Finance Bill (Second sitting)

Stella Creasy Excerpts

Committee Debate: 2nd Sitting: House of Commons
Tuesday 17th October 2017 Public Bill Committees

[Anneliese Dodds]

As the Minister has indicated, amendment 20 is to the schedule, which is grouped with clause 14. We have a number of concerns about the proposed changes to social investment tax relief, which is why our amendment asks for a review of their effectiveness and impact.

As colleagues will be aware, social investment tax relief is aimed at supporting social enterprises, comprising those businesses that plough their profits—or at least a proportion of them—back into a social and/or environmental mission. With this relief, where investments by individuals are eligible, they can reduce an individual’s income for income tax purposes by almost a third. It is clearly a significant relief and one that, while having many positive impacts, has been suggested as leading to abuses, with the social or environmental impacts from investment in some anecdotal cases being cosmetic rather than actual.

There are also underlying issues about whether there is a level playing field between social enterprises and the public sector when it comes to the delivery of some public services, which could be intensified by the development of additional scope or type of tax reliefs when it comes to social enterprises. Indeed, for those reasons, some people have entirely rejected even the principle of social investment tax relief in the first place. I understand Dame Hilary Blume, director of the Charities Advisory Trust, was concerned about the creation of the relief in the first place, saying it would attract those interested in profits rather than social good to the sector.

In my experience as a constituency MP—and others may share this experience—social enterprises that operate in my constituency, such as the charity Aspire Oxford, undertake work that the Government either have never done or which they have abandoned due to a lack of resources, such as the enormous reductions in support provided through probation services. It is important that organisations such as these, which genuinely deliver additionality, are supported. Nonetheless, in that context, we have a variety of concerns about the currently proposed changes and it is for that reason that we ask for a review. I would be grateful—even if our amendment does not pass—if the Minister could provide answers to a number of these concerns, presently or by letter in the future.

The first concern we have is about the process surrounding these measures. As colleagues will know, rather confusingly, not all social enterprises qualify for social enterprise relief. Predominantly, the relief is focused on community interest companies, charities and community benefit societies. For that reason, before receiving investment, many social enterprises ask HMRC for advance assurance—this topic pops up again—that they will qualify for SITR. I am concerned to have learned from the sector that assessors seem to have been taking decisions already about whether social enterprises will qualify for SITR on the basis of the rules we have in front of us today, which have not yet been passed by Parliament, rather than on the basis of the current rules.

I know the rules would have retrospective impacts: in practice they would be for investments dating from 1 April. It seems strange, however, for assessors to be taking decisions already on the basis of the new rules and this is potentially a disadvantage for social enterprises that are negatively affected by the new rules.

I have also heard concerns about the new treatment of leasing within the new provisions. As I understand it, the Government conceive of leasing as an inherently low-risk activity and therefore not worthy of subsidy, but it is not clear to me that all the implications of this position have been thought through. An example is that of a specialist facility, such as a rundown heritage swimming pool. In fact, many of us may have those in our constituencies—as we know, many have closed. It is very difficult for local authorities to redevelop those facilities in current financial circumstances. We could imagine an example where a social enterprise might want to take on that pool, purchase it, attract investors into that project, but not run the swimming pool themselves as they do not have the expertise to do so. They might then want to have a leasing arrangement with a specialist leisure provider to deliver the services from that swimming pool. The problem with the new changes is that, in this context, even though the risk of that new approach would be reduced because the specialist provider would have more experience of running swimming pools than the social enterprise, the latter would be left in an invidious position, because it would lose the tax break if it engaged in that kind of leasing arrangement.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

My hon. Friend is making a powerful case about the importance of trying to make these kind of rules work for the reality of how social investment often happens in our local communities. Does she agree with me that there is also a concern that by excluding asset-leasing, things like community pubs and community land trusts might also be excluded by the Government, probably unintentionally? Many of us know of small community groups that may want to take over pubs in our communities that would be excluded by this measure and unintentionally actioned against. Surely we should be acting on that.

[Anneliese Dodds]

I am grateful to my hon. Friend for making that point, and I agree that this could apply to a range of different facilities. In many circumstances, this kind of arrangement is the only way to keep those facilities going. We could see them entirely disappear—we all know about the sad disappearance of community pubs in our areas—so I am grateful to her for making that point.

In addition to those potential issues, we are also concerned about the differential treatment of social enterprises by age, with the £1.5 million cap being lifted for social enterprises under seven years old. Will the Minister explain why there is precisely this seven-year limit? It may in practice be that local authorities are relying on well-established, well-run and highly experienced social enterprises to help to provide essential services and facilities in conditions of extreme budget cuts, but it is those older enterprises that are potentially disadvantaged by this scheme. I hope that we are going to learn the exact decision-making process on this seven-year cut-off point. If it is specifically to advantage younger social enterprises, why is that the point? Is it the case that youth is being viewed as a proxy for the ability to take on risky activities? If so, where is the evidence basis for that?

I point again to the example of Aspire in my constituency that operates a range of programmes, including one that supports offenders going into work—people who would not normally necessarily be taken on by different employers. Surely that is a highly risky activity, but it is one at which they—as an established social enterprise—excel. Age does not necessarily appear to be a good proxy for the ability to take on riskier activities. If this seven-year cut-off is not there to encourage younger social enterprises, then why has it been instituted? We need more information on this.

Finally, we feel that additional evidence on the effectiveness of the anti-avoidance clauses within the new provisions is required. Social enterprises in the voluntary sector have a long history in areas such as hospice care, specialist domestic violence and mental health services where they have often genuinely driven innovation. Other social enterprises, such as those I mentioned earlier, have merely donated some of their profits to charity, rather than having a genuinely social or environmental mission. May we have more clarification on how abuse will be identified and dealt with?

[Mel Stride]

Compared with typical companies, social enterprises face greater difficulties in accessing the funding they need to grow and develop. Social investment tax relief provides a number of generous tax reliefs to encourage individuals to invest in social enterprises that deliver social or community benefits. The current limit to the amount of investment that a social enterprise can receive through SITR is around £300,000 over three years. We announced in 2014 that we would look to expand the scheme, and we are now doing so.

The changes made by schedule 1 will increase the investment limit to £1.5 million over the lifetime of all social enterprises using SITR. In order to target the relief more effectively at the social enterprises that most struggle to attract investment, those under seven years old will no longer be bound by the three-year rolling investment limit of £300,000. I think this addresses the issues raised by the hon. Member for Oxford East about why the period is seven years. There is a greater vulnerability when social enterprises start up and they are fresh and young. They have yet to have a track record on which they can build, in order to grow. For those we are removing the roaming £300,000 over three years requirement. Social enterprises older than seven years can still use SITR for investment up to the three-year rolling investment limit of £300,000, subject to the lifetime limit of £1.5 million.

Schedule 1 makes a number of other changes to ensure that the scheme is well targeted at activities that will genuinely achieve socially beneficial aims, and provides value for money. That includes targeting SITR at social enterprises with fewer than 250 employees. Some activities have always been excluded from the relief so that it is not used as a tax-advantage route for low-risk investment. The excluded activities list will be updated to exclude a number of low-risk activities, including leasing assets and raising finance to lend on to others.

I agreed wholeheartedly with the hon. Member for Oxford East’s assertion about the importance of these social enterprises. She mentioned Aspire, for example, in her own constituency and many of us can think of similar organisations in our constituencies. On the more detailed process points that she was interested in, particularly around HMRC and advanced assurances, I am happy to write to her.

On the specific issue of leasing, allowing those activities to benefit from SITR would risk diverting finance away from higher risk social enterprises. We must not lose sight of the fact that the whole purpose of this scheme is to encourage those kinds of organisations and all the good works that they do, which might not otherwise come forward for the reason of being high risk. Of course, those organisations struggle the most to raise finance. Leasing assets typically provides a reliable income stream, which makes it a lower risk activity. Allowing social enterprises to raise money to lend on to other enterprises would be complex to administer and would leave the scheme open to misuse.

[Stella Creasy]

As a Co-op, as well as Labour, MP, I am rather passionate about the idea of social investment. The Minister seems to be a little short-sighted about the idea of assets—after all, there are many people looking at running community pubs, for instance, which is a great example of a community asset that we might want to support. I would not see that as an example of a low-risk venture. Surely, if he accepts our amendment, we can look at some of those issues and make sure that he is not missing out on some of the things he would like to see investment in because of a concept of risk that is rather narrow, rather than recognising some of the boundaries of co-operative and social investment.

