Finance (No. 4) Bill

Stephen Williams Excerpts

Monday 16th April 2012 Commons Chamber

[Stephen Williams (Bristol West) (LD)]

I wish to make only a short speech in support of giving this Bill a Second Reading, because I made a speech on the broad thrust of the Budget on Budget day itself and because, once again, I have been the lucky winner of the Liberal Democrat Whips Office lucky dip competition and will be serving on the Committee. I therefore have many days ahead of me going through the Bill’s detailed provisions, both in this Chamber and on the Committee corridor upstairs.

One Budget highlight of a month ago for Liberal Democrats was the largest rise in history of the income tax threshold. My hon. Friend the Member for Gainsborough (Mr Leigh) mentioned John Bright, and I am sure that John Bright would have approved of that simplification of the tax system, as it would have disproportionately benefited the thousands of factory workers that he represented in Birmingham. Other highlights of the Budget were the introduction of effective wealth taxes and anti-avoidance measures, and, in order to make the United Kingdom more competitive internationally, the two reductions in corporation tax scheduled for the next couple of financial years.

Taken together, those measures in the Budget involve billions of pounds, but since the Budget we have heard much about the pasty tax, the granny tax, the church tax and the charities tax. Now we hear from the hon. Member for Kingston upon Hull North (Diana Johnson) about the caravan tax. I had not heard about that before, but no doubt we will take much interest in it as the Finance Bill progresses. Even though all those measures and all those controversies are important in their own right, the focus on them suggests that the broad thrust of the Budget—rewarding work, taxing wealth effectively and making the United Kingdom economy more competitive—was right and that the Chancellor and Chief Secretary struck the right Budget judgment.

All those measures will, of course, be discussed during consideration of this Bill, which is another behemoth of a Bill. Every year we hear that the Treasury has produced another mammoth Bill and this one seems to be a bit of a record, as it contains 225 substantive clauses and 38 schedules. We can all look forward to dealing with them over the next few weeks.

Clause 1—it is rightly clause 1—is the Bill’s most important, because it announces the increase in the personal income tax threshold that took place on 6 April, while we were on recess, raising the threshold to £8,105. We know from the Budget statement that in a year’s time that threshold will be raised to £9,205. Cumulatively, since the general election, we will have raised 2 million people out of the income tax net altogether and provided a tax cut in cash terms of more than £500 to more than 20 million basic rate taxpayers. We also know that there is to be a proposed stamp duty charge on properties worth more than £2 million. As the hon. Member for Kingston upon Hull North said, we do not have a mansion tax, but we do have a mansion duty—a new stamp duty charge on properties worth more than £2 million. This was indeed a Budget that gave a tax break for the millions while taxing effectively the wealth of millionaires.

In business terms, the Liberal Democrats very much welcome the fact that corporation tax will be cut this year to 24% and next year to 23%. We also welcome the introduction of yet another scheme to encourage entrepreneurial activity, the seed enterprise investment scheme. It is a five-year scheme to support small business start-ups. As the Member of Parliament for Bristol West, I particularly welcome the announcement in the Budget of a consultation in order to proceed to giving tax credits to the television industry, and, in particular, for animation, on the same basis as those for the film industry. I met Aardman Animations Ltd, which is based in my constituency, last week and I understand that discussions between the Treasury—with my hon. Friend the Exchequer Secretary and his colleagues—and the animation industry are progressing well. I look forward to the Finance Bill 2013 and to the full provisions for that tax credit to support important British business being introduced in a year’s time.

[Anne Marie Morris (Newton Abbot) (Con)]

Given the hon. Gentleman’s interest in small businesses, does he welcome, as I do, the new provision for a cash-based tax return that will make it much simpler for small businesses with turnovers of less than £77,000? Simplifying the tax return and making it cash-based is a real step forward for the smallest businesses.

[Stephen Williams]

Yes. I welcome my hon. Friend’s intervention. When I met representatives of the Federation of Small Businesses, they were particularly keen that that measure should be introduced in the Budget and they are no doubt very pleased that the Government have responded to their representations and those made by hon. Members, such as my hon. Friend, on its behalf.

