Finance (No. 2) Bill (Except clauses 1 to 4, 12 and 13, and 19)

Tulip Siddiq Excerpts

Tuesday 21st May 2024 Public Bill Committees

[The Exchequer Secretary to the Treasury (Gareth Davies)]

It is a great pleasure, as always, to see you in the Chair, Mrs Latham. Clause 20 begins the process of introducing legislation for a new type of investment fund—the reserved investor fund, which I will refer to from now on as the RIF. At Budget 2020, the Government announced a review of the UK’s funds regime, covering tax and relevant areas of regulation. The review had an overarching objective to make the UK a more attractive location to set up, manage and administer funds, as well as ensuring that UK investors can access a wide enough range of investment vehicles to suit their needs. In the years since, the Government have made a number of successful reforms. In order to build on these successes, the Government announced at spring Budget 2024 that we would be proceeding with the RIF.

The RIF will fill a gap in the UK’s existing fund offering by creating an onshore alternative to existing non-UK fund vehicles that are commonly used to hold UK real estate. Clause 20 provides a definition of the RIF and provides a power for the Treasury to make detailed tax rules through secondary legislation, consistent with the approach taken when introducing tax rules for other investment funds. A later statutory instrument will set out detailed tax rules for the RIF. The regulations will set out supplementary qualifying conditions for a RIF, entry and exit provisions, and rules that deal with breaches of one or more qualifying conditions.

The UK has a world-leading asset management sector. The RIF will play an important role in supporting that leadership by making the UK a more competitive destination for our fund management industry. Indeed, stakeholders from the financial services industry have already shown considerable support for the RIF. I therefore commend the clause to the Committee.

[Tulip Siddiq (Hampstead and Kilburn) (Lab)]

It is a pleasure to serve on this Committee under your chairmanship, Mrs Latham. I am pleased to respond to clauses 20 to 24 on behalf of the Opposition. Clause 20, as the Minister set out, introduces the necessary powers to set the scope and design of the tax regime and rules for the RIF. Labour welcomes the introduction of the RIF, as it will add to the investment products available here in the UK, particularly for the UK commercial real estate sector. However, the trade bodies representing investment managers and real estate fund managers, the Investment Association and the Association of Real Estate Funds, have raised some concerns that I would like to put to the Minister.

There was a widely held expectation across the sector that RIF would broadly mirror the conditions of the existing authorised contractual schemes, or ACSs, but offer less regulatory supervision, freeing the RIF to become a more flexible investment vehicle for a range of more experienced investors. Due, however, to the Government’s decision to categorise the RIF as an alternative investment fund instead of a special investment fund, the RIF and the ACS will now differ in two key aspects. First, the supply of fund management services will be standard-rated at 20% as opposed to being VAT-exempt, and secondly, an alternative investment fund comes with a requirement to raise capital from a number of investors with a view to investing it in accordance with the defined investment policy for the benefit of those investors. That makes sense for large-scale, open-ended funds with an ongoing investment strategy, but it clearly is not designed for funds that do not have a specified investment objective, such as funds of one, joint ventures, co-investment vehicles and acquisition vehicles, which instead were created for a particular purpose such as repackaging and selling existing assets to new markets. Since they do not exist to raise additional capital, the requirements associated with alternative investment funds risk being an unnecessary burden and disproportionate when applied to the RIF.

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[Gareth Davies]

I am always grateful to see the hon. Member for Hampstead and Kilburn in her place in opposition in these forums, and I appreciate her comments. I will first set out the background to the establishment of the RIF, which was based on significant consultation with industry to fill a specific gap for an unauthorised, contractual-based vehicle. As such, it was based on specific feedback from the industry. The hon. Lady asked a very reasonable question about classification of the fund, and I can tell her that that was considered to be part of the consultation, but in the end we decided to proceed with the structure that we have gone with in the legislation. However, we will of course keep that under review and continue to engage with stakeholders, and we will issue a report on the progress of the RIF in due course. Although we have not established it in the way that some may have wished us to, it is based on consultation and will be reviewed in due course.

