Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Ways and Means
Mel Stride ExcerptsWednesday 6th September 2017
(6 years, 7 months ago)
Commons ChamberRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mel Stride)
I beg to move,
That—
(a) provision (including provision having retrospective effect) may be made amending Part 3 of the Income Tax (Earnings and Pensions) Act 2003, and
(b) (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision may be made taking effect in a future year amending Chapter 6 of that Part (taxable benefits: cars etc).
The motions on the Order Paper provide the basis for the second Finance Bill of 2017. They will define the scope of the Bill and allow the Government to introduce it for further debate and consideration in the normal way. The motions ultimately represent a number of measures that will refine our tax system to make it fairer and more sustainable.
As the House will be aware, Finance Bill resolutions are typically the formal subject of the Budget debate and are considered at that point. That was the case earlier this year, when the Government introduced the first Finance Bill of 2017 after the spring Budget. The general election, however, meant that time to consider that Bill was curtailed. We proceeded on the basis of consensus, taking a number of important provisions, including the soft drinks industry levy, through to Royal Assent before Parliament was dissolved, but a large volume of legislation on other announcements at the spring Budget and earlier fiscal events was withdrawn. At that point, my predecessor clarified to the House that there was no change of policy and that the Government intended to legislate for the withdrawn measures at the first opportunity. The written statement I provided on 13 July again confirmed that intention.
These motions now pick up where we left off and legislate for the provisions that were introduced and withdrawn due to time constraints. The areas of tax legislation that they provide for will not be a surprise to right hon. and hon. Members, who passed resolutions corresponding to these tax changes after the spring Budget and debated them on Second Reading of the earlier Act.
In fact, Members who are aficionados of tax legislation—I note that a few usual suspects are here today—will find a lot of the Bill to be even older news. Before they were introduced after the spring Budget, many of the clauses had been published in draft and the policy design had been consulted on with tax professionals, businesses and the public. Such an open and consultative approach is an important part of the tax policy making process; it helps to ensure that legislation achieves its intended effect and means that those who will be affected know in advance what to expect.
Lady Hermon (North Down) (Ind)
I am grateful to the Minister for allowing me to make an early intervention. So that the House can understand the voting patterns later tonight, will he clarify whether the motions before us are covered by the deal done between the Democratic Unionist party and the Conservative party? That answer will be very informative to the House and, indeed, to our constituents.
Mel Stride
I assure the hon. Lady that the process at the conclusion of this debate will be exactly the same as the one we go through on any consideration of Ways and Means measures in respect of such fiscal matters.
An open and consultative approach is important to our tax policy making process, and our commitment to a single major fiscal event each year is a further valuable step to improving the process for making fiscal policy. Just as with most other major economies, people will no longer face a host of tax changes twice a year.
The transition to the new Budget timetable will, of course, mean that a further Finance Bill will be introduced following this autumn’s Budget. In line with our past practice, the Government will next week publish drafts of some clauses that we plan to introduce in the next Finance Bill. The transition means there are fewer clauses than in recent years, but pre-legislative scrutiny will again help consideration of the Bill.
On that subject, Members may notice that there has been a slight change to the motions on today’s Order Paper. The Government have withdrawn a motion covering changes to the definition of a taxable disposal within landfill tax. That motion and the corresponding clause will no longer be taken forward in the current Bill.
Mel Stride
The hon. Gentleman has brilliantly pre-empted my next comments. If only he were a little more patient, all would be revealed. Her Majesty’s Revenue and Customs has been consulting on related changes to the taxation of illegal waste disposals over the summer, and we will set out our proposals in this area on 13 September when draft clauses for the winter Bill are published.
Mr Jones
Is the Minister saying that those proposals will actually come forward? I will address this in my speech, but I have been in discussion with HMRC’s policy department, which has given certain commitments to making some serious changes in order to collect more landfill tax and stop avoidance.
Mel Stride
The hon. Gentleman is right about the importance of those measures, and they will go forward. The policy has not changed; it will just come forward at a different time with other measures in this area.
Mr Jim Cunningham (Coventry South) (Lab)
Does the Minister have the staff to do the job on addressing tax avoidance?
Mel Stride
Our record on addressing tax avoidance speaks for itself. HMRC has raised £160 billion from clamping down on avoidance, evasion and non-compliance since 2010, which is a vast improvement. Given that our current deficit is running at about a third of the 2010 level, this Government have brought in a huge amount of money. In terms of having the resources, we have invested £1.8 billion in HMRC since 2010 to focus exactly on tax avoidance.
Mr Kevan Jones
As the Minister knows, HMRC’s landfill tax figures show a £150 million tax gap. Will the future proposals be published for further reaction and consultation? What I hear from the industry is that some of the proposals it wants are being ignored by HMRC.
Mel Stride
All the measures relating to the motions we are debating will be out there and will be clear. They will be brought forward along with other measures later in this Session.
Moving back to the Bill at hand, the motions on the Order Paper give little mystery as to the provisions that we will be introducing. I look forward to debating them in more detail as the Bill progresses, and I will say more about the overall aims of the Bill on Second Reading. For the moment, I will provide a brief outline of some of the main measures.
The Bill that the motions provide the basis for will make significant changes to the corporation tax regime for large companies. Building on work that this Government have championed internationally and the recommendations of the OECD, the Bill will limit the extent to which big multinational corporations can reduce the tax they pay in the UK through excessive deductions for interest expense. That measure will address a significant area of corporate tax avoidance, and is forecast to raise £5.3 billion over the next five years by ensuring those corporations pay a fair contribution.
The Bill will also change the treatment of losses within corporation tax; it restricts the extent to which past losses can be set against taxable profits, ensuring that companies with profits over £5 million in a year must pay some corporation tax. At the same time, the Bill will provide for allowances recognising donations to grassroots sport and to museum and gallery exhibitions, and for new £1,000 allowances so that those earning small amounts from trading or property will not have to pay tax on this income. The changes to tackle avoidance of corporation tax by multinationals are part of a number of changes that take further steps in tackling tax avoidance and tax evasion.
Rachel Maclean (Redditch) (Con)
Does my right hon. Friend agree that Labour’s plans to raise corporate and personal taxation will damage real incomes and investment in the UK?
Mel Stride
My hon. Friend is relatively new to this House but she makes an important and insightful point, which is that, as we know, we should be under no illusions that under Labour’s plans corporation tax will rise. We have seen it fall from 28% to 19%, and it will continue down to 17%—
Mr Kevan Jones
On a point of order, Madam Deputy Speaker. I thought this debate was about the Government’s proposals. The Minister, following a set-up question from a Back Bencher, is now talking about what proposals Labour might have. Is that in order? Should we not be sticking to the—
Madam Deputy Speaker
The hon. Gentleman must not add more from a sedentary position to his point of order, so I will not take up that point, which in any case I cannot answer. The Minister has barely begun, and I am sure that in his wide-ranging speech he will cover everything he ought to cover and everything the House requires him to cover.
Mel Stride
Thank you, Madam Deputy Speaker. I could not have put that better myself. [Interruption.] And I will get on with it, too. I am not surprised that Labour Members are slightly shy about our discussing their tax plans, because they are not good for our country. Having a plan to raise corporation tax to 26%, with an increase for small companies as well, and to change the tax threshold to bring many, many more people into the higher rate of tax is not a way of incentivising jobs, wealth and economic growth, as the hon. Gentleman well knows.
Our changes to tackle avoidance of corporation tax by multinationals are part of a number of changes that take further steps in tackling tax avoidance and tax evasion. Others covered by these resolutions will introduce a penalty for those who enable tax avoidance, a penalty for transactions connected with VAT fraud and measures to tackle disguised remuneration tax-avoidance schemes.