[Mel Stride]

I thank the hon. Lady for her intervention. I guess there is a trade-off between getting very detailed and more precise in where we target these kinds of reliefs and, on the other hand, sometimes having complexity and confusion. It can be difficult to winkle out the precise anomalies that she may be alluding to. However, I can reassure her that, under the EIS scheme, many pubs, including community pubs, can qualify. They may be excluded under certain circumstances within the SITR scheme, but under EIS she will find that there are at least possibilities.

On the general issue of anti-avoidance, we are seeking to avoid situations where these schemes—whether they are EIS, SITR or VCTs—are simply being used as places to preserve capital at very little risk and to give a tax return as a consequence of the scheme. It is important that we have tight, sensible and effective avoidance measures in place.

Finally, further provisions to align the rules more closely with the enterprise investment scheme, including anti- abuse provisions, will also be introduced. Amendment 20 would require a review of the effects of the scheme, including the effectiveness of the anti-abuse provision and other changes being made by schedule 1. The Government have already committed to a full review of SITR within two years of its expansion. An early review would make it impossible to adequately gauge the effectiveness of the provisions that we are introducing now. Further, these anti-abuse provisions were introduced in direct response to HMRC becoming aware of the creation of aggressive tax-planning structures designed to exploit this relief. We estimate that around 800 social enterprises will benefit from the relief over the next five years. By 2021-22, SITR is forecast to cost £65 million per year, £30 million more than if the scheme was not enlarged.

We have had an interesting debate on the scheme. As we have already committed to a full review, I ask the hon. Member for Oxford East to withdraw amendment 20. Schedule 1 will increase the amount of investment that social enterprises can raise through SITR making it attractive to a wider range of enterprises and investors. Other changes will ensure that the scheme is well targeted and delivers value for money.

Finance Bill (Third sitting)

Stella Creasy Excerpts

Committee Debate: 3rd sitting: House of Commons
Thursday 19th October 2017 Public Bill Committees

[The Chair]

With this it will be convenient to discuss the following:

Amendment 5, in schedule 5, page 364, line 10, at end insert—

“443A Review of effects in relation to PFI companies

(1) Within three months of the coming into force of this Chapter, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the effects of the provisions of this Chapter in relation to PFI companies.

(2) The review shall consider in particular the effects if the provisions of—

(a) the Chapter, and

(b) the exemption in section 439

were not to apply to PFI companies.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”

This amendment requires a review to be undertaken of the impact of the provisions of Chapter 8 of new Part 10 of TIOPA 2010 in relation to PFI companies and if the provisions did not apply to PFI companies.

Amendment 28, in schedule 5, page 367, line 46, at end insert—

“448A Sectoral reporting on operation of this Chapter

(1) Within fifteen months of the coming into force of this Chapter, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the operation of its provisions in relation to different sectors.

(2) The sectors covered by this review shall be—

(a) water and sewerage,

(b) gas and electricity,

(c) telecommunications,

(d) railway facilities,

(e) roads and other transport facilities,

(f) health facilities,

(g) educational facilities,

(h) facilities or housing accommodation provided for use by any of the armed forces,

(i) facilities or housing accommodation provided for use by any police force,

(j) court or prison facilities,

(k) waste processing facilities,

(l) buildings (or parts of buildings) occupied by any relevant public body other than for purposes principally concerned with matters specified in paragraphs (a) to (k).

(3) A review under this section shall separately identify, in respect of each sector, information on operation in respect of qualifying infrastructure companies undertaking activities that were previously undertaken by a nationalised industry.

(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”

This amendment would require HMRC to report on the operation of the special provisions in Schedule 5 relating to public infrastructure in relation to sectors and, within sectors, in relation to privatised companies as a group.

Amendment 6, in schedule 5, page 368, line 13, at end insert—

“‘a PFI company’ means a company which has entered into a contract with a public sector body under the Private Finance Initiative or the PF2 initiative.”

This amendment defines a PFI company.

That schedule 5 be the Fifth schedule to the Bill.

New clause 1—Review of relief from corporation tax relief for PFI companies—

“(1) Within three months of the passing of this Act, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about how corporation tax relief is given for losses, deficits, expenses and other amounts of PFI companies.

(2) For the purposes of this section, ‘a PFI company’ means a company which has entered into a contract with a public sector body under the Private Finance Initiative or the PF2 initiative.

(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons within three months of its completion.”

This new clause requires a review to be undertaken of the corporation tax reliefs available to PFI companies.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship this morning, Mr Howarth. I am looking forward to this debate because it is something all of us across the House feel concerned about. I recognise that we are debating the Finance Bill. I reassure you that the amendments and the majority of what I will talk about today are about taxation and, in particular, the requirements of the legislation. I just want briefly to set out how that fits into the context of the concerns that are shared across the House about private finance and the cost to the public sector of borrowing to be able to build the infrastructure that we all know we need.

To be clear, Governments of all colours have used private finance and continue to do so. The private finance initiative and private finance 2 schemes are little different from each other. It is recognised that questions about the companies involved and the role of taxation in the decision to use PFI or PF2 to fund public infrastructure are questions for all of us, because we see in our constituencies the problems that are caused.

I note that the constituency of the hon. Member for Brentwood and Ongar now has repayments of £169 million as a result of private finance. The constituency of my hon. Friend the Member for Bootle, the shadow Minister, has £423 million-worth of repayments required under private finance contracts. I would describe private finance as the hire purchase of the public sector—indeed the legal loan sharks of the public sector— because the companies offer credit to the public sector, but at a high cost. In particular, the cost of the credit—the taxation that will come from the companies involved—is part of the decision to go with them. That is specifically part of the Green Book calculations. I am looking forward to the Minister telling us what has happened to those Green Book calculations, which were supposedly withdrawn in 2013 but I understand are still being used by Departments for private finance deals, to understand how tax plays a part in the decision to use private finance companies. The idea is that this form of credit may be more expensive but that the companies will repay us in taxation in the UK. That forms part of the decision to use them. The widespread evidence now is that those companies are not paying UK taxes, and that they are benefiting from changes in our tax regime over the past 20 or 30 years. That should trouble all of us because we are not getting the value for money that the deals were supposed to be.

One of my concerns that I hope the Minister will address is that PF2 also pays little regard to the question of where the companies are situated and how much tax they pay. I have therefore tabled two amendments—in fact, three; one is about defining private finance companies—to understand what kind of deal we are getting from those companies and how we as taxpayers and those who represent taxpayers can get a better deal for the British public.

For the avoidance of doubt, the debate is not about not using private finance. One day, I hope that we will have another debate—I am sure the Minister will look forward to it as much as he is looking forward to this one—about the alternatives to private finance. There is a role for private finance, but the question is, if we are getting a bad deal and if the companies are not honouring the obligations that we as taxpayers assigned to them, what can we do about it?

Clearly, the PFI companies are making huge profit. Research from the Centre for Health and the Public Interest shows that over the next five years almost £1 billion in taxpayer funds will go to PFI companies in the form of pre-tax profits. That is 22% of the extra £4.5 billion given to the Department of Health alone.

In my constituency I see at first hand the impact of this. Whipps Cross University Hospital is technically in the constituency next door, but serves my local community—it is part of Barts, which has the biggest PFI contract in the country: £1 billion-worth of build, £7 billion to be repaid. The hospital is paying back £150 million a year in PFI charges, more than 50% of which is interest alone on the loan. The hospital downgraded the nurses’ post to try to save money, and so found that many nurses left. It therefore faced a higher agency bill.

It is clear that PFI and the cost of those loans drives problems. It is also clear that those companies make what I would term excessive profits. That is where new clause 1 begins to try to offer us some answers. If the companies make excessive profits, that is not part of the contract that we signed with them. The National Audit Office has been incredibly critical of how taxation played a role in decisions about private finance companies, but that has not been realised.

Also, not that many companies are involved, yet the tax returns are huge. Just eight companies own or appear to have equity stakes in 92% of all the PFI contracts in the NHS. Innisfree manages Barts, which is my local hospital, and it has just 25 staff but stands to make £18 billion over the coming years. It might be thought, therefore, that companies of that size and stature would pay a substantial amount of tax—I see that the hon. Member for Brentwood and Ongar can predict where I am going with this; sadly, it does not appear to be the case.

Indeed, many of the companies seem to report little or no tax in the UK. One of the simple reasons for that is that many of them are not registered in the UK. That is crucial because the provisions in the Bill to give those companies a relief on paying tax on the interest that they get from shareholder debt are predicated on the idea that they are UK companies. That is the starting point for amendments 5 and 6. The Bill will bring in a cap on the amount of relief that companies can claim against interest. However, there is a public sector exemption, for public sector infrastructure companies, and it will substantially benefit the companies in question.

