Tuesday 17th October 2017
(6 years, 6 months ago)
Public Bill CommitteesFinance (No.2) Act 2017 View all Finance (No.2) Act 2017 Debates Read Hansard Text Amendment Paper: Public Bill Committee Amendments as at 17 October 2017 - (17 Oct 2017)
The Committee divided: - Ayes: 9 / Noes: 10 - Question accordingly negatived.
The Chair
Mr Howarth made some preliminary announcements this morning regarding Committee proceedings, including permission for Members to remove their jackets if they wish to do so in this October heatwave. Before we come to clause 10, I understand that the Minister wishes to raise a point of order.
The Financial Secretary to the Treasury (Mel Stride)
On a point of order, Mr Walker. I believe that in this morning’s sitting, in response to a question from the hon. Member for Bootle, I may have inadvertently suggested that the Bill’s changes to the money purchase annual allowance regime will result in a £70 million per annum cost to the Exchequer. I should have said that £70 million of revenue will be raised for the Exchequer in each year.
The Chair
I thank the Minister for that clarification, as I am sure does the entire Committee.
Clause 10
Personal portfolio bonds
Question proposed, That the clause stand part of the Bill.
Mel Stride
It is a great pleasure to serve under your chairmanship, Mr Walker. Clause 10 provides the power to amend by way of statutory instrument the property categories that the holder of a life annuity, life insurance policy or capital redemption policy can select without making that policy or contract a personal portfolio bond.
The personal portfolio bond rules introduced in 1999 countered avoidance arrangements where an individual could select personal investments, such as property portfolios, in life insurance policies to defer the tax charge on any resulting income or gains. The legislation treats a policy as a personal portfolio bond if it allows the holder to select the property held in that policy. A policy will not be a personal portfolio bond if it permits only the selection of property specifically listed in the legislation. The categories of property listed in the legislation have features that ensure that the policyholder cannot customise them to allow personal property to be placed within the policy.
The list of permitted property has not materially changed since the rules were introduced in 1999. Since then, various new types of investment vehicle have been developed that similarly cannot be manipulated to include personal property. Up to now, those have not been added to the list. That unnecessarily narrows the range of investment choices for policyholders.
The clause provides the power to make secondary legislation to amend the categories of property listed. The power will ensure that, in future, the rules can be updated more quickly to accommodate new types of investment vehicles. Following Royal Assent, the Government will lay regulations using the power to add three investment vehicles as permitted property: real estate investment trusts, overseas investment trust companies and authorised contractual schemes. Draft statutory instruments have been provided to the Committee. The power will allow the Government to respond quickly as new methods of investment develop, to enable legislation to keep pace with changes in the financial services industry and ensure that tax rules do not needlessly impede innovation and competition in the sector.
Anneliese Dodds (Oxford East) (Lab/Co-op)
I am grateful to the Minister for providing clarification. Is there any evidence of the extent of awareness among fund advisers regarding the existing restrictions, and how will they be made aware of the new rules? That is particularly important if new rules are to be adopted through secondary legislation. We have heard about the new categories of property that might be incorporated, but there is likely to be less spotlight on them in future if we do not discuss them in the context of a Finance Bill. At present, it is possible for fund advisers to accidentally acquire non-permitted assets for a client’s policy, which rules it out as a PPB and means that the rules on yearly deemed gain do not apply.
Mel Stride
I reassure the hon. Lady that there has been extensive consultation on the measure. The consultation on reviewing the list of properties ran from 9 August to 3 October 2016 and explored adding three types of investment vehicle. The majority of respondents welcomed the proposed addition of the investment vehicles discussed. Many suggested further additions, which will require further review before any recommendation is made.
Question put and agreed to.
Clause 10 accordingly ordered to stand part of the Bill.
Clause 11
EIS and SEIS: the no pre-arranged exits requirement
Question proposed, That the clause stand part of the Bill.