[Tulip Siddiq]

I thank the Minister for his response. He said that he considered the options and decided to proceed with it as an alternative investment fund, but he did not actually set out the reasons why. Was there any reason why he decided that it made more sense to do that as opposed to a special investment fund, especially in line with the international comparisons that I gave?

[Gareth Davies]

This is designed specifically to fill a gap that was previously or currently filled by things such as Jersey property investment trusts. Where there are unauthorised, contractual-based schemes, we do not currently have a vehicle that fills that gap. What we are introducing with the RIF fills that gap and satisfies a vast amount of stakeholders who fed into the consultation, and we are proceeding with that today.

Question put and agreed to.

Clause 20 accordingly ordered to stand part of the Bill.

Clause 21

Economic crime (anti-money laundering) levy

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

[Gareth Davies]

Clause 21 increases the economic anti-money laundering levy for very large firms, meaning firms regulated for anti-money laundering purposes and which have UK revenue greater than £1 billion per annum. The charge for very large firms increased from £250,000 to £500,000 with effect from 1 April 2024. There is no change to the charge for firms with revenue below £1 billion per annum. The levy was introduced in the 2022-23 tax year as a source of sustainable funding for measures to tackle economic crime and support the delivery of the Government’s commitments contained in the economic crime plan 2. The Government made it clear during the public consultation that levy charges may be adjusted periodically in response to new information, inflation or under-collection. The adjustment is made in response to receipts falling short of the levy’s stated £100 million revenue target.

The clause amends part 3 of the Finance Act 2022 to replace the current charge for very large firms with the new charge of £500,000 per annum. The change will impact an estimated 100 to 110 very large firms across the anti-money laundering regulated sector including, but not limited to, financial services, legal and accountancy firms.

No other aspects of the levy’s calculation or operation are changing and we therefore anticipate administrative impacts on affected firms to be negligible. This adjustment to the economic crime levy for the largest firms will put funding for measures to tackle economic crime on a sustainable footing, helping to protect UK citizens and make the UK a safer place to do business. Only the very largest firms will pay more and burdens will remain low. I commend the clause to the Committee.

[Tulip Siddiq]

We support the measures in clause 21 to raise the funds needed to tackle money laundering, fraud and other types of economic crime, but I cannot ignore the fact that the Government’s efforts to tackle economic crime have been a complete failure. Fraud and scams, for example, have rocketed under this Government, with at least £7.3 billion stolen directly from consumer bank accounts in the UK through fraud last year alone.

Last year, the Government published their fraud strategy to widespread criticism from industry for largely rebadging old measures and re-announcing existing national teams, such as the re-announcement on the replacement of Action Fraud from 2022. The consensus from experts in the industry is that the measures in the strategy will not significantly move the dial, as they do not establish a regulatory framework for tech companies and telcos to participate in the fight against fraud, including through data-sharing with financial services firms and enforcement agencies to enhance detection and prevention measures.

UK Finance, for example, has stated that it is increasingly difficult to understand the imbalance between the financial services sector’s contribution through the levy and that of other sectors that do not contribute but are known to be introducing risk into the same system. We also know that most scams originate on social media or via telecommunications networks yet those sectors do not face the same obligations regarding contributions, nor do they compensate victims defrauded through their platforms. Does the Minister agree with UK Finance? Does he accept that until the Government find a way to bring the tech giants to the table, efforts to tackle fraud and scams will continue to fail?

UK Finance has also raised concerns about the transparency of the levy and reporting on economic crime. On reporting for anti-money laundering purposes, I have heard from numerous City firms that, despite frequent requests, they receive little granular feedback on the impact their reports make. Does the Minister agree that better feedback and wider publicity around successes could help AML-regulated firms to see the value and importance of work in this area more clearly, keeping it at the forefront of their minds? What are the Government doing to ensure that happens?