Having been a Member of this House for seven years, I have always assumed that when such a provision is introduced we will be able to debate its merits. I note that the restrictions in relation to the measure mean that we cannot stop it, or ask whether we are being wise and whether, given that we know the companies do not necessarily pay the tax it was assumed they would in the UK, we are getting their tax situation right. We cannot stop the measure, but we can certainly ask just how much the companies are going to benefit from it.

Amendments 5 and 6 are intended to enable taxpayers to understand how much the companies will benefit from the exemption, and how much extra money they will be able to write off against their tax bill, thus paying little tax in the future. It matters very much to the companies, because most are heavily indebted to their shareholders. They use a model involving 80% to 90% senior debt; the rest is equity loans in terms of the products that they offer. PF2 will change that very little. The amount of debt that they carry, and therefore the amount of interest that they can trade off, which the measure will allow them to do, will be relevant to their ability to give returns to their shareholders.

It is clear that those companies give their shareholders substantial returns, and will be able to fund that through such tax relief. Indeed, the shareholders’ returns are 28% on their sales—more than double the 12% to 15% that was predicted in the business cases. Between 2000 and 2016 the total value of sales of shares in PFI companies was £17 billion. It is notable that in 2016 100% of equity transactions involving those companies were to offshore infrastructure funds in Jersey, Guernsey and Luxembourg. That is based on a sample of 334 projects.

Those companies are going to get a substantial tax relief from the exemption. Yet they do not pay tax in the UK—or, certainly, there is a lot of evidence that they do not. It is an exemption that will enable them to continue to justify paying little or no tax; they will be able to write off the interest on their loans and projects against it. Yet taxpayers are not benefiting from the tax that they said they would pay.

New clause 1 goes to the heart of that question. Those companies signed up for public sector contracts, with particular rates of tax at the time they were finalised. Yet, as we know, corporation tax has varied substantially over the past decade. The debate is not about what the right level of corporation tax is; it is about a simple principle. If a company has signed up to pay a certain rate of tax, and the tax rate changes, it clearly benefits from that. We signed up to the deals for taxpayers, however, on the basis that they would pay a certain rate of tax. That tax rate will now change. New clause 1, again, asks just how much the companies are benefiting from the changes.

I know that the Minister will tell me that there are various anti-discriminatory clauses in the PFI and indeed the PF2 contracts. I agree with him. Therefore, how we might start to reclaim some of that excessive profit is a tricky question, but there is a strong case that, if a company has signed up in good faith to a particular rate of tax, surely that is the rate of tax that it should pay. That is written into the contract, it is part of the business case in the Green Book that is made on these sorts of deals. We as taxpayers have an expectation. Indeed, I would expect the Minister to have a series of sums reflecting the amount of money that would be paid back that he would write off against the large sums that I talked about. However, given that the corporation tax situation has moved from some of these companies nominally paying 28% to their paying 19% or less, that is clearly a substantial discount on what they were expected to pay. New clause 1 asks us to do what, frankly, at the moment we do not do as a country—understand what the difference is between what we expected to get in from tax from these companies and what we will get in.

It is always troubling to me that the Treasury does not seem to have a central database either of how much we were paying to take on these loans—particularly the rates of return, which we know are substantially higher than the rate of borrowing on the public sector—or of the taxation these companies are paying back versus what they were expected to pay back. New clause 1 would get to the heart of that matter and it sits alongside amendments 5 and 6 in trying to understand where these companies are making excessive profits from the public sector.

I am sure that the Minister will tell me that this is a dreadful attack on the private sector and that we should not be saying that these companies are ripping the British public off and that they are legal loan sharks. However, I ask him: if he will not accept the amendments, will he commit to gathering the data about how much these companies have paid in tax, how much difference these have made to the value-for-money case for these businesses, and therefore how our communities will be able to pay back the sums involved?

I am sure that the hon. Member for Brentwood and Ongar would love to have £169 million to invest in his local community; there are many worthy causes that I am sure he would support. I am sure that the hon. Member for Hitchin and Harpenden would be interested in the £170 million that I believe Stevenage, near his constituency, will have to pay out to PFI companies. That money could be invested in the public infrastructure that we so desperately need.

I am sure that all of us would agree that we expect these companies to pay their tax, as they signed up to in these contracts, yet it is clear that they do not. So if the Minister is not prepared to accept these incredibly reasonable amendments in this environment, I hope that he will set out precisely what he is going to do to get our tax money back. All of us and all of our constituents need and deserve nothing less.

[Peter Dowd (Bootle) (Lab)]

It is again a pleasure to serve under your stewardship, Mr Howarth.

I thank my hon. Friend for tabling the amendment, which seeks a review of the effect that the measures we are discussing will have on PFI companies. The Government blithely assert, including in their notes on the Bill, that companies involved in public benefit infrastructure spending are an inherently low risk for tax avoidance. That is an odd claim, especially in the light of what my hon. Friend has said. We know that some PFI companies have engaged in profit shifting to non-UK jurisdictions. It does not make sense to say that just because the profits of a company are extracted from public investment it cannot seek to be paid in a way that is fiscally undesirable.

No one should bemoan the huge public infrastructure investment that the last Labour Government enabled. It was fixing many of the problems left from years of neglect in the public sector. All Governments have taken part in PFI. When PFI was in effect the only game in town, so to speak, many public authorities took up the chance to make the investment they needed; my hon. Friend identified some in my constituency that benefited from such investment. However, we know that some contracts have produced excessive costs for the public sector, where direct borrowing could have produced much lower ongoing costs and provided for more direct influence over the quality of some ancillary services. Therefore, it is right that a review be used to work out whether we should be privileging PFI companies with exemptions from these measures at the same time as knowing that they often benefit from guaranteed profits at the public expense.

[Kirsty Blackman (Aberdeen North) (SNP)]

I appreciate where the hon. Member for Walthamstow is coming from with the amendments. We support Labour on new clause 1, which calls for a review of how much we are spending and where the money is going. Good points have been well made about how companies are making more of a profit as a result of the changes in corporation tax rates.

On the other amendments, we are concerned about the possible impact that any changes to PFI would have on Scotland. We are still paying off a number of PFI projects in Scotland. I know that people say that all Governments have implemented such projects, but the Scottish Government have moved away from the PFI funding model because the SNP does not support it. We have the Scottish Futures Trust and not-for-profit delivery mechanisms, which mean that profits do not go to private companies.

[Stella Creasy]

To be clear, the evidence of the problems with the PFI model extends to the not-for-profit model. I encourage the hon. Lady to read the work of Mark Hellowell of the University of Edinburgh. No political party can claim the moral high ground when it comes to private finance in this country.

--- Later in debate ---

[The Financial Secretary to the Treasury (Mel Stride)]

It is once again a great pleasure to serve under your chairmanship, Mr Howarth. Before I respond specifically to the amendments tabled by Opposition Members, I will set out the aims of the Bill and some details of how it will work.

Clause 20 and schedule 5 introduce new rules to limit the amount of interest expense and similar financing costs that a corporate group can deduct against its taxable profits. Interest is a deductible expense in the calculation of profit subject to corporation tax. Therefore, there is a risk of groups borrowing excessively in the United Kingdom, with the resulting deductions for interest expense eroding the UK tax base.

The new rules are part of the Government’s wider changes to align the location of taxable profits with the location of economic activity. The rules follow the internationally agreed recommendations from the OECD’s base erosion and profit shifting, or BEPS, project to tackle tax avoidance by multinational companies. The rules aim to prevent businesses from reducing their taxable profits by using a disproportionate amount of interest expense in the UK.

The schedule introduces a new part into the Taxation (International and Other Provisions) Act 2010 and will raise about £1 billion a year from multinational enterprises and other large companies. The rules take effect from 1 April 2017, as announced in the business tax road map published in 2016 and reconfirmed at the spring Budget this year. Maintaining that commencement date ensures that groups that have already made changes in light of the new rules are not unfairly disadvantaged and that there is no delay in protecting the UK tax base. Given the sophisticated nature of corporate finance, the rules are detailed and technical. However, the core effect of the rules, which aim to match deductions with taxable profits, is relatively simple.

All groups will be able to deduct £2 million in net interest expense a year, so only larger businesses—those with financing costs above that level—can suffer a restriction. Above that threshold, the core rules will restrict interest deductions to a proportion of the group’s UK earnings or the net external expense of the group, whichever is lower. I will discuss the rules in further detail.

