellor in the autumn statement and now legislated for in this Bill. Although in principle the decarbonisation allowance may sound innocuous or even useful, it is in fact an outrageous subsidy that sees the taxpayer paying companies to decarbonise their activities.

Under this scheme, a company spending £100 on so-called “upstream decarbonisation”—in other words, reducing emissions from the process of extracting oil and gas that then goes on to be burned—is eligible for £109 in relief. We should remember that these companies have themselves admitted that they have

“more cash than we know what to do with”,

and earlier this year they recorded obscene, record profits, with BP’s profits more than doubling to £23 billion and Shell reporting annual profits of more than £32 billion, all while millions of UK households face unbearable choices between basic needs and desperately struggling to make ends meet.

In his Budget statement, the Chancellor recognised what he called the enormous pressures on family finances, with some people remaining in real distress, yet even with the decision to freeze the energy price guarantee at £2,500 as of this month, bills will still rise by almost 20% and 7.5 million households will be in fuel poverty. It is utterly perverse that in this context the Government have decided to hand the climate criminals—those who have profited from the spoils of war—yet another subsidy. These are, at bottom, political choices.

The Chancellor may say, in response to my amendments, that we should be endorsing the decarbonisation allowance to cut emissions from the oil and gas sector, but that ignores the economic reality of the situation and the reality of our planetary boundaries, with upstream decarbonisation doing nothing to mitigate the end result of the fossil fuels choking our precious planet. I am afraid that, in the face of worsening climate impacts, paying companies to power oil rigs with wind turbines or to monitor emissions to detect leaks simply does not cut it. Even more alarming is the provision in the Bill for the decarbonisation allowance to support carbon capture. That UK taxpayers would pay oil and gas companies to capture their emissions in order to allow them to continue production—essentially, to continue business as usual—is a shocking violation of the “polluter pays” principle.

If the Government were seriously looking at reducing production emissions, they would, for example, be looking to bring forward an outright ban on flaring by the end of 2025 at the very latest—I remind Members that flaring has been banned in Norway since 1971—or they would be strengthening the lamentable targets in the North sea transition deal from a 50% reduction in emissions by 2030 to at least a 68% reduction, as proposed by the Committee on Climate Change in its balanced pathway, both of which have been called for by the Environmental Audit Committee, of which I am a member. Yet in their response to the EAC’s report on “Accelerating the Transition from Fossil Fuels and Securing Energy Supplies”, the Government roundly rejected both recommendations, maintaining that the existing targets in the North sea transition deal are “sufficiently ambitious”.

This is not a Government who are serious about cutting emissions from production, and they are certainly not serious about the climate crisis. New clause 10 recognises that the decarbonisation allowance is just one of the handouts to fossil fuel companies that have been introduced under the energy profits levy. It would require the Government to produce an assessment of the cost of the decarbonisation allowance to the Treasury and, crucially, its impact on overall investment in oil and gas production. It would also reveal how much money would be raised through the energy profits levy without the enormous gas giveaways in the form of both the investment allowance and the decarbonisation allowance, as well as assessing their impact on delivering our crucial climate targets.

At this point, I would like to say a few words in support of new clause 6, which would require the Chancellor to conduct a review of the decarbonisation allowance and its impact on public finances, although it is important to note that the amendment is somewhat narrower in not requiring an assessment of climate impacts as well. The Government are very transparent about the fact that the investment allowance is directly aimed at encouraging companies to pump more money into oil and gas extraction in the UK by allowing them to claim £91.40 for every £100 invested. That policy runs directly counter to the advice of the world’s leading scientists on what is needed to keep 1.5° within reach, with the UN Secretary-General calling for a cessation of

“all licensing or funding of new oil and gas”

at the recent launch of the Intergovernmental Panel on Climate Change’s “AR6 Synthesis Report”, and the report itself being clear that emissions from existing fossil fuel infrastructure already exceed the remaining carbon budget for 1.5°.

The bottom line is that our climate simply cannot take any new oil and gas licences. As I have said time and again, new licences would also fail to deliver energy security. With the oil and gas sold on global markets to the highest bidder, they will not bring down bills in the UK and will inevitably come at a huge cost to the taxpayer. Indeed, if we take just one example, Rosebank, the UK’s largest undeveloped oilfield, the costs become clear. Rosebank is enormous. At triple the size of the neighbouring Cambo oilfield, it would produce more emissions than 28 low-income countries combined or, to put it another way, it would produce the carbon dioxide equivalent of running 58 coal-fired power stations for a year. If developed, its owners will be gifted a £3.75 billion taxpayer-funded subsidy from the Government to the estimated £4.1 billion project. The Norwegian state-owned company Equinor, which made a staggering £62 billion last year, contributed just £350 million while pocketing enormous profits.

--- Later in debate ---

[Emma Hardy (Kingston upon Hull West and Hessle) (Lab)]

What an interesting debate it has been. I have found myself slightly amused numerous times by comments from Conservative Members, especially when have they tried to make out that theirs is the party of low taxes, when taxes as a share of GDP are heading to a post-war high. The public are not stupid. A recent poll in The Spectator showed that the public associate the Conservative party with higher taxes. The reason is that the Conservatives keep putting their taxes up.

