Finance Bill

Debate between Seema Malhotra and Rob Marris

Tuesday 6th September 2016 Commons Chamber

[Seema Malhotra]

I am grateful for the opportunity to speak in this debate, which was opened by my hon. Friend the Member for Salford and Eccles (Rebecca Long Bailey), on the new clause and amendments relating to capital gains tax. I will speak particularly about new clause 14, on “Entrepreneur’s Relief: value for money”, amendment 174, which would remove the capital gains tax cut, and amendments 175 and 176 on the investors’ relief sunset clause. Labour’s main issue of contention with the Government is the reduction of capital gains tax, the reasons for which have been well outlined. I want to highlight the very serious issue of value for money in public finances, and to continue to make our call for the Government to look at the way in which we scrutinise and review tax reliefs.

As we have argued since the Budget, the Finance Bill is inadequate if we are to rise to the challenges we face and to work towards a very strong economy in which we can all feel and believe that prosperity is shared by all. At a very tough time for the public finances, the Government have chosen to prioritise a corporation tax cut and a capital gains tax cut. Certainly while working on the Finance Bill, including as shadow Chief Secretary, I have had several conversations with business figures who quite openly said that they did not necessarily expect a corporation tax cut while other issues that are so important for their business success—investment in skills, housing, infrastructure and superfast broadband, and ensuring that we get the productivity shifts this country so desperately needs—require great attention. To purport that there is a simplistic link between a capital gains tax cut and a strong enterprise and investment culture is therefore not very honest, because it has not been proven that the cut is either necessary or sufficient to achieve that outcome, which we do indeed want.

Let us not forget that at the last Budget, the OBR took all the Chancellor’s measures into account and still downgraded the business investment forecasts. The latest figures from the Office for National Statistics estimate that business investment decreased by 0.8% between the second quarter of 2015 and the second quarter of 2016. Therefore, it continues to be a concern that the Government’s economic strategy does not take into account the wider needs of businesses beyond tax cuts.

It is the context of squeezed public services and lack of investment that leads me to raise the issue of tax reliefs, particularly those pertaining to capital gains tax, and the way in which we understand the needs of businesses. Tax reliefs are an important part of our tax system and have been needed for a variety of reasons, many of them extremely valid. However, after six years of this Government’s failure on the economy, in so many ways, with many people feeling the brunt of the cuts and with our public services under considerable strain, every penny of public spending should be going on much needed investment in our schools and hospitals and on supporting the most vulnerable. The figures got even worse this summer, with more than a third of children leaving school without the equivalent of five good GCSEs, and schools in my constituency tell me that they are giving out money every day to help parents buy school uniforms and shoes. We therefore need to justify every penny that is spent by the Exchequer.

That also has to apply to every penny that is not collected. Tax reliefs are effectively tax forgone. I firmly believe that we need to apply just as much scrutiny to relief as we do to expenditure. That is not to say that I am opposed to tax reliefs to incentivise good and positive business behaviours—far from it. For me, providing behavioural incentives to achieve economic and social goals is a central part of the role of Government, but they must use effective judgment that is based on the interests of fairness and prosperity. A Government who are working in strategic partnership with business and industry in the interests of the economy and society will actively consider such measures.

However, there is a serious paucity of scrutiny of whether and to what extent various tax reliefs are achieving those goals and whether they remain value for money for the taxpayer. The HMRC website lists 405 tax reliefs in the UK, but in reality there are many more. The Office of Tax Simplification has identified 1,140 tax reliefs. Of the 405 tax reliefs listed by HMRC, 102 cost more than £50 million, 84 cost under £50 million and there are 219 for which HMRC does not provide cost data.

[Rob Marris]

Does my hon. Friend agree that of all those reliefs, the biggest scandal is tax relief on pension contributions, which costs more than £30 billion a year in forgone revenue and principally goes to the most well-off? For years, the Department for Work and Pensions has had no evidence that that tax relief produces a change in behaviour that results in more people making pension contributions. We are, in effect, handing out a lot of money mostly, but not entirely, to a lot of rich people to get them to do something, when there is no evidence that it does so.

[Seema Malhotra]

My hon. Friend makes an important point. The conundrum of how we fund, finance and incentivise pension savings needs to be thought about much more holistically. He highlights an example of incentives that reach not the majority, but a minority. We must keep that under review.

The Public Accounts Committee took forward the work of the National Audit Office on these issues and took evidence. Its report found that some reliefs

“costing some £100 billion a year, are designed to deliver a policy objective that could be met instead through spending programmes”,

which would be more rigorous and more auditable. The report states that

“HM Treasury and…HMRC do not keep track of those tax reliefs intended to influence behaviour. They do not adequately report to Parliament or the public on whether reliefs are working as intended and what they cost and whether they represent good value for money.”

Nothing has really changed since the report was published last year. That is why Labour continues to raise this issue during the passage of the Finance Bill.

We need to question the efficacy of tax reliefs such as capital gains tax relief and entrepreneurs’ qualifying business disposals, or entrepreneurs’ relief. There are clear reasons for entrepreneurs’ relief and it can be argued that it incentivises investment, but does it make a great enough difference to be worth £3 billion a year to the Exchequer? I do not claim to have all the answers, but we do need evidence to prove that it makes that difference and the Government need to be challenged to justify this and other reliefs.

In Committee of the whole House, the then Financial Secretary to the Treasury defended entrepreneurs’ relief and, as usual, did so without evidence, saying:

“of course, as with all tax reliefs, it is entirely appropriate that the Government keep it under review to ensure that it is well targeted and not open to abuse”.—[Official Report, 28 June 2016; Vol. 612, c. 245.]

I challenge the Government to say when they will do that. New clause 14 would make the Government and all of us turn those warm words into action.

Furthermore, the Finance Bill introduces a new relief, investors’ relief, which extends the low rate of capital gains tax to investors in an unlimited trading company for at least three years. In principle, I support the idea of a relief that is intended to incentivise investment and to support access to capital for businesses, particularly at an early stage in a business’s life cycle, if we can provide evidence that it will help turn those with initial ideas into the successful job creators and innovators of the future. That is extremely important in creating the economy of the future, with all the opportunities that new technology and other initiatives can bring.

However, it concerns me that this could end up being yet another tax relief that is introduced for a good reason, but then left to mushroom into a relief that is extremely expensive and difficult to remove. We need a mechanism to ensure that there is time to review whether it is achieving the desired effect, whether the costs are aligned to those that are forecast and whether it constitutes value for money. For that reason, I support the sunset clause for the relief in Labour’s amendment 176, which would ensure that after a number of years, when we have the evidence on which to base our conclusions, those questions will not go unanswered.

I call on the House and the new Treasury Ministers to take seriously our scrutiny of tax reliefs and to support the Opposition amendments, which would put in place proper mechanisms for reviewing the reliefs and ensure that they remain targeted at supporting businesses, while showing evidence of value for money.