First, the fixed ratio rule will limit interest deductions to 30% of the company’s taxable EBITDA—earnings before interest, tax, depreciation and amortisation. Secondly, the modified debt cap will limit interest deductions to the net external interest expense of the worldwide group; this rule is consistent with the recommendation in the OECD BEPS report. There are provisions to ensure that the rules will not adversely affect groups that are highly leveraged with third-party debt for genuine commercial reasons. Thirdly, the group ratio rule will allow groups to increase their deductions if their UK borrowing does not exceed a fair proportion of the external borrowing of the worldwide group. In addition, there are public infrastructure rules that provide an alternative but equally effective approach for companies that are highly leveraged because they own and manage public infrastructure assets.

The Bill provides rules to help address fluctuations in levels of net interest expense and EBITDA. Amounts of restricted interest are carried forward indefinitely and may be deducted in a later period if there is a sufficient allowance. Unused interest allowance can also be carried forward, for up to five years.

The Bill introduces additional provisions to ensure that the rules work for certain types of business, such as banks and insurers, joint ventures, securitisation vehicles and real estate investment trusts. There are also rules to deal with particular issues including related parties; leases; payments to charities; the oil and gas tax regime; incentives such as the patent box and research and development tax credits; and double taxation relief. Given the technical nature of the Bill, we need to deal with a wide range of corporate arrangements. We will, as always, continue to keep their detailed implementation under review.

I welcome the opportunity to debate amendments 5 and 6 and new clause 1, tabled by the hon. Member for Walthamstow. Amendments 5 and 6 propose a review within three months of Royal Assent on the effect of the provisions contained in the new chapter 8 proposed by the schedule on companies with PFI contracts. Legislating for a review of the rules within three months is unnecessary. The Government have already undertaken extensive work and consultation on the issue over the past 18 months. We will continue to monitor the impact of the legislation, and Government officials continue to meet key stakeholders impacted by the rules in the chapter.

Proposed new chapter 8 includes the public infrastructure rules designed to ensure that companies holding public infrastructure assets are not disproportionately affected by the corporate interest restriction. In particular, proposed new section 439 of chapter 8 contains a grandfathering provision for loans entered into by certain companies on or before 12 May 2016. Such companies are highly leveraged as part of their standard business model, given their fixed assets and fixed income flows. The grandfathering ensures that investors who entered into contracts to provide Government services in good faith are not unfairly impacted. That could be the case where the additional tax expense was not factored into original funding models and there is no scope to pass on any of the cost. Given that PFI projects are long-term in nature and provide many of our vital public services, the rules grandfather the treatment of interest payable to related parties to the extent that the loan was agreed prior to the publication, on 12 May 2016, of detailed proposals for the interest restriction rules.

[Stella Creasy]

The Minister says that he has met the stakeholders affected and is setting out how those companies might be impacted. Will he clarify which companies his officials have met to discuss these rules?

[Mel Stride]

With respect to the hon. Lady, I do not think I said that I had met all the stakeholders, but as part of their ongoing work in this area officials naturally meet a large range of officials. If she is keen to know exactly who they are and what types of companies, I would be happy to ask my officials to write to her with that information.

The hon. Lady also proposes a new clause, which would require a review within three months of Royal Assent of how tax relief is given for losses, deficits, expenses and other amounts in relation to PFI companies. PFI companies do not obtain any special treatment under the tax rules in the way that losses, deficits, expenses and other amounts are treated. Legislating for a review of these rules in three months is unnecessary. As we debated on Tuesday, the Government have already undertaken extensive work on the treatment of losses and deficits over the past 18 months and through extensive consultation. The Government will continue to monitor the legislation’s impact, and officials continue to meet key stakeholders impacted by the rules in this chapter.

I turn now to some of the more general and specific points that the hon. Lady has raised. In doing so, I should acknowledge the important contribution she has made over a long period in Parliament on the important issues surrounding PFI. She is right to point out that PFI contracts are the creatures of many different Governments. It would be widely accepted that many of the issues that have arisen, and to which she and other Members have alluded, certainly occurred under the watch of the previous Labour Government. She rightly points out that not all of those contracts are perfect. That is evidenced by the fact that this Government have secured a rebate of about £2.5 billion by working with the private sector and raising funds through that approach.

We have had a general discussion about PFI, and proposed chapter 8 gives rise to the question whether PFI infrastructure projects should be treated differently from other projects that would otherwise be subject to the interest restriction. I have two important points to make. First, these are infrastructure projects, so they are, by their very nature, highly leveraged. They are projects where large amounts of interest are often part of the natural, right and proper, way in which they are constructed.

The second point, which in a sense follows from that, is that of proportionality. To what degree does one apply this kind of approach to a business of that particular nature, given that the downstream revenues from PFI arrangements cannot be easily adjusted to accommodate the provisions that would otherwise apply in the Bill?

The hon. Lady raised two specific points. One was related to the Green Book calculations. In 2012 we set up the operational efficiency programme to deliver savings from existing programmes. That brought in £2.5 billion. We also introduced the new PF2 model, to offer better value for money and greater transparency in the operation of these arrangements.

--- Later in debate ---

[The Chair]

I am going to call the hon. Member for Walthamstow, who tabled two of the amendments. The hon. Member for Bootle cleverly managed to balance the context and the amendments, but we need speeches that, although they might refer to the context, actually speak to the amendments at hand.

[Stella Creasy]

Be under no illusions, Mr Howarth; I intend very much to speak to the amendments at hand.

The Minister argued, slightly bizarrely, that we already have information about whether the changes would affect PFI companies, because the Government have been able to assess that, yet they are rejecting our call to put that information in the public domain. The Minister said clearly that his officials have met PFI companies, and I asked him to clarify which companies. I hope that when he meets stakeholders he will meet my local hospital, which is dealing with the difficult consequences of PFI deals for its financial position. I would argue that officials who are essentially having to sack nurses to pay back PFI loans are equally stakeholders, so I would be interested to know whether he has met any of them.

[Kelvin Hopkins]

Does my hon. Friend have a figure for the total cost of PFI repayments every year to the national health service? That would illustrate the enormous burden of PFI schemes on our health service.

[Stella Creasy]

I can go better than that—

[The Chair]

Order. We do not want too much context.

[Stella Creasy]

Well, this is why how much tax these companies pay matters. I hate to tell the Minister how to do his job, but I have looked at the PFI and public sector comparator documents used to assess the value for money of the deals, and they explicitly talk about the levels of tax that the companies pay and, indeed, look at how those would be traded off against the cost of borrowing to the public sector.

My hon. Friend the Member for Luton North asks about the £300 billion for which we are now indebted in repayments on the loans, as against the £55 billion of outlay. One reason why we took on the £300 billion was that we expected to get back in tax from the companies money to trade off against it. That was an explicit part of the value-for-money calculations done by the Departments. That is why the Green Book matters. That is why I am slightly troubled when the Minister says that tax treatment is part of the deal, but does not then want to give us those data. He says that his Department has looked at the matter and therefore the amendment is unnecessary. Will he therefore commit simply to publishing the information used to assess whether the exemption was in the public interest? It can be in the public interest only if it does not affect the amount of tax that we get back from the companies to go towards the £300 billion that we will have to pay out as a consequence of signing the contracts.

I encourage the Minister to read the work from the National Audit Office on this issue, and specifically about the tax adjustments made in the contracts and whether that really did get value for money for us, and indeed its assessment of PF2. Far be it from me to suggest that pride comes before a fall, but I think that he will find it as troubling as I do that we have not cracked how best to borrow, given that, as my hon. Friend the shadow Minister says, we are always a good bet. Frankly, we never let hospitals or schools go bust, so we always repay our debts. I also encourage my colleagues from north of the border in Scotland to do that, given that the problems also apply to the Scottish Futures Trust. This is about the use of private finance companies. Their tax take is absolutely part of the calculation.

I note, too, that the Minister did not address at all new clause 1 and the levels of tax that the companies signed up to pay. Again, that is very troubling. Either the Minister is telling us that he knows and does not want to tell us, or he does not know and does not care. Either way, we as taxpayers should know and should care, because that money should go towards the £300 billion.

The new clause matters because we know that tax relief on interest paid to shareholders and other affiliates where the debt is held at arm’s length, which is what many of these companies do, has been widely abused, with shareholders injecting debt for the sole purpose of reducing their pre-tax profits and hence the company’s corporation tax. When the Minister gives the tax relief to these particular companies, which he admits are highly leveraged, he is giving them a bonanza. All the amendments do is ask the Government to admit just how much that is, because all of us will have to recognise that that money, which the companies will be able to pay off against their loans, is money that we will have to find to bridge the gap in relation to the £300 billion that we have now committed to paying them. It is entirely in order and within the scope of this legislation, Mr Howarth, that we should ask for that information.