Mel Stride
Clauses 11, 12 and 13 make changes to the tax-advantaged venture capital schemes: the enterprise investment scheme, the seed enterprise investment scheme and venture capital trusts. The changes provide small but useful easing of the rules, which I shall explain in more detail. Following the calling of the general election and subsequent negotiations between the Government and the Opposition, these clauses were removed from the Finance Act 2017. As all the clauses are wholly relieving, the Government have introduced retrospective legislation to ensure that taxpayers can still benefit from the changes being made from the original commencement date.
The tax-advantaged venture capital schemes provide a range of generous tax reliefs to encourage individuals to invest directly or indirectly in certain smaller and higher-risk early stage companies. These small companies would otherwise struggle to access the funding they need to grow and develop, because they have little or no track record to attract funding from the market.
Clause 11 makes changes to an anti-abuse rule, the no pre-arranged exits requirement, in the enterprise investment and seed enterprise investment schemes. The rule prevents tax relief from being provided if arrangements under which the shares were issued might lead to a disposal of those or other shares in the company and so potentially put the future continuation of the company at risk.
Many companies include such rights in their standard documents. However, rights allowing for share conversions in the future carry no risk to the integrity of the scheme, as excluding the rights can be administratively burdensome for some companies. The changes will allow companies to qualify for relief if they issue shares that include rights to a future conversion into shares of another class in that company. The changes are wholly relieving and will apply retrospectively, with effect for shares issued on or after 5 December 2016.
Clause 12 makes technical changes to clarify the law and ensures venture capital trusts can provide follow-on funding to certain groups of companies. The changes ensure that the VCT rules work in the same way as those for EIS. The rules for VCTs and EIS were changed in late 2015 to target the schemes more closely on early stage companies. However, the rules do allow older companies to receive tax-advantaged investments in some situations. These include follow-on funding provisions. Broadly speaking, follow-on funding may be provided to an older company as long as the company received its initial tax-advantaged funding at a time when it met the basic age limit. The changes made by clause 12 ensure that, where certain conditions are met, VCTs will be able to provide follow-on funding for companies that have been taken over by a new holding company after the initial funding was received.
Clause 13 makes changes to extend a power for the Treasury to make regulations on the exchange of certain investments held by a VCT. A VCT may hold non-qualifying investments, but only in very limited circumstances. Regulations under the current power ensure that VCTs are not at immediate risk of losing their approved status when they are obliged to exchange a qualifying investment for a non-qualifying investment. However, the power to make regulations applies only where the original investment is a qualifying investment.
The new regulations will provide broadly similar protection to VCTs where the original investment is a non-qualifying investment and the VCT is similarly required to exchange the investment as part of a commercial reorganisation or buy-out. Without the new regulations, VCTs would continue to rely on Her Majesty’s Revenue and Customs exercising its discretion to avoid immediate loss of approval when a non-qualifying investment is exchanged. Draft regulations will be published for public consultation later in the year. The regulations will provide certainty to a VCT regarding the treatment of the new shares or securities obtained when it exchanges non-qualifying investments.
Clauses 11, 12 and 13 make technical easements to reduce administrative burdens and smooth certain rules within the tax-advantaged venture capital schemes. I therefore hope that they will stand part of the Bill.
Anneliese Dodds
I have two questions about clauses 11 and 12. First, EIS and SEIS are two of the four tax-advantaged venture capital schemes, alongside venture capital plus and social investment tax relief, which we will discuss under a later clause. In addition to the features mentioned by the Minister, the schemes share in common the fact that advance assurance applications and submissions of statutory compliance statements are often sought by those seeking to reassure potential investors about the tax treatment of their investments. Clearly, the new requirement will widen eligibility for EIS and SEIS, potentially leading to a greater number of requests to HMRC for these kinds of ex-ante assessments. I would be grateful if the Minister could assure us that HMRC will be able to satisfy those requests in a timely manner.
I understand from the Minister’s response to my parliamentary question on this matter that there is no time limit on an advance assurance application, and while the target for more complex cases is 40 days, he admitted that more complex cases may take longer. Although I agree with him that the changes will simplify the administrative side for business to an extent, they could complicate qualifying criteria from HMRC’s point of view. How will the Minister ensure that that does not lead to greater pressures on an already struggling HMRC?