The Government’s aim to make the tax system fairer is further supported by the Bill’s provisions on the taxation of those with non-domiciled status. A number of changes will be made, and these are forecast to raise £1.6 billion over the next five years. Most importantly, permanent non-dom status for people resident in the UK will be ended, so that they pay tax in the same way as everybody else. That major reform makes the tax system—
Mr Kevan Jones
I wish to make a point about tax avoidance and fraud. When it comes to landfill tax, will that extend to companies or public organisations which know that the price they are paying for the collection of their waste cannot possibly include the disposal rates of landfill tax? Or will it cover those accountants and others who are involved in a landfill tax company and know what is actually going on? Will that be covered by the definition of fraud and avoidance?
Mel Stride
I will ask the relevant Minister in the relevant Department to get back to the hon. Gentleman on that very specific point.
I was discussing a major reform that makes the tax system fairer and supports the public finances, increasing, but not jeopardising, the contribution that non-doms make to tax revenues. Other clauses will legislate for the changes—
Steve McCabe (Birmingham, Selly Oak) (Lab)
Will the Minister explain how long the Government have been working on this major concession and when he anticipates that there will actually be some change that means non-doms experience the same arrangements as ordinary taxpayers in this country?
Mel Stride
The answer to the hon. Gentleman’s question is that that is precisely what this Bill will be achieving. We will be putting an end to permanent non-dom status, so that those who are “deemed domicile” are treated on the same basis for taxation purposes as other residents in our country. Let me gently remind him that his party was in government for 13 years and very little happened then on the issues to which he now professes objection. So we should not be taking too many lessons from Labour on the issue of non-doms.
Charlie Elphicke (Dover) (Con)
Does my right hon. Friend recall, as I do, that for the best part of a decade the Labour party kept saying every year that it would do something about non-doms and then did nothing whatsoever because it was so into the prawn cocktail circuit and pandering to big business, and that Labour only ever took any action when it was humiliated by our previous Chancellor, George Osborne, when he was in opposition? Does my right hon. Friend also agree that this Government have been leading the way consistently on making sure that a fair share of tax is paid by non-doms and others?
Mel Stride
My hon. Friend is entirely right about that. We currently raise £7 billion a year from non-domiciled individuals, which is £1 billion more than was the case a decade ago. The provisions in this Bill will ensure that we raise a further £1.6 billion over the next five years, so this Government are serious about this issue and are acting on it.
Other clauses will legislate for the changes we have announced to the dividend allowance, reducing the differential between taxation of different individuals, and to the money purchase annual allowance for those who have accessed their pensions under the flexibilities that this Government have provided.
Finally, these resolutions provide for the Finance Bill to legislate for the Making Tax Digital programme.
Lady Hermon
I was provoked to my feet by the word “finally”. I am very concerned that a number of the resolutions before us include the words
“including provision having retrospective effect”.
I have waited patiently for the Minister, guided by Madam Deputy Speaker in his extensive contribution on this crucial piece of legislation—we are discussing the Budget and the Finance Bill, for goodness’ sake—to tell us why on earth so many provisions are having retrospective effect.
Mel Stride
The answer to the hon. Lady’s question is that many of these things relate to the fact that this Bill has been, in effect, interrupted; we now have a second Finance Bill because we had a general election some time ago, as a consequence of which not all of the measures that were going through Parliament at that time were proceeded with. The second point I would make to her is that the fact that some measures are retrospective does not mean that they have not been fully consulted on or that draft legislation has not been out there to inform the public and stakeholders.
Lady Hermon
I raise this point because where there is late payment of tax, for whatever reason, be it carelessness or inattention to a particular detail, penalties and fines will be imposed. When we are considering things having retrospective effect, we may well find that such provisions will not comply with our commitments under the European convention on human rights about the retrospective creation of fines and penalties. The Government will not want to hear that, but I just bring it to the Minister’s attention when we talk about the retrospective effect of any provisions in a Bill such as this, which involves fines and penalties.
Mel Stride
I thank the hon. Lady for her further thoughtful point, but I just return to my comments, which are that those who will be affected by the retrospective measures in this Bill will have had an opportunity to be fully apprised of them prior to their coming into force under an Act of Parliament.
In conclusion, the resolutions provide for the Finance Bill to legislate for Making Tax Digital. The Government are committed to creating a tax system fit for the digital age. Businesses increasingly interact with customers, manage their purchasing, organise their payroll and undertake a host of other functions online. It is the future for keeping their accounts and reporting their tax affairs. Moving to a digital system will help us to address the £9 billion annual cost of taxpayer errors. It is right that we act.
Kit Malthouse (North West Hampshire) (Con)
As one of the Conservative Members who was gently trying to persuade the Government to take a more staged approach to Making Tax Digital, may I take this opportunity to thank the Minister for his announcement in July of the changes to the scheme? Those changes have been greeted in particular by the small business community with some relief and gratitude, and I speak as a small business owner myself. The prolonged nature of introducing the full-throated Making Tax Digital programme means that business has time to adapt. Will he confirm that that means the Government have plenty of time to tweak the system for some of the perhaps unforeseen burdens that may still arise?
Mel Stride
I thank my hon. Friend for his kind remarks. By way of mutual appreciation, I thank him for his input around the discussions I held immediately prior to taking the decisions to which he alludes. He is right that we now have the time to ensure that the measures are sufficiently piloted, are robust and are not overly onerous on the businesses and individuals to whom they will apply, and that they work to make businesses more efficient and effective in themselves while reducing the tax gap further and raising much needed revenues.
I have heard the representations from businesses and from members of the House about the speed of the transition to Making Tax Digital. To ensure that businesses are ready, I announced a new timetable for the programme before the summer recess. In the first instance, from April 2019 participation will be required only for businesses that have to register for VAT and they will be required to provide only updates on their VAT liabilities, which they already report quarterly. We will extend mandatory participation further only once the programme has been shown to work well, and at the very earliest in April 2020. As my hon. Friend the Member for North West Hampshire (Kit Malthouse) suggested, I know that will be welcomed by Members from all parts of the House who have raised such concerns with me.
As I have outlined, the purpose of the resolutions we have tabled is to enable the introduction of a Finance Bill that will legislate for a number of tax changes announced before the general election. The changes the Bill will make are important. They will make a major contribution to the public finances, tackle tax avoidance and evasion and address areas of unfairness in the tax system. We will doubtless debate the principles of the changes fully on Second Reading and consider them in detail in Committee. Today is an opportunity to begin that process and take forward again the tax legislation curtailed at the end of the last Parliament. I commend the resolutions to the House.
Mel Stride
The debate has been engaging and I thank all Members for their contributions. I will touch briefly on the points that have been raised. As I said in my opening speech, there will of course be further opportunities to debate the principles behind the Finance Bill, not least on Second Reading next week.
The measures to be included in the Finance Bill have been consulted upon widely and scrutinised by the public, key stakeholders, tax professionals and, to some extent, the House. The shadow Chief Secretary, the hon. Member for Bootle (Peter Dowd), said that the Bill was being rushed through. I remind him that we have already debated the Second Reading of a Bill which, substantially, contained nearly all the measures that we will debate in the weeks and months ahead.
The Bill will raise some £16 billion over the next five years, but, far from what the hon. Members for Bootle and for Oxford East (Anneliese Dodds) would have us believe, much of that revenue will be raised from large multinational corporations—and, yes, from non-domiciled individuals. On the issue of the taxation of non-domiciled individuals, let me make it clear that we are abolishing permanent non-dom status. It is this Government who have presented proposals, consulted on them widely, and delivered a fair and balanced package. During the debate I heard Opposition Members criticise offshore trusts. Let me be clear again: if funds are taken out of trusts, they will be taxed in the normal way. In recent years, we have reached important international agreements on the automatic exchange of information to ensure that we can effectively monitor those movements.