The anti-avoidance measures in the Budget and the Bill are also very much welcomed by the Liberal Democrats, particularly the consultation on introducing a general anti-avoidance and anti-abuse role based on the paper prepared for the Treasury by Graham Aaronson. We will need to wait until the next Finance Bill to see how that pans out. There are also specific anti-avoidance measures in the Bill, such as those to tackle the use of envelope schemes by corporate bodies and unincorporated bodies to acquire properties while avoiding stamp duty. That abuse was overlooked for far too long by the previous Administration and I am delighted that the coalition Government are tackling it head on.

Other more controversial potential abuses are being tackled in the Bill through the limits on tax reliefs that individuals are able to claim. Before the Budget, the Deputy Prime Minister talked about a tycoon tax. Across the Atlantic, President Obama has been talking about a minimum rate of tax, such as 30%, that US citizens should be expected to pay, and Warren Buffett has been making very similar points. We have many reliefs available in our tax code in this country to encourage enterprise, such as the enterprise management incentive scheme, the enterprise investment scheme and the venture capital schemes of which, in my life before 2005, I used to help many businesses and entrepreneurs to take advantage.

The Bill provides another relief, the seed enterprise investment relief, but all the reliefs available at the moment are capped. They are limited as regards both time and the amount that can be put into them, and therefore the amount of tax relief—whether it is on income tax or capital gains tax—that a wealthy individual might be able to obtain. That leaves various uncapped reliefs that are available under our tax code for income tax losses, loan interest and, of course, philanthropy, which is where a lot of the controversy has come about in recent weeks.

From the outset, it is right to say that the extension of restrictions and caps on reliefs, whether they are on gifts to charity or loss reliefs, is entirely logical. When restrictions are imposed on existing reliefs, such as gift aid, the Government and the Treasury must take greater care than when they are imposing reliefs from the outset for a new scheme, such as the seed scheme. The Government and the Chancellor have already said that they intend to work very closely with the charitable sector on the introduction of the restriction on gift aid, and I hope that that will lead to a measure that meets the Government’s objectives of protecting our tax base while ensuring that philanthropy can continue.

It is important, however, to say that, contrary to much of the coverage that we have read about and that constituents have written to us about, the restriction on reliefs is not the same as the abolition of reliefs. The phrase “charities tax”, which has been bandied around the Chamber this afternoon, has left hanging in the air the implication that the Government are somehow withdrawing tax relief from philanthropic activities altogether. That is simply not true. An individual will still be able to donate and receive tax relief on the higher of £50,000 or a quarter of their annual income. Some of us might dream of this, given the salaries that we are on, but if we had an annual income of £1 million, we could still donate £250,000 to charity while receiving full tax relief. I understand from figures that I have seen from the Charities Aid Foundation that the median donation that our constituents make is about £11 a year, so very few people will be affected by what the Government have proposed. It is right that such details should be closely considered by the Treasury and by all of us, as parliamentarians, to ensure that they work.

There are various things that the Government could do. The limits are annual and perhaps they could consider rolling up the annual limits. If you, Mr Deputy Speaker, were to win £1 million on the lottery, you would not be able to donate an amount to charity under the Bill’s provisions while getting tax relief and while, more importantly, the charity got the gift aid matching relief, too. That would be an absurd anomaly and I am sure that it was not intentional.

[Jacob Rees-Mogg]

My hon. Friend talks about someone winning £1 million on the national lottery but a £1 million win on the national lottery is not taxable; one ought not to get tax relief on a gain that is not taxable.

[Stephen Williams]

I am trying to think whether my hon. Friend has caught me out on a provision, but I am not sure that he has. The reason there has to be a £50,000 limit on relief is that most people who give large amounts of money do so out of their accumulated wealth and their asset base, which may have come from a lottery win or from an inheritance. It is likely to be a one-off event in their life when they receive a large amount of money and philanthropically decide to give much of it away. It would be absurd if the charity was not able to claim higher rate income tax relief if the individual who received that one-off legacy or windfall gain was not able to claim gift relief.