[Drew Hendry]

This is a welcome move in principle and in targeting economic crime, but I would agree with the comments we have just heard—this does not shift things in the way that they need to be shifted in order to deal with the issue. It does not seriously tackle online crime, which is relatively rampant, with people being conned and funds being taken illegally. It does not really do much for fraud and economic crime and fails to tackle issues such as money laundering. There has still not been enough action on limited partnerships, for example, which continue to allow unknown individuals to funnel money through those mechanisms. Why are the Government not taking this issue more seriously than through these minor actions in the Bill?

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[Tulip Siddiq]

We believe that individuals or companies generating wealth in the UK should pay their fair share, so we are in complete support of the aims of this clause. However, we have heard concerns raised by the Chartered Institute of Taxation about the effectiveness of the Government’s proposals and I would be interested to hear the Minister’s views on those concerns.

First, the Chartered Institute of Taxation has argued that the clause adds complexity to the tax system, because it uses income tax legislation to tackle perceived corporate tax avoidance. Clause 22 extends provision within the Income Tax Act 2007 to cover avoidance of any tax through transfer made by a closely held company. Could the Minister explain the thinking behind the Government’s decision to tackle corporate tax avoidance in this way, rather than through the corporate tax regime? Does he agree with the Chartered Institute of Taxation that it could add unnecessary complication to the tax system?

Secondly, the Chartered Institute of Taxation made the case that the Government’s position that any participator in a company is deemed to be involved in a company’s decision to move assets abroad is unfair. For example, a company may have several minority shareholders who have no participation in the running of the company. What is the Minister’s assessment of the case made by the Chartered Institute of Taxation that only major shareholders, directors and shadow directors should be assumed to be involved for the purposes of this legislation?

Thirdly, the Chartered Institute of Taxation has warned that these changes could damage the UK’s international competitiveness, because the test as set out in the legislation leaves too much discretion to HMRC, which compounds uncertainty for businesses. For example, a UK holding company that provides a loan to an offshore subsidiary that in turn generates profits could be caught by the changes, despite that being a routine transaction. The Chartered Institute of Taxation argues that that could lead to an increased number of inquiries and appeals to the tax tribunals and could seriously undermine the UK’s attractiveness for international headquarters.

What does the Minister make of those concerns? What steps will HMRC take to ensure that involvement and objection defences under the clause are not ambiguous or uncertain, and to ensure that those charges do not prove to be increased excessively for taxpayers?

My final point is that the changes introduced by clause 22 appear to be retrospective, as no date is specified whereafter transactions are affected; the clause says only that income arising after April 2024 is caught by the regime. Can the Minister confirm whether that is the case? Will commercial transactions that were carried out many years ago, but from which income arises after April 2024, still be caught?

[Nigel Huddleston]

I thank the hon. Member for Hampstead and Kilburn for her comments. We very much appreciate the input that we have received from stakeholders and interested parties, including the Chartered Institute of Taxation. Some of those points are about broader issues around the TOAA regime, rather than specific to this legislation, but we do hear what they have to say.

I will respond to the hon. Lady’s points about the changes that apply to companies when the TOAA regime is primarily about individuals. The transfer of assets abroad legislation is an anti-avoidance provision aimed at preventing individuals from avoiding a tax charge by transferring an asset to a person overseas while still being able to enjoy the income of that asset in some way. It would be easy for an individual to sidestep the legislation by transferring such an asset to a company that they controlled before the company then made the transfer abroad. The legislative changes are aimed at preventing that situation and ensuring that the TOAA rules are applied as intended.

On the point about the legislation being broad, let us not forget that it is being brought in in response to the Supreme Court judgment; we are trying to make sure that it acts as intended throughout. The intention of the legislation is to put the situation involving transfers by companies back to how HMRC considered it operated before the Supreme Court decision. The transfer of assets abroad legislation aims to stop that tax avoidance.