Overall, we have developed a balanced policy that promotes fairness in the tax system and, importantly, protects vital revenues for our public services. Those non-doms bring in about £9 billion per year in tax revenues, which is up from £8 billion about a decade ago. We expect, in addition to those revenues, to raise a further £1.5 billion over the next five years as a direct result of this Finance Bill.
The Bill introduces important changes in corporation tax, implementing rules agreed internationally and recommended by the OECD. They will ensure that big companies pay corporation tax when they make large profits, no matter what their past losses might have been, and will prevent them from using artificial borrowing to avoid the tax that they owe. I remind the House that those matters have been the subject over some years of intense international work—international work that the Government have been instrumental in driving forward. These changes represent real results, which Labour Members never seemed to get around to when they were in office.
The hon. Member for Bootle also criticised measures relating to termination payments. The £30,000 tax-free allowance will still be available and statutory redundancy will be tax-free. However, we must face the fact that, while it may be a particularly easy argument to prosecute that we are somehow beating up those who are losing their jobs, the reality is that that situation is being used as a vehicle for tax avoidance, and when the Government find tax avoidance, we will clamp down on it.
Let me now deal with the points raised by the hon. Member for Bootle about the Government’s record on tax avoidance and evasion, and the work of HMRC. He suggested that somehow HMRC was not doing enough. I remind the House that in 2016-17, HMRC brought in £574.9 billion in tax revenue, and that was the seventh record year in a row. It generated £29.9 billion of compliance revenue in one year, and in 2016-17 it prosecuted 886 criminals for tax avoidance and evasion, more than double the number six years ago. The hon. Member for Oxford East criticised our commitments to HMRC. Since 2010 we have invested £1.8 billion in HMRC for the purpose of clamping down on tax avoidance and evasion, and we have brought in £160 billion by clamping down on avoidance since that date.
Members have rightly made much of the need to narrow the tax gap. The Government are committed to that as well, but many have failed to recognise that the gap now stands at 6.5%. That is one of the lowest figures in the world, and it is lower than the figure that applied every year in which Labour was in office. We can pride ourselves on having one of the most robust and transparent tax gap estimates in the world, with the methodology scrutinised by the International Monetary Fund and the National Audit Office.
The hon. Member for Bootle suggested that Labour would do more than any other party to tackle the tax gap, but let us judge Labour on its record. The latest tax gap is 6.5%. In 2004-05, after two terms of a Labour Government, it was around 9%. That is not a record to shout about. The tax gap for corporation tax in particular is 7.6%, but a decade earlier, under Labour, it was around double that figure. For large businesses, the tax gap for corporation tax we that inherited was 11.1%; now it has almost halved to 5.8%. And let us look at the receipts: onshore corporation tax revenues last year hit a record of around £50 billion. In 2004-05, after two terms of a Labour Government, they were almost £20 billion lower.
I want now to turn to some of the other contributions to the debate. My right hon. Friend the Member for Loughborough (Nicky Morgan) made some very pertinent points, and I congratulate her on her election to her new position as Chairman of the Treasury Committee—I look forward in due course to appearing before her, with a mixture of excitement and some trepidation, I have to say. I also thank her for her comments about Making Tax Digital. The work of her Committee’s predecessor certainly informed my previous judgment on that matter. She made some important points about the UK being truly open for business. I also subscribe to those points, and the Government are determined to ensure that that remains the case. She made important points on certainty and stability in our tax regime, too, and she will have noted the answer I gave to the hon. Member for North Down (Lady Hermon) in respect of retrospective legislation.
When I was listening to the speech made by the hon. Member for Aberdeen North (Kirsty Blackman), I thought for a moment that I was in a dream where she was not a member of the SNP, but a Conservative—a fellow traveller. She is always welcome on this side of the House. She welcomed the measures for tax deduction of employee legal costs and for electric vehicle charging point tax reductions. She also welcomed our measures on petroleum revenue tax and to clamp down on enablers of aggressive tax avoidance, as well as the changes we have made to the MTD regime. The hon. Lady raised some points about VAT refunds for museums, and I will be happy to look into them and come back to her in due course.
My hon. Friend the Member for Ochil and South Perthshire (Luke Graham) made some important points on MTD. I can say to him that the Government will certainly consult very widely as we go forward with this approach.
As for the hon. Member for North Durham (Mr Jones), who has a flicker of a smirk about his face on the Back Bench there, what can I say? He started his speech by telling us he was going to speak rubbish, and I think it is fair to say that he amply met his objective, not in terms of the content of what he said—he was as eloquent and erudite as always—but in terms of his apparent inability to speak to the matters in question, because of course landfill tax, important though it is, will not form part of the current Bill. He then mentioned APD, for which I was grateful, because that is in the Bill, but I fail to see how I could get puppies in by any possible stretch of the imagination.
The hon. Member for Ilford North (Wes Streeting) gave a thoughtful speech, although I have to say that there were limited areas of agreement between us. I was pleased that he welcomed our changes to MTD. He stressed the importance of the wealthiest paying their share of tax. He is right, but he will know that the top 1% of earners in this country pay 27% of all tax, that the most wealthy 3,000 pay as much tax as the poorest 9 million, and that income inequality is at its lowest level for 30 years.
Mel Stride
I will not on this occasion, as I have very little time—I apologise.
The hon. Gentleman mentioned non-dom trusts. I have made it clear that funds remitted out of non-dom trusts will be taxable. He also, however, flirted with the idea of politicians getting directly involved in the tax affairs of individuals, which would be a dangerous road to go down. I do not want politicians interfering in people’s tax affairs; I want to protect tax confidentiality. He also talked about the resourcing of HMRC which, as I have said, has received £1.8 billion since 2010, and is bringing in record levels by clamping down on tax avoidance.
The hon. Member for High Peak (Ruth George) mentioned termination payments and said that she hoped we would not be reducing the £30,000 allowance. That is certainly not our intention at present, and if there were any move to change the figure, it would have to be the subject of a statutory instrument subject to the affirmative procedure, meaning that it would come back to the House for approval or otherwise.
The hon. Member for Enfield, Southgate (Bambos Charalambous) made the point that we need to raise money to pay for public services—he is absolutely right. That is why we are clamping down on tax avoidance and pursuing our policies. The hon. Member for Birmingham, Selly Oak (Steve McCabe) also mentioned termination payments, and I refer him to my earlier remarks about that. He talked about business investment relief, which will be available and made more flexible for those who have non-domiciled status. That should not be criticised. This is money coming into our country to invest in businesses, in British jobs, in wealth creation and in creating the taxes that, in turn, will fund the public services on which we all depend.
While we consider the action being taken in this Finance Bill, let us not forget what we inherited from the Labour party and the important actions that we have taken. Foreigners did not pay capital gains tax when they sold houses in the UK, but we stopped that in April 2015. Private equity managers could pay minimal rates of tax on their performance fees, but we stopped that in the summer Budget of 2015. Thousands of the richest homeowners did not pay stamp duty, but we stopped that in 2013. On corporation tax, banks did not pay tax on all their profits, but we stopped that in December 2011. Investment companies could cut their tax bill by flipping the currency that their accounts were in; we stopped that in 2011. On income and inheritance tax, people avoided paying tax by calling the salary from their own company a loan; we stopped that in 2013. Non-doms could avoid paying UK tax by splitting their employment contracts; we stopped that in 2014. Hedge fund managers could use partnerships to avoid paying tax on their income; we stopped that in 2014. People could claim inheritance tax relief twice on some assets; we stopped that in 2013. On the economy more generally, and perhaps most importantly of all, the Labour party wanted us to go on bankrupting Britain, but we stopped that in 2010.
That record on tax avoidance and fairness shows that this Government have delivered, and we will continue to deliver with this Bill. Opposition Members have accused the Government of using smoke and mirrors, but the record shows that it is they who talk tough but take little action. The upcoming Finance Bill continues our work to deliver a fair and competitive tax system. It implements measures that will raise £16 billion for our public services. It clamps down on avoidance and evasion, and addresses the challenges that the Labour party chose to duck. I commend the motions to the House.