On clause 12, my second question is perhaps more fundamental. As I understand it, EU state-aid rules generally suggest that the operation of such tax reliefs should focus on genuinely promoting new growth rather than on the acquiring of existing businesses, given that we are talking about the state exempting certain categories of firms from tax that others must pay. Will the Minister provide us with a taste of how he has assured himself that this relief genuinely will focus on the promotion of such new growth?
Mel Stride
I thank the hon. Lady for her questions. On clause 11, she has been in touch with the Treasury about the important matter of advance assurances from HMRC, which always does its utmost to provide advice in as timely a manner as possible. The change proposed by the clause, however, is to remove a requirement on HMRC to opine on the approach that some companies intend to take, which will introduce greater certainty.
Clause 12, which relates to VCTs and the introduction of a parent company, is also likely to ease the investment decision because it will take away the uncertainty that would otherwise accrue by having a parent company inserted into the corporate structure under consideration. These technical amendments therefore make important changes to existing legislation.
Question put and agreed to.
Clause 11 accordingly ordered to stand part of the Bill.
Clauses 12 and 13 ordered to stand part of the Bill.
Clause 14
Social investment tax relief
Question proposed, That the clause stand part of the Bill.
The Chair
With this, it will be convenient to discuss the following:
Amendment 20, in schedule 1, page 103, line 37, at end insert—
“10A After section 257TE (minor definitions etc), insert—
“257TF Review of operation of this Part
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of social investment tax relief.
(2) The review shall consider in particular—
(a) the effects of changes made to this Part by Schedule 1 to the Finance (No. 2) Act 2017, and
(b) the effectiveness of the anti-abuse provision.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.””
This amendment would require HMRC to undertake a review of the operation of social investment tax relief, including the changes to it made by Schedule 1.
That schedule 1 be the First Schedule to the Bill.
Mel Stride
Clause 14 and schedule 1 make changes to increase the amount of investment that newer social enterprises can raise through social investment tax relief. These changes will make social investment more attractive to a wider range of enterprises and investors. Excluding lower risk activities will ensure that the scheme is well targeted and delivers value for money.
Would it be in order, Mr Walker, to speak now to amendment 20 and schedule 1?
Kirsty Blackman (Aberdeen North) (SNP)
I do not want to speak for long, but I wanted to say that the hon. Member for Oxford East made a comprehensive, passionate and well-informed case on the amendment. If the Labour party seeks to press the amendment to a vote, we will support it. If the Minister responds to any of the comments by letter, I would be keen to see some of his answers, so I would appreciate being copied into that response.
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.
Anneliese Dodds
I am grateful to the Minister for his clarification, which has been enormously helpful. However, he referred to winkling out particular anomalies and we feel that that is exactly what we need a little more of. On the issue of the seven years of activity as a social enterprise before qualifying for the three-year £1.5 million cap, I am concerned, despite the Minister’s helpful comments, that we are not focusing on the exact loci of risk. We seem to be assuming that risk is inherent in the age of the social enterprise concerned and not on the activity that it is engaged in. It is perfectly possible—I mentioned an example earlier—for an older social enterprise to try to attract funding in order to undertake a very risky activity. Dealing with some of those risky activities is what we need social enterprise to be engaged in, particularly as we have many areas where local authority funding is no longer available and there are also market failures. We really need to have community facilities and different services preserved. I therefore wish to press the amendment.
Mel Stride
I think we are in total agreement with the hon. Lady on the issue of focusing these funds and incentives on riskier social enterprises, in other words, the ones that would not naturally happen without this kind of intervention. However, while those that are less than seven years old will be subject to the £1.5 million cap, which is a considerable increase in what we have had before and will not be restricted by the £300,000 maximum investment in any three-year period, those social enterprises that have been trading for longer than seven years, can still have access to £1.5 million in total, albeit in any three-year period they are restricted to £300,000 maximum to be raised. It is not as if there is a terrible cliff edge between the two. We will still be providing a lot of support for older social enterprise.