For the avoidance of doubt, let me be very clear that I have absolutely no intention of giving these companies a penny more of taxpayers’ money. I do not wish to get into litigious battles with them about their tearing up their contracts and giving their lawyers an opportunity to claim even more money. Frankly, they have had more than enough from the British taxpayer. I am determined that we can table legislation and show these companies that we are serious about recognising where they have generated excessive profits, where we can learn from the windfall tax of the previous Labour Government, to be able to bring them to the table to renegotiate the costs and get the money back for the British taxpayer so that we can properly invest in infrastructure.

There is another debate to be had about the range of credit available to this country, but with this legislation and the tax breaks that this Government are giving to these companies, it is the taxpayer who will lose out, and we deserve to know by just how much.

[Anneliese Dodds (Oxford East) (Lab/Co-op)]

It is a pleasure to serve under your chairmanship, Mr Howarth. I have just two comments. The first is in response to what the Minister said about the extent to which the new measures implement OECD recommendations. The second is a comment about our amendment 28.

As I am sure the Minister is aware, the OECD BEPS recommendations, and specifically recommendation 4, which applies to this area, offer a range of possibilities when it comes to deciding what the write-off can be. The cap is allowed to be between 10% and 30%. Her Majesty’s Government have decided to go with 30%, but it is feasible for states to go down to 10%. When the EU looked at implementing this measure through the anti-tax avoidance directive, which of course applies to us for as long we are still a member of the EU, again a range between 10% and 30% was given. I have not yet heard why the Government have chosen 30% rather than 10%.

On amendment 28, our request for a review is specifically about the rationale for having special provisions for public infrastructure-providing companies. That is in the light of some quite worrying developments occurring around large swathes of British public infrastructure now being owned by firms and in effect provided through debt finance.

One example we touched on in some Finance Bill debates is Thames Water. As the Minister will know, back in 2006 Macquarie bank purchased Thames Water. It did sell it off—after a number of problems, if we are honest—but during that period our water infrastructure was owned by a firm that was in effect debt-financed, and through the Cayman Islands, which is a separate issue. There are genuine questions about whether that model is appropriate. Does it cause additional potential risks to service quality and continuity? What would happen if that debt financing model could not be serviced by one of these firms?

[Stella Creasy]

My hon. Friend is making a powerful point about the nature of these companies based overseas. Does she share my frustration that the Minister seems to think that does not matter because these clauses will only affect companies in the UK while not recognising that those companies have only nominal addresses in the United Kingdom, with their parent companies being based overseas? They are able to trade off the tax exemptions that the Bill will bring in. All of these PFI infrastructure companies may well claim to be UK-based for tax purposes to trade off these incomes, but actually they will be in Guernsey and Jersey, the Cayman Islands and the like. It is a con.

[Anneliese Dodds]

I am grateful to my hon. Friend for making those points. Indeed, that issue came up in Committee of the Whole House. There needs to be much more muscular engagement in questions around profit shifting between jurisdictions and especially between those that have low or no-tax regimes, where there appears to be a lot of evidence of harmful tax practices.

Finance Bill (Fourth sitting)

Stella Creasy Excerpts

Committee Debate: 4th sitting: House of Commons
Thursday 19th October 2017 Public Bill Committees

[Mel Stride]

Clause 33 and schedule 10 introduce the final element of this historic package of non-dom reforms. As with the clauses that we have just discussed, it was our intention to include these provisions in the previous Finance Bill, and we are pleased to be able to introduce the changes from April 2017 as we originally intended. The changes will ensure that non-domiciled individuals who hold UK residential property through an overseas structure are liable for inheritance tax on that property, in the same way as UK residents.

The basic inheritance tax position is that a non-UK-domiciled individual is liable for UK inheritance tax only on the property in their estate that is situated in the UK. That has been the case since inheritance tax was first introduced.

However, it has long been fairly common practice for some individuals to take deliberate steps to avoid tax on homes they hold in the United Kingdom. Instead of owning UK residential properties directly in their own names, they set up an overseas company or partnership that has legal ownership of the property. They will often use overseas trusts as part of those structures. The effect of doing so is that the non-domiciled individual is no longer a UK homeowner; instead they own shares in an overseas company or an interest in an overseas partnership. In other words, by changing the structure of the way they hold UK assets—UK property is transformed into overseas property—they are no longer subject to UK inheritance tax.

The Government do not believe it is fair that non-doms with residential property in the UK can avoid paying UK inheritance tax in that way. That is why we are making changes to ensure that, from now on, they will pay the same tax as everybody else. The changes made by clause 33 and schedule 10 will ensure that individuals domiciled overseas pay inheritance tax on UK residential properties they hold through overseas structures. They will do so by looking through the overseas structures to the underlying UK property, bringing any share or interest into the scope of inheritance tax, even if those shares are overseas. In other words, the clause will ensure that an inheritance tax charge will arise wherever the value of such structures is derived from a residential property in the UK.

The clause closes a long-standing loophole that has allowed non-domiciled individuals to structure their assets to avoid inheritance tax on their UK homes. This change will ensure that non-dom individuals with residential property in the United Kingdom are treated the same way as everyone else, raising an estimated £250 million over the next four years.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

Having heard the Minister make a compelling case about the importance of ensuring that non-doms do not avoid paying tax, I look forward to the debate that we will have on new clause 2, which raises exactly the same issues about the treatment of commercial property as a way for non-doms to avoid residential property taxes. I look forward to the Minister supporting the new clause accordingly.

[Mel Stride]

Like the hon. Lady, I cannot wait to get to the matter at hand.

Question put and agreed to.

Clause 33 accordingly ordered to stand part of the Bill.

Schedule 10 agreed to.

Clause 34

Employment income provided through third parties

Question proposed, that the clause stand part of the Bill.

Finance Bill (Fifth sitting)

Stella Creasy Excerpts

Committee Debate: 5th sitting: House of Commons
Tuesday 24th October 2017 Public Bill Committees

[Kirsty Blackman]

I appreciate the Minister’s point. In an earlier sitting, he mentioned the positive timelines when people phone HMRC for advice; apparently the phone is answered very quickly. I get that he says the statistics show that, but people are walking into my surgeries and into my constituency office saying that they have tried for hours to phone HMRC and have really struggled to get through. Despite him saying that the statistics show one thing, the lived experience of my constituents is very different. That is why I have these concerns, and even if one person or a handful of people cannot get through on the phone and fill in their form on time because they are not able to answer the question, it is a concern. I implore the Minister to continue working on call times and to ensure that, when people phone, they get through as quickly as possible and that the calls are answered, and that the advice provided is correct so that people can make the correct choice, particularly with online forms.

Labour Members have tabled a number of amendments to the clause. We were clear in the SNP manifesto that we supported a phased move to digital reporting, so what the Minister has proposed is now much more in line with what we were thinking. I ask that Labour Members, in speaking to the amendments, explain why they chose 2022, and I will make a call after that on whether we think supporting them is relevant. One Labour amendment suggests that we should not move towards digital reporting, which would be a concern for us because our manifesto commitment was positive about digital reporting. I look forward to hearing the comments from the Opposition and the Minister.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

As ever, I am eager to serve under your chairmanship, Mr Howarth. I come to the Committee with a series of amendments on what digital reporting might offer us to resolve some of the challenges faced by employers and employees in our country. There are two issues in particular, which I will come to in turn, because as ever with the Finance Bill, they are technical.

First, I will deal with the treatment of the lowest-paid staff in our country—Office for National Statistics data show that, of all low-paid people, waiters and hospitality staff get paid the least—and what we can do to help them with their incomes. Secondly, I will look at how digitisation could help us to address compliance, which is one of the biggest issues for small businesses. To prefigure the Minister’s comments, I know he will say that that is for another Bill, but given how important it is for the systems to work together, I think this is an issue for this Bill. I hope he will bear with me.

I turn first to amendments 7 and 8—amendments 8 and 39 are identical—which concern the treatment of waiters and hospitality staff. Many Members may be familiar with campaigns on the treatment of tips, service charges and gratuities and with evidence showing that some employers were using those to top up people’s wages and to avoid paying the national minimum wage. Members might therefore be relieved that legislation was brought in to prevent that, but it has become clear that many employers still use tips, service charges and gratuities to avoid paying their staff properly. The amendments go to the heart of how we can address that.