Question put and agreed to.
Resolved,
That—
(a) provision (including provision having retrospective effect) may be made amending Part 3 of the Income Tax (Earnings and Pensions) Act 2003, and
(b) (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision may be made taking effect in a future year amending Chapter 6 of that Part (taxable benefits: cars etc).
The Deputy Speaker put forthwith the Questions necessary to dispose of the remaining Ways and Means motions (Standing Order No. 51(3)).
2. Pensions advice
Resolved,
That provision (including provision having retrospective effect) may be made for an employment-related exemption from income tax in connection with pensions-related advice or information.
3. Income tax treatment of certain legal expenses etc
Resolved,
That provision (including provision having retrospective effect) may be made about—
(a) the deductions from earnings that are allowed under section 346 of the Income Tax (Earnings and Pensions) Act 2003,
(b) the exceptions from the application of Chapter 3 of Part 6 of that Act provided for in sections 409 and 410 of that Act, and
(c) the payments that are deductible payments for the purposes of Part 8 of that Act by virtue of section 558 of that Act.
4. Termination payments etc
Question put,
That (notwithstanding anything to the contrary in the practice of the House relating to the matters that may be included in Finance Bills) provision may be made taking effect in a future year about the tax treatment of payments or benefits received in connection with the termination of an employment or a change in the duties in, or earnings from, an employment.
Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Finance Bill
Mel Stride ExcerptsWednesday 11th October 2017
(6 years, 6 months ago)
Commons ChamberRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Committee of the whole House Amendments as at 11 October 2017 - (11 Oct 2017)
Peter Dowd
The only people who are scaremongering are this Government who are threatening to tax people’s redundancy payments—that is the scaremongering in this House.
Perhaps the Minister would like to withdraw this proposal. I will happily give way to him if he wants to reconsider his decision—he might have discussed it with the Prime Minister. In some instances, a job loss can be even worse if individuals lose their employment because of base and nasty discrimination, whether because of their age, gender, race, religion or sexuality.
The amendments speak directly to the question of how much money an employee who has lost their job should receive in tax-free redundancy pay, and how much an employee who is discriminated against should receive in tax-free compensation from an employment tribunal.
The Financial Secretary to the Treasury (Mel Stride)
Is the hon. Gentleman not aware that when a tribunal has granted an award on the grounds of discrimination, that is automatically exempt from tax, despite what this clause may or may not be doing?
Peter Dowd
That will be dealt with later, but it is not the case for many multinationals. The papers are strewn with examples of the Government’s sweetheart deals with multinationals, so the hon. Lady cannot tell me that that is the case.
Mel Stride
I thank the hon. Gentleman for generously giving way. The latest figure for the tax gap is 6.5%, which he will know is lower than that in any year under the last Labour Government. It was over 8% in the financial year 2005. He will also know that our record on avoidance and evasion is that we have raised £160 billion since 2010. What amount did his party achieve by clamping down on avoidance, evasion and non-compliance when it was in office?
Mel Stride
What a pleasure it is to serve under your chairmanship, Dame Rosie, and to respond to the first of what I am sure will be a series of lively and exciting debates on the Finance Bill. Before I respond to some of the more detailed points raised, as well as the amendments, let me remind the Committee of the overall purpose of clause 5.
The clause is designed to tighten and clarify the tax treatment of termination payments to make the rules fairer and to prevent manipulation. Our tax treatment of termination payments is one of the most generous in the world. That is something of which we can be proud and something that this clause does not change, but the current rules can also be unclear and complicated, as many hon. Members have suggested. Some payments are taxed as earnings, others are taxed only above £30,000 and others are completely exempt from income tax and national insurance contributions. Most employers use the rules as intended, but the complexity in the system leaves it open to manipulation. Indeed, a small minority of individuals and employers, particularly those with the most generous pay-offs—this is an important point—have thought to manipulate the rules by categorising large pay-offs as termination payments, rather than earnings.
Kelvin Hopkins
My hon. Friend the Member for Lewisham West and Penge (Ellie Reeves) made the point that the tax-free amount has not been indexed for many years. Had it been indexed properly, it would now be £71,000, not £30,000. Would not that be a way of avoiding any of these difficulties, as the lump sum would be so much bigger?
Mel Stride
This is one of the most generous thresholds in the world. In fact, there is no threshold at all in Germany and the United States of America, because none of these payments is treated as being tax-exempt.
Such categorisation means that payments qualify for the £30,000 tax exemption and an unlimited employer national insurance contributions exemption. The situation is clearly unfair for the vast majority of employees, who are unable to manipulate their payments in this way. Clause 5 makes changes to prevent such manipulation in the future, while still ensuring that the vast majority pay no income tax on their payment. The first £30,000 of all termination payments will remain exempt from tax.
The hon. Member for Bootle (Peter Dowd) made a general point about the Conservative party’s treatment of workers, and I make no apologies for the way this Government have stood up for workers up and down our country. We are committed to enhancing workers’ rights. We introduced the national living wage, and we doubled fines for firms that break the rules in that respect. We appointed the first director of labour market enforcement, and we are committed, as we have constantly said, and as our Prime Minister has made clear, to protecting workers’ rights as we leave the European Union.
Nearly 85% of payments are below £30,000, so retaining the threshold will ensure that the vast majority of people going through the difficult experience of being made redundant will still pay no tax whatever. That means that the UK continues to have one of the most generous tax exemptions for termination payments, and I have mentioned Germany and the United States having no tax exemption at all.
Clause 5 tightens the tax rules for termination payments to prevent manipulation—a point made by my right hon. Friend the Member for Forest of Dean (Mr Harper) in an excellent contribution. He highlighted our overall record on bringing in taxes where attempts are made to avoid tax, and I referred to the £160 billion raised since 2010. He referred to our being at the forefront of the OECD base erosion and profit shifting project, and we have also brought in the diverted profits tax to clamp down on the kind of behaviour he referred to.
Let us not lose sight of the purpose of bringing in tax, which is to raise public finances so that we can employ doctors, nurses, paramedics, police and soldiers and pay for all those great public services that all of us hold so dear. That is why I am so proud of this Government’s record on clamping down on tax avoidance more generally.
The Office of Tax Simplification has said:
“the well-advised can often end up better off than the unadvised, as they are more able to structure their employment contract (or, indeed, their termination payment) to achieve the better tax treatment.”
The hon. Member for Bootle said in this House only last month:
“If there is genuine evidence of the abuse of payments in lieu of notice, that needs to be acted on”—[Official Report, 6 September 2017; Vol. 628, c. 206.]
It is fair to say that, while the hon. Gentleman is a very amiable fellow, he is not right about everything, but on this point he is actually very right. This clause is to deal with the very abuse about which he has previously expressed concern. We will prevent employers from categorising large pay-offs as tax-free payments, rather than earnings. Instead, employers will now be required to tax what the employee would have earned if they had worked their notice period in full. All payments in lieu of notice will now also be taxable as earnings to equalise the treatment of those with and without a contractual right to such a payment.
Finally, clause 5 clarifies that there is a total tax exemption for payments on account of injury or disability of an employee. In 2014, the Office of Tax Simplification raised the possibility of removing this exemption. It recognised that that would be a draconian approach, but it noted that interpretation is
“often a problem area for employers and their advisers.”
However, we have not pursued that approach. Instead, we have provided certainty by confirming the current position established by case law in statute. The total exemption relates to termination payments provided on account of a physical or psychiatric injury that prevents the employee from carrying on the duties of the employment, which hopefully addresses the point raised by the hon. Member for Aberdeen North (Kirsty Blackman). Therefore, employees with evidence of an identified medical condition will pay no tax on related termination payments.