Anneliese Dodds
I thank the Minister, but I am still concerned about why exactly seven years has been chosen as the cut-off. Listening to his helpful remarks, I imagine that we could see some gaming around this, because there is a significant tax advantage from having a younger social enterprise. Would we see social enterprises being created out of previous ones just to qualify for the different tax treatment when actually they would be focused on the same activity? It seems peculiar to me and I do not understand why the seven-year figure has been chosen. My dad was an accountant; he always said to me, “You’ve got to keep your bank statements for seven years”, so I can understand seven years from that perspective. Why is there no gradation? Why seven and not another figure—three, five, 15 or 20 years? Perhaps some clarification can be provided.
Mel Stride
I suppose we are saying that whatever number of years we chose, the hon. Lady’s argument would always be relevant, in the sense that it is an arbitrary figure. It happens to be seven years in this case. In terms of anti-avoidance and gaming at the margins, to which she referred, there are some strong anti-avoidance measures in the Bill that, for example, seek to address directly the specific issues she raised of perhaps one social enterprise taking over another that has a different age profile and in some way gaming the system as a consequence. Those elements are addressed in the anti-avoidance measures.
Question put and agreed to.
Clause 14 accordingly ordered to stand part of the Bill.
Schedule 1
Social investment tax relief
Amendment proposed: 20, in schedule 1, page 103, line 37, at end insert—
“10A After section 257TE (minor definitions etc), insert—
“257TF Review of operation of this Part
(1) Prior to 30 June 2019, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of social investment tax relief.
(2) The review shall consider in particular—
(a) the effects of changes made to this Part by Schedule 1 to the Finance (No. 2) Act 2017, and
(b) the effectiveness of the anti-abuse provision.
(3) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.””—(Anneliese Dodds.)
This amendment would require HMRC to undertake a review of the operation of social investment tax relief, including the changes to it made by Schedule 1.
Question put, That the amendment be made.
The Chair
With this it will be convenient to discuss that schedule 2 be the Second schedule to the Bill.
Mel Stride
Clause 16 makes changes to ensure that landlords can use the cash basis to calculate their profits for tax, and simplifies the treatment of capital expenditure within the cash basis.
At Budget 2016, the Government announced that we would explore options to simplify the tax rules for businesses, self-employed people and landlords. Trading businesses have been able to use the cash basis method of calculating their profits for tax since 2013. The method calculates profits on a cash in, cash out basis and minimises the need for complicated accounting adjustments. It has been well received; more than 1 million trading businesses have chosen to use the cash basis since its introduction. Extending and improving the cash basis is a significant step to simplify the tax rules.
Following consultation, the Government announced that from April 2017 they would increase the cash basis threshold for traders to £150,000, extend the cash basis to some landlords, and simplify the treatment of capital expenditure in the cash basis. The increase to the cash basis threshold for traders was implemented by secondary legislation, so does not appear in the Bill.
The changes made by the clause will allow more than 2.3 million property businesses to choose to use the simpler cash basis method of calculating their profits for tax, which will provide administrative savings to approximately 1.8 million of them. The changes to the treatment of capital expenditure in the cash basis will allow capital expenditure to be deducted from income, unless it relates to specific types of assets listed in the legislation. That will mean that, including any additional property businesses, nearly 3 million businesses using the cash basis will have a clearer idea of what they can deduct for tax, and when.
The clause legislates for measures announced at spring Budget 2017 and takes effect from April 2017. It therefore has retrospective effect. The measures will simplify tax on many businesses and landlords, who will benefit from the use of the cash basis and the reform of the capital expenditure rules in the cash basis.
Question put and agreed to.
Clause 16 accordingly ordered to stand part of the Bill.
Schedule 2 agreed to.
Clause 17
Trading and property allowances
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 21, in schedule 3, page 155, line 15, at end insert—
“Chapter 3
Review of chapters 1 and 2
783BR Review of operation of this Part
(1) Prior to 30 June 2020, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the provisions of this Part.
(2) The review shall consider in particular—
(a) the use and effects of full relief,
(b) the use and effects of partial relief,
(c) the use of relief in relation to trading income, and
(d) the use of relief in relation to property income.