In particular, Members might not be aware that people are supposed to pay tax and national insurance on their tips. If an employee is paid their tips through a tronc, where their employer collects the money usually using an online system, which is what we are debating today, the employer is supposed not only to pool the tips and share them out—after all, I think we would all recognise that as well as the person who serves a meal, the people who work in the kitchen deserve recognition of their work—but to check that the employee has paid national insurance and tax.

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[Stella Creasy]

Yes, that is the concern. There is a lot of evidence that the exemption, which lets staff run their own tips scheme—it is like staff in a small café sharing the money in the jar, but across a large restaurant chain—is being used by major employers to avoid paying national insurance and, indeed, pension obligations further down the line, especially given auto-enrolment.

Another issue to which the amendments relate is the variations in charges that employers apply to employees for administering such schemes. Some restaurant chains will pass on 100% of the tips paid to a member of staff, while others will charge up to 20% in administration fees for doing it through an electronic system. Clearly, that is not fair and I warrant that customers have never had a restaurant explain to them how much they will charge the employee to pass on the tip that customers want to give them. The amendments are designed to help us understand what is going on.

I hope that the Minister will have strong words with his colleagues in the Department for Business, Energy and Industrial Strategy, because if, as we fear, a tax take is being avoided and the lowest-paid people in our country are being exploited as a result, surely we all agree that we need to do something about that. That is why I tabled the amendments. Indeed, 18 months ago, many of us took part in a Government consultation on precisely those issues—that is, how to ensure a fair system for administering tips, service charges and gratuities. I have to tell the Minister that, 18 months on, the Government have not even published the results of that consultation, let alone looked at what could be done to make sure that neither the Exchequer nor the employer is being short-changed.

The Bill offers the Minister an opportunity to make progress on an issue that his ministerial colleagues have kicked into the long grass. If we are digitising records, we can ask employers to clarify precisely what is being collected in tips, service charges and gratuities, and what is income. The amendments address exactly that point: they simply propose that an employer should record the different forms of income—with electronic systems that should be a relatively easy thing to do—and an employee would then be able to access that information.

That is important because if someone is self-employed and working in restaurants—my colleagues from north of the border have mentioned people administering their own tax records—they ought to know what their liabilities are. At present, however, someone who is part of a tronc system does not necessarily know what they are being paid in tips, gratuities and service charges. These simple amendments ask the employer to set out precisely the different streams of income, which their computer systems will easily collate for them, so that our tax system acts more efficiently.

If the Minister is not prepared to accept the amendments and acknowledge the need to make progress—we are, after all, talking about the poorest-paid employees in our country—will he commit to asking his ministerial colleagues in BEIS why it is that, 18 months on, when so many people have provided information about how we could solve the problems, nothing has happened? Indeed, I have regularly asked when the consultation results might at least be published, but the answer has always been, “Sometime in the future.” I am sure that the Minister would agree that the people who serve him a cup of coffee in a restaurant deserve better service from us in making sure that they are not exploited.

Amendment 10 relates to an issue that has come up very little in this Committee—we should correct that—namely the Japanese knotweed that is Brexit, which has taken up so much of our time. I appreciate that the Minister will say that the amendment is not needed because he has published a White Paper on how customs and VAT should fit together. However, having read that White Paper, I must draw attention to an omission from it.

I am sure that Government Members will judge me because I have become slightly obsessed with things such as the 13th directive on VAT, and I am sure they would all like to do a pub quiz on it too. Normal VAT rules allow that businesses registered in the UK can recover UK VAT. People understand that: for most businesses, VAT compliance is one of their biggest pieces of work. The issue with the 13th directive, which the amendment addresses, is the question of what happens when businesses trade in Europe. After all, Europe is still the primary market for the vast majority of businesses: 63% of members of the Federation of Small Businesses have said that Europe is their priority market. That means that if a salesman goes to Sweden and stays in a hotel, the hotel might charge VAT and there is no way that that business would be able to deduct Swedish VAT on its UK VAT return. At the moment, however, under the single market procedures, there is a process by which foreign VAT can be recovered directly from the country in which it was incurred.

For those Members who are VAT geeks, that provision is in articles 170 and 171 of Council directive 2006/112/EC, the prime VAT directive. I will, of course, pass that detail on to Hansard. The detailed rules are in Council directive 2008/9/EC. That is implemented in our own domestic legislation, in section 39 of the Value Added Tax Act 1994 and regulation 20 of the Value Added Tax Regulations 1995. In practice, that means that each European state is obligated to make a VAT refund. Obviously, there are rules on that, but it works pretty straightforwardly through an online electronic system, which is why it is relevant to the charge under discussion. I can see the Whip wondering where I am going with this, but there is a direct connection.

A similar scheme applies across the EU to businesses that are not established in the EU. That is the 13th VAT directive, which is implemented by section 39(2)(b) of the 1994 Act and is a more complicated system. The amendment is simple. When we leave the EU, we will no longer be able to rely on the simplicity of the intra-country VAT collection scheme that has helped businesses in Britain to trade and provide services, particularly in Europe. We will, therefore, need to move to the 13th directive, or we may move to something else. The customs White Paper, for instance, mentions an “innovative” scheme, but I am pretty sure that other countries, for which the intra-country scheme works well, would not be particularly willing to undertake such innovation. I think they would be happy for us to move to the 13th directive.

I am concerned that there is a lot of evidence that the 13th directive and its administration is not very effective for countries outside the EU. In particular, the 13th directive states that member states must refund VAT to foreign traders. It also states:

“Member states may make the refunds…conditional upon the granting by third states of comparable advantages regarding turnover and taxes.”

One could argue that the Bill’s introduction of an online electronic system provides a comparable advantage, but my amendment asks the simple question being asked by many businesses, including local businesses in my constituency, which are starting to panic about how they will manage their VAT returns in future. How will the proposed electronic scheme fit in with regard to both the current regulations relating to intra-EU VAT refunds and the 13th directive?

Having looked at the Minister’s document, I am concerned that, although it talks a lot about what the UK will do, it does not talk a lot about the 13th directive and what it will mean for British businesses. Page 19 refers to contingency in case there is no deal—of course, we all know that that is a sensitive question for the Cabinet—but what British businesses need to know now is, if they are going to continue to trade in Europe, how they can do that in a cost-effective and red-tape-free way?

One of the more bizarre elements of Brexit is that we seem to be arguing about red tape as though the other side wants more of it, and those of us who wanted to stay in the European Union are bad for wanting less of it. This issue is a great example of that challenge, where being part of the European Union had simplified a process for British businesses. A quarter of FSB members have said that the introduction of any tariff or complication with trading with Europe would put them off trading altogether. We need this Bill to match what is going to happen in future, so that businesses using an online system will not have to change it very quickly as a result of the rules of the 13th directive implemented by other countries making it harder for them to use.

If the Minister will not accept my very simple amendment asking him to set out just how this Bill will impact on the 13th directive, will he commit to discussing with British businesses what the directive might mean for them in terms of VAT compliance and recouping their costs, and what the consequences for them will be in terms of administering the scheme? All small businesses in our constituencies that are looking at that future trading relationship will want to know how much additional paperwork they are going to get, and they deserve an answer.

[Peter Dowd]

I will to speak to clauses 60 and 61, schedule 14 and clause 62 together, as they represent a package of measures that would introduce powers and regulations surrounding digital reporting and record keeping for both VAT and income tax.

The Opposition’s concerns about the Government’s plans for making tax digital are well-versed. We raised them on Second Reading of the March Finance Bill, before they were dropped, and raised them again in the debate on the Ways and Means resolution for this Bill, as well as on its Second Reading. We fully support digitalised tax reporting, which we can all agree has the potential to drastically reduce the amount of time individuals and business owners will have to spend filling out long and complicated tax returns. We could also free up some of HMRC’s time, so that it is better spent clamping down on tax avoidance.

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[Stella Creasy]

I am a little surprised, given that we have presented evidence today that tax may be being avoided by using HMRC’s E24 guidelines, that the Minister says that we have to wait. We have been waiting 18 months for the consultation even to be published. If he will not accept the amendments today, can he just tell us how long he is prepared to wait and how many people he is prepared to see exploited by the regulations before the Government act?

[Mel Stride]

I thank the hon. Lady for what is a slightly loaded question, if I may say so. I am certainly not prepared to wait for abuses of any kind, but I am prepared to wait, and it is right to wait, for a deep and considered consultation, as opposed to a short debate in the context of the Finance Bill. That is the critical point to bear in mind on this matter.