Some Members raised concerns in previous debates that the Government would be taxing compensation paid to employees where it is proven that they have been discriminated against. Once again, I am happy to reassure them. All compensation for awards for proven discrimination during work will continue to remain completely exempt from tax. There was an interesting interaction between my hon. Friend the Member for Reddich (Rachel Maclean) and the hon. Member for Lewisham West and Penge (Ellie Reeves) on this point. We accept that, where there is a tribunal award in respect of injury to feelings, it is treated in exactly the same way as when an employer accepts that discrimination has actually occurred. All the clause seeks is to confirm the long-standing position that genuine compensation payments are tax exempt, while ensuring there is no loophole that can be used to reduce the tax that is owed.
Let me now turn to the amendments. As the hon. Member for Bootle set out, amendment 1 would remove the power to amend the meaning of basic pay for the purposes of calculating post-employment notice pay by regulation. When we consulted on this measure, we listened to responses that asked us to make the basic pay definition more simple. It now excludes overtime, bonuses, commission and tips. However, we introduced this power to allow the Government to act quickly and to remain flexible if there is manipulation in the future. Any amendment to the meaning of basic pay would be subject to a statutory instrument under the affirmative procedure, so the House would have to expressly approve any change to the meaning. I therefore urge the House to resist the amendment.
Amendment 2 and consequential amendment 3, also tabled by the Labour party, would remove the power to reduce the £30,000 threshold by regulation. Some Members have raised concerns during the debate that the Government intend to reduce this tax-free amount. We have no intention to do so. If we were to do so, we would, as my hon. Friend the Member for Braintree (James Cleverly) pointed out in his excellent speech, be required to do so by an affirmative statutory instrument. However, I repeat that we have no intention of reducing this tax-free amount. I therefore urge the House to resist the amendment.
Amendment 4 would include injured feelings within the definition of injury. As I outlined earlier, clause 5 confirms that termination payments provided on account of physical or psychiatric injury will be completely tax exempt—an important point raised by the hon. Member for Aberdeen North. However, the clause also confirms the established position that injury to feelings is not covered by this definition. The reason for this restriction is clear: without it, there would be a large loophole—as identified by my hon. Friend the Member for Braintree and my right hon. Friend the Member for Forest of Dean—allowing payments to be routinely reclassified on account of injury to feelings, and without medical evidence, simply in order for people to pay no tax. These things are hard to prove or disprove, and would be difficult for HMRC to police. However, it remains the case that payments on account of an injury to feelings, like any normal termination payment, will qualify for the £30,000 tax exemption. I therefore likewise urge the House to resist the amendment.
Kirsty Blackman
The Minister is concerned that some people might be exploiting a loophole, but as a result he has decided to disadvantage everybody who is subject to termination as a result of injury to feelings, rather than giving them the benefit of the doubt, which seems pretty unfair to me.
Mel Stride
The problem is that one cannot escape the possibility that the employer and the employee, who could both gain from reduced tax, will work together to suggest that there has been an injury to feelings, even when in fact there has not been. How does one prove whether or not there has been an injury to feelings? That is why there is a loophole.
Amendment 12, tabled by the hon. Member for Aberdeen North, would require a review of how these changes will affect low-income workers. That is unnecessary because only 85% of the payments are below £30,000. As I have explained, the provisions do not affect awards for discrimination at work, for example. We have also maintained the £30,000 income tax exemption. We have considered the impact on low-income workers throughout, and we will continue to do so.
In conclusion, the Government recognise that losing a job is a challenging time, but we must remain vigilant to opportunities for the tax rules to be manipulated. That is why clause 5 sets out a fair and proportionate set of changes that will continue to protect the vast majority of employees. The first £30,000 of a termination payment will remain tax-free, as will the whole of the compensation payment for discrimination during employment. However, where there were opportunities for manipulation, the loopholes must be closed, and they now will be. I therefore urge hon. Members to reject the amendments and agree to clause 5.
Peter Dowd
The Government seem to have taken a scattergun rather than forensic approach to this matter, affecting everyone regardless of the circumstances. Time after time they go for easy targets. If they have no intention of revising thresholds downwards, what is the point? Why are they wasting the Committee’s time? The key point is whether people who have been made redundant should have further worries about their financial future vis-à-vis redundancy, and that sets a hare running, whether the Government like it or not.
Mel Stride
Clause 15 expands the scope of the business investment relief scheme because it supports economic growth and investment by encouraging foreign individuals to invest in UK businesses. Business investment relief was introduced in April 2012 and is aimed at individuals who are taxed on the remittance basis. As Members will be aware, a remittance basis taxpayer is subject to UK tax on their overseas income or gains only if they bring them to the UK. That can discourage them from bringing their overseas money into the country, even when doing so would benefit the UK economy by investing in UK business. The business investment relief scheme seeks to address this by allowing those who are taxed on the remittance basis to bring their income and gains to the UK without incurring a tax charge, provided those funds are invested in a qualifying UK business. In other words, the scheme enables overseas funds that would otherwise remain outside the UK to be invested in UK businesses.
The independent Office for Budget Responsibility has confirmed in the costings that, without this scheme, this money would simply be left offshore, and so the UK would not benefit from it. Any UK gains and income arising from the investment will be fully taxable in the UK. It is worth noting that elsewhere in the Finance Bill—contrary to the views expressed by the hon. Member for Enfield, Southgate (Bambos Charalambous)—the Government have introduced the most fundamental change to non-dom taxation in history, ending permanent non-dom status. That is more than the Labour party managed the last time it was in government. This clause supports these wider reforms by ensuring that the UK remains attractive to those people who want to live here and use their foreign income and gains to invest in Britain.
Clause 15 expands the types of businesses in which investment can be made. The new rules widen the relief so that it can be used to purchase existing shares, not just new shares. The changes also lengthen the time before a new start-up company has to become a trading business from two to five years. That will enable investment in large infrastructure projects, which can take a long time to complete. Finally, clause 15 updates the anti-avoidance rules to ensure that genuine investment is not discouraged.
Let me turn to the amendment and new clause tabled by the Scottish National party. As the hon. Member for Aberdeen North (Kirsty Blackman) outlined, amendment 13 and new clause 3 would delay the commencement of these provisions until the Government had laid before the House a review of the efficacy of the conditions for BIR. I can be clear that the Government are confident of the effectiveness of this scheme. Investment using BIR increased from £197 million in 2012-13 to £837 million in 2014-15. In only three years, that has meant total investments of more than £1.6 billion in our economy since the scheme was first introduced.
Kirsty Blackman
I would very much appreciate it if the Treasury would commit to publishing that information and details of the sectors in which the money has been invested. If it does that, we will all be much happier, across the House.
Mel Stride
I thank the hon. Lady for her intervention, and I will come on to deal with the information that the Treasury is already publishing, which is very comprehensive.
As I was saying, that includes investment in the hospitality and energy sectors, and in many different types of businesses, including small and medium-sized ones. It includes investment in manufacturing and pharmaceutical science businesses in the midlands and north of England, and a £3 million investment in aerospace businesses in the north-west of England. As I outlined earlier, the independent OBR has certified that these changes do not have any cost to the Exchequer. In other words, this is money coming to this country which would not otherwise have done so. I am sure that these are investments in our country that the whole House wants to see—investment in British businesses right across the country. I therefore urge Members to reject new clause 3 and amendment 13.
Let me also address new clause 1, tabled by the official Opposition. In a similar vein to new clause 3, it would require the Government to review the conditions under which BIR is available, including estimates of the value of the relief and an analysis of the characteristics of those using it. Such a review is wholly unnecessary, as Her Majesty’s Revenue and Customs publishes much of this information already. As my hon. Friend the Member for Wealden (Ms Ghani) pointed out, in August HMRC published official statistics on non-domiciled taxpayers in the UK, which includes a commentary document and tables. This publication contains statistics on the number of individuals who are non-domiciled, and on the total income tax, capital gains tax and national insurance contributions of the non-domiciled population. Moreover, it includes information on the current number of investments and the amount invested in the UK by non-domiciled individuals using business investment relief.