(3) The review shall compare the effects on the Exchequer in each of the first two years of its operation with the effects forecast by the Office for Budget Responsibility at the time of—
(a) the 2016 Budget, and
(b) the 2016 Autumn Statement.
(4) The Chancellor of the Exchequer shall lay a report of the review under this section before the House of Commons as soon as practicable after its completion.”
This amendment would require HMRC to undertake a review of the operation of the new trading and property allowances in the first two relevant tax years.
That schedule 3 be the Third schedule to the Bill.
Kelvin Hopkins (Luton North) (Lab)
It is a pleasure to serve under your chairmanship, Mr Walker. I support my hon. Friend the Member for Bootle. It is said that Britain has more accountants per head of population than any other country, probably because the complexity of our tax system means that we all need to use one. However, in this situation, as he said, the amounts involved might be small, and the cost of an accountant might be quite high. That could deter people from using accountants, getting them into more difficulty.
Is there not a case for a proper review by HMRC, which knows the score because it deals with such things on a daily basis? HMRC could advise the Government on introducing appropriate changes that would simplify the tax system as well as helping those who would benefit from tax reliefs in a more practical and pragmatic way.
Mel Stride
Clause 17 and schedule 3 introduce two new tax allowances so that, from April 2017, individuals with gross trading or property income below £1,000 no longer have to declare or pay tax on that income. Digital platforms are allowing more and more people to supplement their income by sharing property, resources, time and skills. It is perhaps a rather more rapidly growing segment than the hon. Member for Bootle recognised. The UK is a world leader in the sharing economy; a report by PwC shows that the UK sharing economy has grown at the fastest pace in Europe, with transactions worth about £7.4 billion in 2015. This is expected to grow to £140 billion in 2025.
As the economy changes, the tax system should keep pace. For this reason the Government want to support the sharing economy and ensure that the tax system is not burdensome for those making small amounts of income, whether through selling goods, providing services or renting out their property. This could include those advertising their plumbing services through an online platform or those renting out a driveway space, for example. The changes made by clause 17 will introduce two new income tax allowances so that the individuals with gross trading or property income below £1,000 will no longer have to declare or pay tax on that income. Many individuals engaging in these activities on a small scale are not aware of their tax obligations. The new allowances make these obligations clear and straightforward, providing much needed clarity for people making small levels of extra income.
The trading allowance will also include miscellaneous income from providing assets or services, creating certainty for individuals, who will not have to understand tax case law to determine whether their activities should be taxed as a trade. The Government estimate that at least 700,000 individuals could benefit from the allowances. Over three quarters of these are basic rate taxpayers who could save up to £400 in income tax each year.
The Opposition raised a number of points. One was the lack of availability of this allowance to those who are already making self-assessments to HMRC, because they are already sole traders. Part of the reason for that is to ensure that we do not have any diversion of activity from those individuals’ general work arrangements into this scheme driven solely by an attempt to lower taxation. The point has been made about the importance of simplicity in the scheme. Certain aspects of the scheme clearly make it simple: people with that kind of income are not required to make a submission to HMRC, and there is a “miscellaneous” category of income that can address the complications around whether this is trading income—“miscellaneous” is quite a wide-ranging term.
The hon. Member for Bootle raised a fair point on rent-a-room tax relief arrangements; that is why HMRC’s efforts in detailing its guidance on the gov.uk website are so important. All the allowances will be very carefully explained. The guidance is being prepared alongside representative bodies and will include clear, step-by-step explanations and a number of examples, so it will be very easy for people to follow exactly how the arrangements work. Support will also be available via the HMRC helpline.
Amendment 21 would require HMRC to complete a review of the cost and effectiveness of the allowances by 2020 and the effects on the Exchequer in each of the first two years. Such a review is unnecessary. As I have set out, the two new allowances ensure that the tax system is not burdensome for those making small amounts of income. Their effect will be to support the enormous contribution that the sharing economy is making to the UK economy, while simplifying the tax system to support the job creators of the future. As there is no need for taxpayers to declare this income to HMRC, any review would impose a disproportionate burden on taxpayers and be inconsistent with the core rationale for the reliefs. In addition, the Bill also includes specific clauses designed to prevent abuse, and HMRC will carefully monitor the reliefs to ensure that they work as intended. I therefore urge the Committee to resist this amendment.