[Charlie Elphicke]

There is one thing that troubles me. The average income in my constituency is below £20,000 a year, so if one of my constituents gives to charity they are able to tag along the taxpayer to the tune of the basic rate. Is it not a basic unfairness that someone who pays tax at 50% is able to drag along the taxman and the public finances to double the amount that a constituent of mine on an ordinary income is able to? That seems an unfair aspect in the way the relief system has worked in recent years.

[Stephen Williams]

I welcome my hon. Friend’s addressing the fact that the tax system should be fair in how different individuals get relief for an activity that is to be encouraged. Perhaps the relief on pension contributions ought to be seen in the same light but I think that would be controversial among many of his colleagues. I suppose that the basic principle of gift aid relief, tax relief and what can be recovered by a charity relates to one’s net income and the money that one no longer has. It therefore has to be grossed up by the rate of tax that has already been taken off one’s income before one chose to give that money to someone else. That is the basic underlying logic.

[Bob Stewart (Beckenham) (Con)]

My problem is that I do not quite understand how it works so perhaps my hon. Friend will correct me. If a philanthropist gives a huge amount of money to a charity, does that mean that he or she chooses who they give the money to and that the only loser is the Exchequer because it does not get tax on that? It is difficult but I rather like the fact that a philanthropist can give all that money and choose what happens to his or her money and that the Exchequer is the only loser. Am I wrong or is that his understanding?

[Stephen Williams]

I intended to give a speech on the Bill this evening rather than a broad-ranging tutorial on how the tax system works, but yes my hon. Friend is broadly correct. The basic premise of philanthropy is that one chooses of one’s own free will to whom one gives one’s money, but one gives from one’s net income and the money available—that is all one has to make that donation. The gift aid system therefore works so that the tax that has been deducted from that income already is put back in place and the charity receives that benefit.

I wish to make a second suggestion about how this restriction could be addressed. Perhaps a better way of looking at it would be to exempt large gifts to certain institutions such as universities. My right hon. Friend the Business Secretary has rightly expressed concern about the effect on the alumni fundraising programmes of our universities. The Russell group universities are particularly active in raising funds from members of their alumni such as myself, although I do not think I would be caught by these provisions. Gifts to other institutions such as Cancer Research UK and national institutions and museums such as the National Gallery could also be exempted. Perhaps we need to look again at the Charities Act 2006 and the public benefit test to see which activities and donations are generally of a philanthropic nature and which may fall into the grey area. It may be an individual’s personal choice to donate to a particular cause but that cause might not be something of wider public benefit that deserves tax relief. Whatever system we come up with, whether it is what is proposed in a dry sense in the Finance Bill or one that takes on board the suggestions that I and others will no doubt make as the Bill progresses, it must support genuine philanthropic activity.

My final point is on the rather obscure clause 180, which it will probably take us some time to reach in Committee. It relates to controlled foreign companies and how the UK is changing the taxation basis for companies with activities abroad. The primary duty of the UK Government, and indeed of Members of the House of Commons, is to safeguard United Kingdom taxpayers, and we must always think about that whenever we debate these issues, but we also have a duty to make sure that our Government’s policies are joined up. At a time when despite decreases in budgets elsewhere we are increasing the budget of the Department for International Development, it would be perverse if DFID had to give developing countries more support because of the adverse effects of the tax changes we are making in this country. We cannot address all those aspects now, and we shall look at them again in Committee, but I hope we can find a way of measuring their effects and supporting overseas tax authorities more effectively to collect their tax liabilities so that they are not adversely affected by changes we are making to our basis for taxation.

I said that I wanted to make a short speech. We have long debates ahead of us over several days, both in the Chamber and in Committee. When the dust has settled on the Budget and it passes into the annals of history, despite everything that hon. Members have rightly mentioned today—whether pasties or caravans—I think it will be remembered for the huge increase in personal allowances that raised millions of people out of taxation and provided a broad cut in income tax for millions more. That is the radical measure in the Budget; it is something I am very proud of and it is why I shall support the Bill this evening.