The clauses before us provide for making tax digital for business. That concerns the way in which businesses record and report their tax liabilities. The hon. Lady made some powerful points about the treatment of service charges, but I believe that they would be better pursued through the Department for Business, Energy and Industrial Strategy. It has responsibility for this area and is best placed to ensure that tips, gratuities and service charges are treated in line with the principles of clarity and transparency set out in its recent consultation. Dealing with the matter through legislation on digital taxation would risk missing crucial elements for employees or businesses that have been captured in the submissions to the consultation.

[Mel Stride]

The hon. Lady raises an extremely important matter, which is those employers who do not adhere to the requirements of the national minimum wage. HMRC and the Treasury take that extremely seriously, and we have mechanisms in place, as she may know, for reporting instances of that where they occur. I can assure her that the Treasury is the Ministry directly responsible for strategic oversight of HMRC and that HMRC takes any abuse of the national minimum wage requirements and regulations in this country extremely seriously, and pursues and brings to book those who commit abuses.

[Stella Creasy]

Will the Minister therefore commit today to investigating the use of the E24 guidelines and the tronc schemes, to which we have referred? He may not accept our wider point about protecting people and the tips that they have rightly earned, but HMRC’s E24 guidelines fall directly within his remit, and it is precisely that scheme that we are worried employers are abusing, so will he commit today, given that he has just explained to my hon. Friend the Member for High Peak that he cares very much about this matter, to an investigation and to publishing the results, so that we can all be confident that no one is being exploited in that way?

[Mel Stride]

HMRC can already investigate when it suspects the kind of abuse to which the hon. Lady alludes. To be specific, if HMRC opens an inquiry into whether PAYE or NICs are being operated correctly, it will be able to ask the employer or the troncmaster how they have recorded service charges and tips and how those have been allocated, and trace them back even to which customers paid for them. The tools are there, the willingness is there and the evidence is there that HMRC is doing precisely what the hon. Lady would expect it to do in pursuing this matter.

[Stella Creasy]

Just so that we are all clear, because I can see that Government Members are also concerned that there may be abuse of the E24 guidelines—this is not about individual companies—will the Minister commit today to his officials doing an investigation on whether the E24 guidelines are being abused in the way that has been described and to reporting back to all of us in the House?

[Mel Stride]

As I just said to the hon. Lady, we can say in relation to any aspect of HMRC’s operation or any of the rules that it is there to clamp down on that we want regular reporting and all the rest of it. The point is that as a Ministry, the Treasury is there to have strategic oversight of HMRC and to ensure that it is behaving in an appropriate way and chasing down tax avoidance, evasion and non-compliance in whatever form they may appear, including the forms that she has raised. We will continue to do just that.

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[Mel Stride]

I thank the hon. Lady for her further point. I guess it comes down to interpretation. It seems to me that if it is not reasonably practical for a person or company to use electronic communications, the reliability of the service—another way of describing the point she raised—would be an important part of the judgment that would be made.

The clause continues with “Further exemptions”. Proposed new paragraph 15(1) states:

“The Commissioners may by regulations make provision for further exemptions.”

New paragraph 15(1) states:

“The exemptions for which provision may be made include exemptions based on income or other financial criteria.”

There is therefore a recognition in the Bill that not only do we need to get it right for the current circumstances, but we need the flexibility to be ready for any circumstances that might present themselves and which we have not considered at this stage. Those would need to be addressed further down the line.

For those who can go digital but require additional assistance, HMRC will continue to provide a diverse range of digital support, including webinars, helplines and YouTube videos, to help them meet the requirements of making tax digital.

The hon. Member for Aberdeen North also seeks to provide for a phased implementation period, with the commencement of each new stage requiring approval by the House. We have already revised the implementation to start with businesses that report quarterly, and stakeholders are operating on the basis of the new timeline. We are phasing in the implementation by piloting the changes and by starting with mandation only for VAT and those above the VAT threshold. The secondary legislation required to lay out the detailed operation of MTD will be laid before the House in due course, offering Members a further opportunity to scrutinise our plans and consider our proposals.

The hon. Member for Walthamstow has tabled an amendment to require HMRC to publish an assessment of the effect of our exit from the European Union on MTD for VAT for small businesses. HMRC wants to give businesses plenty of time to adapt to MTD and is allowing for a full year of piloting the changes before mandation applies and before the UK leaves the European Union. If businesses wish to begin keeping their records digitally before we leave the EU, they will be able to do so.

The hon. Lady raised specific issues in respect of VAT and the 13th directive. The Government do not consider there to be an MTD issue here. MTD is about how records are kept and reported, rather than the nature of the VAT regime itself. The regulations will be consistent with the requirements of the 13th VAT directive, but if she has specific concerns, HMRC will be happy to look into them.

[Stella Creasy]

I am happy to clarify. At the moment, the intra-country VAT scheme is administered online, which makes it relatively simple for people in the UK to reclaim VAT they have incurred in other countries. As we know, the 13th directive requires every single other country to come up with its own VAT scheme, so there is a question about the compliance of different schemes with our scheme. If we have a digitised system, it needs to be able to interact with 27 other countries’ VAT schemes, rather than one EU-wide scheme. Has the Minister’s Department done any work on how the other 27 schemes will interact with our online scheme, so that businesses can be assured of the frictionless transfer that his Government so often promise on these issues?

[Mel Stride]

The hon. Lady raises a very specific point within what is a large set of negotiations on all the issues of customs, excise and VAT. She will be aware that a customs and excise Bill will be presented to Parliament fairly shortly.

[Stella Creasy]

I have looked at the Minister’s White Paper, and it does not mention the 13th directive at all. If he could clarify that a second White Paper will address this issue with the 13th directive, I am sure that many small businesses would be relieved.

[Mel Stride]

As I am sure the hon. Lady knows, the White Paper sets out that the Bill will be a framework Bill. The purpose of the Bill will be to ensure we can enact through legislation—largely secondary legislation—whatever arrangements we arrive at as a consequence of the negotiations we are in the middle of. It is not my position here today to prejudge exactly where we will end up on VAT, but I can reassure the hon. Lady that all the preparations and legislation will be in place to accommodate in as frictionless a manner as possible—as she rightly says—the exercise of VAT between ourselves and our former European partners, as well as customs at the borders and all the other important issues that will arise once we leave the European Union.

[Stella Creasy]

The Minister is being incredibly generous. I hope he will forgive me; sometimes I must feel like a bear of very little brain on these issues. The 13th directive is the manner by which EU countries deal with non-EU countries’ VAT claims. It is an immovable part of the post-Brexit landscape, as I am sure the Minister agrees. Can he clarify that it is the 13th directive that his Department is engaging with? He said that the White Paper was a framework document. Will the customs union legislation deal with the 13th directive, or does he think there will somehow be a completely different scheme? I know that the White Paper talks about innovation, but it seems a bit pie in the sky to suggest that the 13th directive will not be part of this. Why is he not talking about it?

Finance Bill (Sixth sitting)

Stella Creasy Excerpts

Committee Debate: 6th sitting: House of Commons
Tuesday 24th October 2017 Public Bill Committees

Brought up, and read the First time.

[Stella Creasy (Walthamstow) (Lab/Co-op)]

I beg to move, That the clause be read a Second time.

It is a pleasure to serve under your chairmanship, Mr Walker. I am conscious that several members of the Committee may wish to take part in the emergency debate on universal credit—a subject close to many of our hearts—so I do not intend to speak for a long time. However, we ought to get value for money out of these Committee sittings and, indeed, this Bill, so I hope that my new clause gives the Government some ideas about how we can solve the pressing problem of the public finances and the lack of funding.

Government Members often argue that Labour only wants to spend money, but my proposals very much seek to save money for the country. Indeed, they present a way to protect UK taxpayers and British businesses, generate potentially billions for the Exchequer, and address the pressures on the housing market. I am sure that none of us would want to lay claim to the magic money tree, but I believe that my new clause would provide for a concrete cash cow in which the Government could invest, and I hope to convince Ministers and Government Back Benchers to support it.

The new clause relates to a proposal by the previous Chancellor of the Exchequer—I am not sure how many jobs he has now, but he is currently the editor of the Evening Standard—about the way in which capital gains tax was applied to property sales.

[Kelvin Hopkins]

I am interested in the former Chancellor and how many jobs he has. It is particularly interesting to learn how much he is being paid for those jobs.

[Stella Creasy]

I am afraid that I do not have that figure to hand, but I do have figures relating to the amount of money that the new clause could raise for the public Exchequer. I hope that my hon. Friend will be as pleased with and as interested in those numbers as I am.