To provide the report, HMRC uses information provided by taxpayers through the self-assessment process. It is impossible to determine from an individual’s tax return whether or not they have characteristics that are protected under the Equality Act. HMRC does not have the capacity or the resource to acquire such information, so it would be unduly burdensome to place on HMRC a statutory obligation that it would be incapable of meeting. For those reasons, I urge Members to reject the new clause.
Mel Stride
As with my contributions earlier this afternoon, I will set out why the Government have included this measure in the Bill, before turning to new clause 2.
Clause 25 and schedule 7 make amendments to the Northern Ireland corporation tax regime. The Government are committed to supporting growth across all parts of the UK. Creating a stronger Northern Ireland economy will benefit the entire United Kingdom.
Northern Ireland faces a unique set of circumstances and challenges. That was why, in 2015, this House legislated to devolve corporation tax rate-setting powers to the Northern Ireland Assembly, subject to commencement regulations. The introduction of the regime received nearly unanimous support from Northern Ireland’s political leaders and business community. The rate-setting powers given to the Northern Ireland Assembly are another tool to help to rebalance the Northern Ireland economy by revitalising private enterprise and attracting new investment.
This clause and schedule amend the regime to allow all small companies with trading activity in Northern Ireland the opportunity to benefit from future changes in the Northern Ireland corporation tax rate. They also make changes to ensure that the regime is robust against abuse and ready for commencement once a restored Northern Ireland Executive demonstrate that their finances are on a sustainable footing.
It may help the House if I set out how the devolved rate regime has been designed to focus on incentivising genuine investment in Northern Ireland. The regime was set out in the Corporation Tax (Northern Ireland) Act 2015.
Jonathan Edwards (Carmarthen East and Dinefwr) (PC)
The Minister is making a powerful case as to why the devolution of corporation tax is a good thing for the Northern Ireland economy, but should the same case not apply to Wales and Scotland, because it creates an imbalance if one devolved Government have a set of fiscal powers that the other devolved Governments do not have?
Mel Stride
I thank the hon. Gentleman for his intervention, but there is, of course, one key distinction between Wales and Northern Ireland, and that is that Northern Ireland has a land border with the Republic of Ireland, which has a corporation tax rate of just 12.5%. It is particularly important in that context that we make these provisions.
Jonathan Edwards
The Minister makes a fair point about the land border, but large parts of Wales, including my part of Wales—the west of Wales—have a sea border with the Republic of Ireland.
Mel Stride
I do not think it is within the scope of this particular clause to start getting too much into the devolutionary settlement for Wales.
The regime was set out in the 2015 Act, which, subject to commencement regulations, will devolve corporation tax rate-setting powers to the Northern Ireland Assembly. The Government have committed to working with an incoming Northern Ireland Executive on options for commencement, including on timing and adjustments to the Northern Ireland Executive block grant to reflect tax revenues forgone by the UK Government.
There are two key features to the regime’s design. First, the devolved rate will apply only to a company’s trading profits; investment activities, which are highly mobile, are not in scope. Secondly, the Act requires large companies with a substantial trading presence in Northern Ireland to calculate their Northern Ireland profits separately from the rest of their profits. That calculation must follow internationally accepted principles for attributing cross-border profits. Broadly, that means that companies with profits generated in different tax jurisdictions must calculate their branch profits as though each branch were an independent entity. These profit attribution rules are important to make sure the regime works as intended.
An SME with 75% or more of employment time and costs in Northern Ireland would have all its trading profit taxed at the Northern Ireland corporation tax rate. An SME below the 75% threshold would have all its trading profits, including those generated in Northern Ireland, taxed at the UK corporation tax rate.
Ian Paisley (North Antrim) (DUP)
Does the Minister accept that the introduction of this will allow for the rebalancing of the Northern Ireland economy in a very beneficial way? It will allow us to generate more investment and, potentially, more private sector jobs. Of course, this corporation tax will not apply to the financial service sector, so it will not wrongly attract businesses away to Northern Ireland.
Mel Stride
My hon. Friend makes the very powerful point that this is not about brass-plating and shifting profits; it is about generating growth in a very important part of the United Kingdom.
Since we legislated in 2015, we have heard that some small businesses want the option to benefit from the Northern Ireland corporation tax rate on the proportion of their profits generated by trading activity in Northern Ireland. The changes made by clause 25 will give all SMEs trading in Northern Ireland the potential to benefit from the devolved rate, should they choose to do so. That will be done without watering down the rules, and it will ensure that the regime is focused on incentivising genuine economic activity in Northern Ireland. Like large companies, those SMEs that opt to take advantage of this measure will be required to calculate their Northern Ireland profits according to well-established principles. These changes deliver a fair outcome for small companies.
Let me be clear that under these rules a company’s trading profits will be taxed at the Northern Ireland rate only if the company has a substantial physical presence in Northern Ireland and if that is where the economic activity that generates the profit takes place.
New clause 2 would require HMRC to conduct a review of the impact of the changes in schedule 7 on the corporation tax system, the location of companies and the levels of employment across Northern Ireland and Great Britain. A mandated formal review is not an appropriate response to a regime that has been carefully designed to be robust in relation to avoidance and abuse, and one that, as I have said, builds on tried and tested rules when doing so. As with all policies, the Government will monitor the regime closely once it is commenced to ensure that it operates as intended. I urge the Opposition not to press the new clause.
Ian Paisley
Does the Minister accept that those who espouse the peace process also want to see an economic dividend post that process? Therefore, why would anyone want to vote against something that allows that economic dividend, building upon the peace in Northern Ireland?
Mel Stride
My hon. Friend makes a powerful point. This is about strengthening Northern Ireland’s economy, society and infrastructure, to the end that we all seek, which is a stronger and more united Northern Ireland.
In conclusion, these provisions include changes that will ensure that the regime is robust against abuse, in order to maintain the regime’s focus on encouraging genuine additional economic activity in Northern Ireland.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I thank the Financial Secretary for introducing this group. This is an important debate, not only for the future of Northern Ireland, but for this country’s overall approach to taxation and devolution.
We know—we have discussed it frequently throughout this process—that our country faces a substantial tax gap. The official estimate of the UK’s tax gap is at least £36 billion, up from £33 billion in 2010, but that is at best a conservative estimate, given that the Government’s definition of the tax gap excludes convoluted corporate structures, which we know are used by multinationals to minimise their tax liabilities. The view that the tax gap is underestimated is shared by the Institute for Fiscal Studies and the Public Accounts Committee. I think that we all agree that that £36 billion, and possibly more, is money that should be used to fund our public services, and that everybody should pay their fair share.
Corporation tax is an important part of the UK’s tax revenue. In 2016-17, HMRC collected £56 billion in corporation tax receipts. Although it is important that we keep the rate competitive, particularly in the light of the UK’s exit from the European Union, it is worth noting that we face a law of diminishing returns in this regard. At 19%, the UK’s corporation tax rate is already one of the lowest in Europe. We should be confident that we do not need to plunge the rate to rock bottom in order to encourage businesses to invest and domicile here. The UK plays host to a wealth of resources that enable it to be globally competitive, including our legal system, our language, our time zone, our infrastructure, our regulatory bodies and, most of all, our people.
It is equally important that Northern Ireland is equipped with the tools to compete in that international landscape, as has been brought to the fore recently with the punitive tariffs aimed at Bombardier in the United States. As the Financial Secretary has explained, the corporation tax rate has already been devolved to the Northern Ireland Assembly, through the Corporation Tax (Northern Ireland) Act 2015. Now that that legislation has been decided, it is for Northern Ireland’s politicians to work together and use those powers to see where the line lies between a lower tax rate and the broader appeal of Northern Ireland as a business destination. At present, the decision has been that 12.5% best achieves those ends. It is not my intention to revisit those arguments today, and nor would it be appropriate to do so, given the reasons already outlined.