It is also important to remember that the legislation does not bring a tax charge when the transfer is for genuine commercial reasons or when tax avoidance was not the purpose of the transfer. The new legislation gives individuals the opportunity to exclude themselves from the tax charge if certain conditions are met. We respectfully disagree with the CIOT on some of those conditions. We have outlined some of those, and HMRC will produce further guidance in due course.

On the retroactive criticism, the clause has retroactive effect because if it did not, it would have allowed individuals to abuse the loophole between the date of the Fisher judgment and the enactment of the legislation. Again, we do not believe that there will be a significant increase in complexity. The purpose behind the legislation is primarily to ensure that the regime acts as intended.

I will not go into the weeds on HMRC’s determination process—further guidance will be given—but HMRC will review the facts of a case to judge whether someone is directly or indirectly involved in the decision making of a company. It will accept evidence that shows whether someone is involved or not. However, any arrangements that are put in place purely to be used as evidence that an individual is not involved in the decision making of a company will be disregarded and a charge will be levied if the other conditions are met. As I said, HMRC will issue guidance on how it will approach the matter in due course. Decisions will be made based on the facts of each individual case.

I hope that I have given the hon. Member for Hampstead and Kilburn some assurance. We appreciate the concerns that have raised by key stakeholders, and further information and guidance will be forthcoming.

Question put and agreed to.

Clause 22 accordingly ordered to stand part of the Bill.

Clause 23

Minor VAT amendments

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

[Nigel Huddleston]

Clause 23 makes some minor, technical changes to VAT legislation relating to the DIY house builders’ scheme and VAT credit in the penalty reform regime, and allows for reform of the VAT terminal markets order. I will speak briefly about each measure in turn.

The DIY house builders’ scheme allows individuals building their own home, or converting a non-residential building to their own home, to recover VAT incurred on the cost. That puts individual house builders in the same position as property developers, who are able to sell new build residential property at a zero rate and recover the VAT they incur in the process of constructing new build properties. The scheme was simplified and made digital in December last year, which has significantly reduced the time taken for claims to be paid. Under the new process, only essential details are required on the claim form, eliminating the need for claimants to submit certain evidential documents up front. Based on the information provided on the claim form, HMRC can then request evidential documents to verify the claim.

Clause 23(1) will give HMRC a clear power under the DIY house builders’ scheme to require further evidential documentation, such as invoices, from the person who submitted a claim under the scheme. That will assist HMRC in verifying claims.

Clause 23(3) is a minor update to the existing powers that allow for reform of the VAT terminal markets order. The order reduces VAT administration burdens on commodities traded on specified markets, so the power will allow for simplifications to support businesses trading those commodities. The Government previously announced their intention to reform the order to reflect current market practices and to keep pace with market changes, such as trades in new products, including carbon credits. This clause takes that commitment forward.

Finally, subsections (4) and (5) make changes to ensure that VAT interest rules operate as intended. For most major taxes, the Finance Act 2009 requires HMRC to pay interest on amounts due from HMRC to taxpayers, and to charge interest on late payments to HMRC. Historically, that regime did not apply to VAT, which had its own interest rules. Harmonising the rules on interest was an important step in delivering the Government’s ambition to build a trusted, modern tax administration system. Changes made by the Finance Act 2021 brought VAT interest in line with taxes such as income tax from 1 January last year. In implementing the new interest rules for VAT, HMRC has discovered some minor defects in the legislation, which without correction would force it to act in a way that conflicts with policy intent.

Clause 23 will therefore make two changes to the interest rules. The first will address the situation in which interest ought to be repaid to HMRC because, following an assessment or amendment that reduces the amount of VAT credit, the repayment interest due is also reduced. It was always intended that HMRC could recover all these amounts through a simple automated process that does not add to burdens for taxpayers and HMRC alike. The IT system can already operate, but the legislation, mistakenly, does not always allow that automated recovery. The change will ensure that HMRC can do so in all cases instead of needing a different, onerous process for a minority of cases that the original legislation did not cover.