The two new tax allowances will help micro-entrepreneurs by removing complexity and uncertainty for those wanting to earn small amounts of extra income. There will be no forms to fill in and no tax to pay. It is a tax break for the digital age, furthering the Government’s commitment to simplify the tax system and help the UK become a global leader in the digital and sharing economy. I therefore commend the clause to the Committee.
Peter Dowd
We will not press the amendment to a vote but the Minister acknowledges, de facto, that the economy and the world of work is changing fast. There are so many developments out there—apps, online, the whole kit and caboodle—which is all the more reason for the Government to keep on top of this issue. That is why we want the review, because the world changes so quickly.
Peter Dowd
My hon. Friend makes another good point. The Chartered Institute of Taxation has criticised the Government—“criticise” is the word I use, although I am not sure it would say that; it would most probably say it has brought this to the Government’s attention—for not balancing
“its desires to raise some modest revenue with its duty to produce legislation that can be followed with predictability and certainty.”
Other financial organisations have argued that the measure is likely to create winners and losers. Small groups unlikely to have £5 million of losses, for which this is a high proportion of the total, will benefit from the change. For large groups that wish to access the group relief changes, it is less clear. Deloitte has argued that the slowdown in offset of brought-forward losses for large groups may in fact mean an acceleration in the tax cost for larger companies. Will the Minister offer more clarity on how the group relief will work in practice—particularly the nomination process, whereby a specific company has to be nominated to manage the whole group relief?
The measure seems fraught with potential dangers. For starters, the Bill makes no mention of what happens when a company chooses to join or leave a group that benefits from the group relief. Will the Minister explain whether such a mechanism will be built into the legislation, or whether we will need a further clause in a future Finance Bill that tinkers with carried-forward losses once more? Given the uncertainty felt by many in the business community, the Opposition believe it is only right that the Government submit a review of the operation of the group relief in the carried-forward losses, assessing the cost and impact of the new restrictions and how they will impact on large companies.
Mel Stride
Clauses 18 and 19 and schedule 4 make changes to the rules for corporation tax losses, as we have discussed. They modernise the losses rules by increasing their flexibility, while at the same time ensuring that companies pay tax in years when they earn significant profits. When a company makes a loss, it can carry it forward and use it to offset the tax liability of certain income in future years. Carrying forward losses is an important feature of the tax system and ensures that the tax paid by companies is proportionate with their profits over the long term.
However, these loss relief rules are not reflective of the way businesses operate and are out of step with international practice, which I shall come on to in a moment. First, carried-forward losses can typically only be set against profits from the activities to which they relate, as the hon. Member for Bootle pointed out, rather than the profits of other activities in a company, or the profits of other companies within a group. Secondly, the absence of any restriction on the amount of taxable profit that can be relieved by carried-forward losses means businesses making substantial UK profits may not pay any corporation tax due to losses incurred on historic activities.
The clauses will have effect from 1 April 2017, in line with the commencement date previously announced by the Government. The changes made by clause 18 will mean that rules will be relaxed for losses arising from 1 April 2017 that are carried forward, such that those losses can be set against the profits of different activities within a company and the taxable profits of its group members. As we have said, the amount of annual profit that can be relieved by carried-forward losses will be restricted to 50% from 1 April 2017, subject to an allowance of £5 million per group.
The hon. Member for Bootle asked specifically about that £5 million figure, and about whether the Treasury has looked at international comparisons and factored that into its thinking on this matter. I assure him that it has. This rate is more generous than the rates in a number of other countries. In Germany, for example, the rate is €1 million. As he pointed out, the main rationale for focusing the restriction above £5 million is to bear down on the top 1% of profitable businesses in the country without going further down the spectrum. We believe that we have achieved the right trade-off between the level of the figure and the number of companies that will potentially be affected by the restriction.