What is relevant, and the reason Labour has proposed new clause 2, is the relationship between that rate and the rest of the UK. The gap between 12.5% and 19% represents a significant potential for arbitrage between Northern Ireland and the rest of the UK. Some businesses might base their decisions on where to domicile purely with regard to taxation, and that is a risk that we accept—indeed, we already compete with the rest of Europe on that basis. Our concern is that the Government are introducing measures that could be exploited by companies that will seek to abuse the proximity between Northern Ireland and the UK simply to divert profits and benefit from a lower tax regime, which would benefit neither the UK nor Northern Ireland.
Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Finance Bill (First sitting)
Mel Stride ExcerptsTuesday 17th October 2017
(6 years, 6 months ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 October 2017 - (17 Oct 2017)
The Chair
Copies of any written evidence that the Committee receives will be available to Committee members.
Clause 1
Taxable benefits: time limit for making good
Question proposed, That the clause stand part of the Bill.
The Financial Secretary to the Treasury (Mel Stride)
May I say at the outset what a pleasure it is to serve under your chairmanship, Mr Howarth? I look forward to serving under the chairmanship of Mr Walker in due course, and to having a constructive and positive engagement with all Committee members over the next couple of weeks.
Clause 1 makes changes to ensure that there is a clear and consistent date for making good on non-payrolled benefits in kind. Those changes will provide greater clarity and help employers and employees to understand their obligations.
As the Committee will be aware, a benefit in kind is a form of non-cash employee remuneration. The cash equivalent of a benefit in kind is subject to tax and employer national insurance contributions. Making good is where an employee makes a payment in return for a benefit in kind that they receive. A making good payment has the effect of reducing the taxable value of a benefit. For example, a television manufacturer might provide an employee with a television with a taxable value of £1,000; if the employee makes good by repaying the employer £1,000, the taxable value is reduced to nil.
There is currently a range of dates by which employees need to make good on benefits in kind, and for some no fixed date is prescribed in legislation. Employers, large accountancy firms and representative bodies have told us that that often causes confusion and have asked for greater clarity about the deadline for making good. Clause 1 will set the date for making good for non-payrolled benefits in kind as 6 July following the end of the tax year in which the benefit in kind is provided. That is the date by which employers have to notify Her Majesty’s Revenue and Customs of any taxable benefits in kind on their P11D form. For that reason, it is also the date by which many employees already make good in practice. This approach has been greatly welcomed by employers.
The change will take effect for benefits in kind that give rise to a tax liability for the 2017-18 tax year and all subsequent tax years. This small but sensible change will bring greater clarity for businesses.
Question put and agreed to.
Clause 1 accordingly ordered to stand part of the Bill.
Clause 2
Taxable benefits: ultra-low emission vehicles
Anneliese Dodds (Oxford East) (Lab/Co-op)
I beg to move amendment 13, in clause 2, page 5, line 7, at end insert—
‘(5A) After section 170 (Orders etc relating to this Chapter), insert—
“170A Review of changes to appropriate percentages etc for cars
(1) Prior to 31 March 2018, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the forecast effects of the amendments made by subsections (1) to (4) of section 2 of the Finance (No. 2) Act 2017.
(2) The review shall consider in particular the effects on—
(a) the use of zero and ultra-low emission cars as company cars, and
(b) air quality in towns and cities
in each year from 2020-21 to 2030-31.
(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 changes to be made by Clause 2 in advance of their implementation.
Anneliese Dodds
First, I apologise to colleagues —I am full of the cold, and I had a nose bleed this morning given the excitement of the topics that we would be discussing, but I hope that I will be able to struggle through.
We tabled amendment 13 because we believe that it would be sensible for HMRC to undertake a review of the changes to be made by clause 2 in advance of their implementation.
Mel Stride
I welcome the hon. Lady to her position. I am sorry about her cold, and about the excitement that caused her nose bleed. I assure her that there will be no further nose bleeds, because there will probably not be much excitement as the Committee continues, but that is where we are.
Before I respond to what the hon. Lady said about amendment 13, let me remind the Committee about what the clause seeks to achieve. Clause 2 changes the taxation of company cars to support the uptake of the cleanest zero and ultra-low emission cars. As the Committee will be aware, the taxation of company cars is linked to carbon dioxide emissions to promote the purchase of environmentally friendly vehicles. The appropriate percentages for company car tax increase each year in order to ensure that there is always an incentive for company car drivers to choose the most environmentally friendly vehicles.
By 2020-21 the current ultra-low emission vehicle bands in the company car tax regime will no longer support the uptake of the cleanest cars using the latest technology. The changes being made by clause 2 will address that by updating the current two ultra-low emission vehicle bands. From April 2020, the graduated table of company car tax bands will include a differential for cars with emissions of 1 to 50 grams per kilometre based on the zero-emission range of the car. A separate zero-emission band will also be introduced. In addition, the clause will increase the appropriate percentage for conventionally fuelled cars by 1 percentage point in 2020-21, to sharpen the incentive for people to choose ultra-low emission vehicles instead of more heavily polluting ones.
The changes in the clause mean that in 2020-21 a basic rate taxpayer driving a popular battery-powered company car, such as a Nissan Leaf, will be £720 better off compared with 2019-20. That is a saving of £750 per year compared with a basic rate taxpayer choosing an average petrol-powered car such as a Vauxhall Corsa. Legislating in advance will provide certainty and stability for industry and give companies and employees the chance to make informed choices about the future tax implications of their company car.
Amendment 13 proposes that the Chancellor should publish a report reviewing the impact of these changes, focusing on the effects on the use of zero and ultra-low emission vehicles as company cars, as well as air quality in towns and cities in each year from 2020 to 2030-31. I appreciate that the hon Members are trying to ensure that policies are being assessed to ensure they are supporting the uptake of greener vehicles, but a report on our forecasts is not the way to achieve that.
Company car tax rates are set three years in advance, so that companies and employees are able to make informed choices about the future tax implications of their company car. Of course, we have had to take a view of how the market will develop, including for ultra-low emission vehicles, when we set the rates. However, the amendment is asking us to provide a review of the effect of the measure before it has been implemented. It is also not appropriate for the Government to provide commentary on their forecasts, as that could lead to uncertainty that we could make last-minute changes to our proposals. That would go against our policy to announce CCT rates three years in advance for taxpayer certainty.
Hon. Members should also bear in mind that the 2020-21 rates have come out of an extensive consultation with our stakeholders that we carried out in the summer of 2016 into how CCT should be structured. That consultation looked specifically at how to encourage company car drivers to choose the cleanest vehicles. That is what clause 2 seeks to achieve by updating the current two ultra-low emission vehicle bands. Increasing the incentive for people to purchase cleaner cars will help to ensure we meet our legally binding carbon emissions and air quality targets, helping to improve the air quality of our towns and cities and protect the environment for the next generation. Of course, we continue to review the uptake of ultra-low emission vehicles as part of our wider strategy on improving air quality. On that basis I believe that the amendment is unnecessary, and I ask the hon. Lady to withdraw it.
To conclude, the clause strikes the right balance between supporting the purchase and manufacture of ultra-low emission cars, and ensuring that all company car drivers and their employers pay a fair level of tax. I therefore commend the clause to the Committee.
Anneliese Dodds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 2 ordered to stand part of the Bill.
Clause 3
Pensions advice
Kirsty Blackman
I thank the hon. Lady for her intervention, which highlights the issue. It would be useful to hear from the Minister about why £500 has been chosen, given that a £100,000 pension pot is not the biggest of pension pots and some people will have more in their pension pot than that. We need to hear from the Minister the reasons behind choosing that figure. It would also be useful to hear about how this might affect those women caught up in and disadvantaged by the Government’s changes to the state pension age, particularly those who have not been told about these changes.