Another problem that I have seen play out this afternoon as I have sat here is that the Conservative party is inherently divided. Different parts of the governing party are pulling in different directions. That is seen in the seven Chancellors we have had since 2010. As different factions have taken over the leadership, those seven Chancellors have pulled the party in different ways, creating uncertainty. Uncertainty is one of the key things that businesses say leads to a lack of investment. It is not just businesses telling us of the problem of uncertainty, but economists. They tell us about the difficulty with uncertainty and why the UK is uniquely impacted by a lack of investment.

Torsten Bell said that if we go back to 2010 when the Conservatives first came to power—13 long years ago—we initially see a relatively good bounce back from the financial crisis, but then

“we basically miss out on all of the investment growth that other countries saw in the second half of that decade. We flatlined, everyone else soared. In so far as there was a global boom going on, that is when it happened. We did not see that. There have been some revisions to the data recently that make the bounce back from the pandemic on business investment less grim than they looked before, but they are still pretty bad.”

That is one economist. Another economist, Professor Coyle, said:

“Tax will make a difference, but it is not the only thing that matters, and surveys of employers tend to highlight poor infrastructure”—

something that anyone who spends any time travelling by rail around the north is only too aware of—

“and lack of skills, which we’ve already been talking about. Lining up all the different things that matter is obviously part of the challenge—so, consistency”—

that word again—

“and making the system work as a whole.”

Another economist, Paul Johnson, said:

“The lack of consistency in policy is clearly a problem. Something that we talked about—perhaps it is not the right place to talk about it—is that the political instability is a problem for companies looking to invest”.

Seven Chancellors and a divided governing party that does not know which direction to take the economy and our country. Businesses are seeing that, voting with their feet and choosing not to invest in the UK. Professor Coyle went on to say:

“If you look at the past decade or so, what has been happening to firms, even within a given industry, is that the dispersion of productivity has increased. There are some very productive firms. Their productivity growth has slowed down, but they are pulling further and further ahead of…the rest. Firms that are operating outside London and the south-east tend to be the ones in the low productivity part of that distribution.”

As we have said before, the issue goes back to infrastructure. The constant under-investment in Northern Powerhouse Rail, with different Prime Ministers making decisions about whether we will or will not have it, will have an impact on business investment and influence whether businesses choose to invest in our country.

Professor Coyle went on to say:

“I do not mind whether it is called an industrial strategy or not, but we need some kind of long-term perspective—some kind of strategic approach to managing the economy.”

Hear, hear, Professor Coyle. I agree and so does the Labour party, which is why the Labour party has a long-term plan for growth in the country and why I am speaking in support of new clause 3. If businesses cannot have certainty from the governing party or understand which Chancellor is going to introduce which measure in what way, or which faction is the latest to take over the governing party, then they need that certainty from the Labour party, because they are really struggling.

I have met with local businesses in my constituency and they gave me a very clear message: it is incredibly difficult. The Chancellor may boast—boast, ha!—that we are not in a technical recession, but try telling that to the small businesses in my constituency that are finding life incredibly difficult. As we walk around different high streets, we can see the number of shops that are closing. Although the review of business rates does not go as far as the Labour party wants—we want to get rid of business rates altogether—hopefully Members from across the House can support such a fundamental review. Let us look at what we can do to support businesses, especially small businesses. I am sure each and every one of us has been lobbied hard by the Federation of Small Businesses and heard directly from small businesses about how difficult they are finding things.

I will comment briefly on new clause 7 about research and development tax relief, which is proposed by Liberal Democrat Members. It is well worth reading the TaxWatch report into the levels of fraud associated with R&D tax reliefs. We may want to support businesses with R&D tax reliefs—I am not saying that we should not do that—but we need to take the issue of fraud more seriously. The OBR predicts that the total cost of R&D reliefs will increase from £6.8 billion in 2021 to £9.2 billion in 2026-27, but fraud and error in that scheme totals over £1.1 billion in the last three years.

[Sarah Olney]

The hon. Member makes an excellent point about fraud and error. Does she agree that removing the tax breaks entirely is a sledgehammer to crack what is ultimately quite a small nut? Further attempts to crack down on fraud and error would be a much more constructive way to approach the issue she raises, rather than scrapping the tax relief entirely.

[Emma Hardy]

I never for one moment suggested we should scrap the tax relief entirely, but we definitely need to do something about fraud. When we have businesses ripping off the taxpayer for £1.1 billion—money that is desperately needed for our public sector, hospitals and infrastructure—we need to take the issue seriously and not brush it under the carpet. R&D claim firms continue to hard sell opportunities to claim refunds, often to companies that should not qualify.

We have issues with the tax gap, which is around £32 billion. That tax gap continues to increase and the tax fraud gap stands at £14.4 billion. That is a heck of a lot of money. If they were serious about wanting to reduce taxes, I would have thought Government Members would want to tackle tax fraud. I have raised the issue with the Minister in a previous debate and I know she is aware of it, so will she outline the steps being taken by HMRC and HM Treasury on the important work of reducing tax fraud and simplifying our tax system?

While we are talking about tax simplification, and as a teaser for the debate tomorrow, it seems strange that the Government wish to abolish the Office of Tax Simplification. That seems a rather strange thing to do when they seem so keen on having tax simplification, but maybe we can continue that discussion tomorrow.