The second change will make sure that VAT-registered businesses are always protected by a provision that creates a fairer basis for the calculation of interest where they owed money to HMRC over the same time that HMRC owed money to them. The original legislation failed to extend that safeguard to all scenarios in which that could happen with VAT, undermining the fairness of the interest regime. To ensure that all VAT-registered businesses are treated equally, the changes will be given backdated effect to 1 January 2023, when the interest rules were introduced for VAT.

Clause 23 makes some small changes to ensure that policy works as intended and to further Government commitments on reforming the VAT terminal markets order. I commend it to the Committee.

[Tulip Siddiq]

The Opposition support the changes that will assist with compliance checks by making online applications equivalent to paper applications. Has the Minister considered adding the online application as a service to the agent services accounts so that an agent can prepare and submit the claim on behalf of their client?

We also support the provisions for modifying the application of VAT for terminal markets, as that will allow for further reforms such as bringing trades in carbon credits within the scope of the Value Added Tax (Terminal Markets) Order. We feel that is a vital and necessary step in developing this important market.

We support the changes to legislation that governs the interaction between late payment interest and repayment interest for VAT. Has the Minister given any thought to reinstating HMRC’s ability not to charge interest on VAT errors where the supplier did not charge VAT, with no loss to the Exchequer because the customer could claim in full?

[Drew Hendry]

On clause 23’s minor VAT amendments, there is very little to disagree with. VAT should be paid where it is due, and HMRC should pay interest where it should pay interest. That is to be welcomed.

However, on Second Reading I pointed out the paucity of thought and imagination that had gone into providing real help for people across the nations of the UK, and the kinds of thing that the Government could have done but have not. The clause title, “Minor VAT amendments”, just highlights the problem with the entire Bill. The Government could have taken some action to deal with the issues for people in hospitality by cutting VAT and doing something meaningful for tourism, but no: they have chosen to make these minor adjustments. They could have used VAT as a mechanism for helping our high streets to create economic zones that could boost life back into vital high streets and centres. Instead, they have taken to tinkering with the VAT rules.

My question to the Minister is why there is such a lack of ambition in his Government. Is it that this is a fag-end Government in a fag-end Parliament that has run out of ideas, or is it just that they do not care?

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[Nigel Huddleston]

Clause 24 makes further provision for collective money purchase arrangements. CMP arrangements are a new type of pension that have the benefit of pooling individuals’ pension pots to provide better incomes in retirement while limiting the liability of employers.

These changes will enable the Government to authorise the transfer of benefits to a member’s beneficiaries, such as their dependants, in the unlikely event that a member dies while a CMP arrangement is being wound up. That will ensure that such transfers do not incur an unauthorised payment charge of 55%, and it will deliver the Government’s commitment to provide the correct tax outcome for CMP arrangements.

The Pension Schemes Act 2021 introduced legislation to allow collective money purchase schemes to operate in the United Kingdom. This measure authorises the transfer of survivor benefits in collective money purchase pension schemes. This will ensure that Royal Mail Group, the first provider of a collective money purchase pension scheme, can launch its scheme as planned.

It is a complicated title, but with a simple purpose. As a result of these changes, an employee of Royal Mail will be able to sign on to a CMP, with all the benefits, without the risk of transferring survivor benefits being put through as unauthorised transactions. I therefore commend the clause to the Committee.

[Tulip Siddiq]

This clause is so uncontroversial that we give it our full support. For the first time, I agree with everything the Minister has said, and the Committee will be happy to know that I have no further questions for him.

Question put and agreed to.

Clause 24 accordingly ordered to stand part of the Bill.

Clause 25

Interpretation

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

[Nigel Huddleston]

I will be very brief, because the clause is fairly straightforward. It provides for the use of abbreviations for a variety of Acts. For example, it provides for the use of “CTA 2009” as an abbreviation for the Corporation Tax Act 2009. I commend the clause to the Committee.

Question put and agreed to.

Clause 25 accordingly ordered to stand part of the Bill.

Clause 26

Short title

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