Historically, only UK residents or those with a permanent UK base have been subject to capital gains tax. In April 2013 that was changed to include the disposals of UK dwellings owned by non-resident companies, partnerships and collective investment schemes, which were subject to an annual tax on enveloped dwellings. In April 2015 that was extended to all non-UK residents disposing of UK residential property, and the critical point is that that was about residential property. The argument that non-doms should be paying capital gains tax on the disposal of property was put forward by the previous, and indeed current, Government. The question is: why did they make it apply only to residential properties? As I hope to prove, that has created a loophole through which some people have chosen to put their properties.

We are talking about a rate of tax that is between 18% and 28%, or 20% for corporates. The standard OECD double tax treaty expressly preserves the right of countries to tax non-residents on capital gains from the disposal of local real estate. Many of us will have seen at first hand in our communities the impact of this country’s over-inflated housing market and the connection between the residential and the commercial property market. The Adam Smith Institute reckons that there are 1 million non-doms in the UK, although only 110,000 are declared. Those people are part of our communities, but they are benefitting from an advantageous tax position because of this loophole.

The Bill tries to address issues relating to inheritance tax and holding property through UK companies, so the Government are interested in where people might be using companies to avoid paying tax. Indeed, that is one of the debates that we have been having. The new clause addresses another issue, which is the ability to designate a property as a commercial property to avoid paying the residential charge that this Government introduced in 2015. We know that that is hitting UK companies competing with non-UK companies. In tabling this new clause, I am making a plea to the Minister to be on the side of British businesses that are being unfairly treated in our tax system. We know that people set up property holding companies to avoid those charges. By changing the loophole, we would be able to apply the charge fairly across the board. Indeed, it has to be asked why anybody would hold UK real estate through a foreign company except for tax purposes.

The Minister might say that this about a competitive tax advantage for the UK. Let me reassure him that almost nowhere else in the world exempts foreigners from tax on selling real estate. By closing the loophole, we would simply bring ourselves into line with Canada, Australia and indeed the rest of Europe. The Minister may claim that there are anti-avoidance rules that would take precedence, but if a non-resident company operates in the UK through a UK permanent establishment, the disposal will be subject to UK capital gains tax. That is not the requirement we are talking about; we are talking about organisations that hold property in the UK through offshore companies and designate that property as commercial property. It is the difference between the residential and the commercial that we need to deal with in terms of this loophole.

--- Later in debate ---

[Ruth George (High Peak) (Lab)]

Does my hon. Friend think that the definition of commercial properties would include properties that were previously residential, such as those in my constituency in the Peak district? They were residential homes, but they were sold to owners who live outside the area and are now used primarily as second homes, although they are rented for a very small number of weeks during the year. That has turned them into commercial properties, severely depleting the number of homes available to local people, particularly in rural areas of outstanding natural beauty.

[Stella Creasy]

My hon. Friend has shown how simple it is to evade the tax by avoiding the loophole—the previous Chancellor tried to close it by ensuring that non-doms paid capital gains tax on the sale of residential property—simply by repurposing a building as commercial property. Even given the rules on closed companies in existing legislation, people can get around the charge. I am suggesting that the figure could be as much as £8 billion. I certainly think that at least £1 billion of public revenue could come from closing the loophole and simplifying the way we treat non-doms with capital gains tax. The Minister may have a different number, but the point of the new clause is to get the number.

The Bill is about how we manage public finances. Giving this tax loophole to non-doms means that our British businesses are unfairly treated and our property market faces artificial pressure. We are missing out on vital funds that could go into our public services. The new clause is not a magic money tree; it is a concrete cash cow. If the Minister will not agree to publishing the data, will he commit to looking at how we can close the loophole?

[Mel Stride]

New clause 2—I think it is now known as the concrete cash cow clause—provides us with an opportunity to discuss the rules surrounding UK commercial property and those who are foreign-domiciled. As the hon. Member for Walthamstow explained, her new clause would require HMRC to review the taxation of capital gains on commercial property disposal by UK taxpayers with a foreign domicile.

There is no question but that all UK residents, whether UK-based or non-domiciled, are chargeable for tax on profits from selling UK land. That includes non-domiciles who are taxed on a remittance basis, where foreign income and gains are taxed only when they are brought into the UK. Our tax base is predominantly those who are resident in the United Kingdom. As the hon. Lady has drawn to our attention, recent changes removed non-residents into the UK tax base for the sale of UK residential property. The new clause raises the fact that that treatment does not extend to non-residents for the sale of commercial property in this country. While I understand why she suggests that extending the laws would raise revenue, I should point out that this is a very complex area, which needs to be carefully considered.

The 2015 rules were designed to catch individuals and ways in which a person may hold title over a dwelling such as via trusts and closely held companies. They do not apply to companies with lots of shareholders. The structures that are used to own commercial property are different from residential property, often more complex and involving corporates, joint ventures and specialist property vehicles. We would need rules that address such structures and get to the heart of the ultimate owner.

Will the hon. Lady consider this illustration? I might live in Canada and own 50% of a home in Walthamstow. I might easily conceive, if I did not know for sure, that selling my part of the house in the UK would mean paying some UK tax. However, imagine instead that I own a handful of shares in a fund of some kind, which in turn owns half an office block in Walthamstow. Being such a minor shareholder, I may not even know how my money is invested. To send the tax man chasing round overseas for the little shareholder in a commercial building would hardly be cost-effective. We would need to design balanced rules that look at how the market works and what would yield the Exchequer the best return.

Extending the current rules to include any UK property is not a simple matter of striking through “residential property” and inserting “all UK property” into the current provisions, as this would not take into account the intrinsic differences in the way that commercial properties are owned and dealt with.

[Mel Stride]

The point I was trying to make was not so much whether one classified a property as residential or commercial. My point was that where it is commercial, the ownership arrangements can be so complicated that this kind of approach is far from simple.

[Stella Creasy]

I think the Minister is making a strong case for the new clause and providing the data. He may want to update his colleagues on the fact that the closed company model is five or fewer participants. Were there to be six participants, that would extend the limitations he is talking about. I also want to ask him, now that we have the residential rules in place, whether he will commit to publishing how many properties that were previously cast as residential are now categorised as commercial use since that legislation came in. We might begin to get an understanding of whether people are using this loophole to evade the capital gains tax to which we are entitled.

[Mel Stride]

I am certainly happy to look into the issue of what data are available that might reasonably be released for those properties that might have changed from residential to commercial. My point is that the existing rules for residential property involve, for example, consultation with external experts over a period of two years. They are arguably, for reasons that we have been discussing, more simple and straightforward than the arrangements that would need to be in place for a commercial property situation. To ensure that legislation works effectively, HMRC would be able to collect taxes from overseas taxpayers.

The UK commercial property market is even more complex and inextricably linked to many other markets and investments both in the UK and overseas. Bringing non-resident companies into these rules would bring with them a whole tax code for corporates, which would need to be considered and applied consistently in the context of someone who may have no other UK tax footprint.

Of course, there are existing exemptions and reliefs for the UK investor that would need to be considered to see whether and how they might apply to an overseas equivalent and whether such exemptions could be used to undermine the idea as a whole. Any change to further broaden our base would require consultation with the public, tax experts and affected sectors, particularly those involved with funds and pensions, to ensure they were clear, enforceable, robust to avoidance, and achieved their intention. I assure the hon. Member for Walthamstow that we keep all taxes under careful and continuous review to ensure that the tax system works effectively for the taxpayers of this country.

[Stella Creasy]

Again, the Minister makes a compelling case for the new clause, which would enable exactly such an information-gathering exercise. As he points out, this may be a complex area. I note, however, that the Bill deals with overseas companies and their inheritance tax positions. I fail to understand why Ministers accept that we need to address the use of commercial entities to avoid inheritance tax but do not accept that we need to address their use to avoid capital gains tax. Will he say a little about that?

[Mel Stride]

As I have said, I assure the hon. Lady that we keep all taxes under careful review to ensure that the tax system works effectively for the taxpayers of this country. I favour that, rather than requiring HMRC by statute to conduct reviews, as the best way to develop tax policy. I heard what she had to say about those taxes, and I will certainly consider the questions that she raised, but I urge the Committee to reject the new clause.

[Stella Creasy]

I am afraid that I am not satisfied that the Minister has made a strong enough argument against his own argument that this is a complicated area in which we need information. The new clause would not commit the Government to closing the loophole; it would simply start the process of asking how much the loophole costs us and recognising that, where we create a category for one type of property and people can apply it to another, that may generate a loophole that is exploited to the detriment of the UK taxpayer. With that in mind, and in full support of the British businesses that are being penalised as a result of the Government’s failure to address that loophole, I wish to test the will of the Committee on this matter.

Question put, That the clause be read a Second time.