Mel Stride
I welcome the hon. Member for Bootle and the hon. Member for Aberdeen North to the Committee and the part that they will play in the debates that lie ahead.
Before I respond to some of the detailed points raised, including the amendments, I will set out the purpose of clause 3. As we have heard, the clause introduces a new income tax exemption to the cover the first £500-worth of pensions advice provided to an employee in a tax year. That will increase the affordability and accessibility of financial advice for those saving for retirement through a workplace pension.
The success of the Government’s auto-enrolment policy means that more people than ever are saving into a workplace pension scheme, as the hon. Lady recognised. There has been quite a change to the general territory of pensions. On top of this, the Government’s historic pension flexibility reforms have given people better access to their retirement savings and control over their money, but with more money and more options, individuals may have a greater need for professional financial advice.
The recent financial advice market review conducted by HM Treasury and the Financial Conduct Authority concluded that there is a particular advice gap in relation to pensions. The Government are keen to ensure that financial advice is accessible and affordable to consumers, especially those nearing retirement. We want to encourage employers to provide advice to their employees to help them to make informed choices about what to do with their pension savings.
As I said, the changes made by the clause will introduce a new tax exemption to cover the first £500-worth of advice in a tax year. It will apply to advice provided to an employee on pensions savings, and on the general financial and tax issues relating to pensions. The exemption applies whether the employer pays or reimburses the employee for the cost of that advice.
Amendment 14 would double the tax exemption to cover the first £1,000-worth of pensions advice provided to an employee in a tax year. We believe that £500 is an appropriate amount. As the hon. Member for Bootle pointed out, that more than triples the current exemption. It also balances the cost to the Exchequer with the objective of encouraging more employers to provide access for their employees to affordable advice. Increasing the tax exemption to cover the first £1,000 also risks inflating the market and making advice too expensive for employers and employees. I can report that we are already seeing the emergence of new forms of tailored advice at a more accessible price of about £500.
The hon. Gentleman spoke about consultation. We have not formally consulted on the changes. As he pointed out, the matter was covered by the financial advice market review consultation, which received 268 responses. Respondents supported the introduction of tax measures to help consumers to afford financial advice. A wide range of stakeholders responded, including employers, individuals and financial services firms. The FAMR also conducted regional roundtables and sought the views of an advisory panel of industry and consumer experts. Consultation on the measure has been deep and meaningful.
On the question whether £500 is the correct amount, as I have explained, this is a tripling of the amount hitherto available. In addition, each employer can utilise the £500 exemption, so an employee who works for two companies may be provided advice by each and benefit from two allocations of the exemption. Although advice can be more expensive, the Government expect more affordable advice propositions to be launched as a direct result of the FAMR. For example, in May 2016 the Financial Conduct Authority launched its advice unit, which will provide regulatory support to firms developing cheaper, automated advice propositions.
The hon. Gentleman also raised the important issue of protections against pension fraud. The important point to bear in mind is that this measure covers all formats of pensions advice, as long as the advice is regulated financial advice delivered by an FCA-authorised adviser. I urge the hon. Gentleman to withdraw the amendment.
Kirsty Blackman
The Minister said the effectiveness of the provisions will be kept under review. Will he commit to ensuring that the review is published at some point?
Mel Stride
As I said, the FAMR body will be conducting a review, which is expected to be published in 2019, and the Government will keep those matters under review on an ongoing basis, as we do all measures of taxation, whether impositions or reliefs.
Peter Dowd
It is crucial that we send the message that the Government are serious about helping people with their pension advice. Although the figure has gone up from £150—a fairly small amount in itself—to £500, we believe that still does not send the proper message about seeking sound advice. Given that, and notwithstanding the Minister’s assurances, we will press the amendment increasing the figure to £1,000 to a vote.
Question put, That the amendment be made.
Peter Dowd
My hon. Friend makes an important point. That is why it is important to tease out the issues. People get confused and deeply worried about these matters, so we need clarity.
Our concern is that the measure will, in essence, be used as a tax break for employers, to the detriment of employees. I am not saying that that is the intention, but it is important to get clarity. Given the lack of detail, we believe that a review of the impact of the changes on the coverage of legal expenses is in order. It would focus specifically on the effectiveness of the measure, the value of the relief and, of course, how many employers and employees it brings within its purview. I reaffirm the point: it is important that this area is clarified and that people know the direction of travel, which is why we moved the amendment, to keep tabs on the proposal.
Mel Stride
Before I address Labour’s amendment 16, I will set out the purpose of clause 4.
The clause makes changes to ensure fair and consistent tax treatment for employees who receive legal support from their employer. Currently, employers may provide legal support or a legal indemnity insurance to their employees tax and NICs-free but, as the hon. Member for Bootle rightly points out, that only applies when employees have had allegations made against them in connection with their employment. Construction workers, nurses or surveyors, for example, may have legal indemnity insurance to provide legal advice in case they are accused of negligence. No equivalent tax treatment for relief is available in relation to proceedings in which no allegation has been made against the employee, such as when an employee is asked to give evidence before a public inquiry.
The changes made by the clause will extend the existing provisions to correct that unfairness. The relief will be made available for expenses incurred in employment-related proceedings where no allegation has been made against the employee. In addition, the clause extends a relief for individuals on termination of their employment or for individuals now deceased, so that a deduction is allowable if the relevant costs are met by the employer on behalf of the individual.
The hon. Gentleman asked some specific questions, in particular about the cost to the Exchequer of the measures, which will in fact be negligible. We expect fewer than 1,500 employees in total to require the benefits of the measure.
As we have heard, amendment 16 would require HMRC commissioners to complete a review before 30 June 2019 of the effectiveness of the changes. Such a review would be disproportionate. As I have explained, this is an important but small change to correct an unfairness. As there is no tax to pay, employers do not need to report information about the legal support or legal indemnity insurance provided to their employees. Indeed, it would be burdensome for employers to have to provide such information simply for the purposes of the review sought by the hon. Gentleman. I urge the Committee to resist the amendment.
The Government acknowledge that legal inquiries can be a challenging and unfamiliar time for employees. The clause will make the system fairer by extending the existing relief for all employees who may require legal advice, helping to ensure that they get the support they need. I therefore commend the clause to the Committee.
Peter Dowd
Again, I appreciate the Minister’s explanations and assurances to some extent, but this is one of those areas that is of importance to people. It is very technical, but teasing the issues out is important. A review might be of specific areas, but reviews often bring up other issues and signpost for us where regulations or the law may need to be changed or tightened. For that reason, it is important for us to send the message that this is something that we will review. Notwithstanding the assurances given, I will press the amendment to a vote.
Question put, That the amendment be made.
Mel Stride
Clause 6 makes changes to simplify the PAYE settlement agreements process, by allowing employers to propose PAYE settlement agreements without the need to agree that with an officer of Revenue and Customs beforehand. PAYE settlement agreements, or PSAs, were introduced in the 1990s as an administrative easement for employers and HMRC. They allow employers to settle, in a single payment, the income tax liability on behalf of their employees for certain benefits-in-kind and expenses.
In their 2014 review of employee benefits and expenses, the Office of Tax Simplification highlighted a number of issues with the PSA process. In response, the Government launched a consultation in the summer of 2016 on proposals to simplify the process for arranging, and clarifying the use of, PAYE settlement agreements. In line with the Office of Tax Simplification’s recommendations, the changes being made by clause 6 will simplify the PSA process. Employers will no longer be required to submit a request in advance of their year-end reporting obligations. Instead, they will be able to submit their PSA request at the year end and make ad hoc requests throughout the year. It also removes the need for PAYE settlement agreements to be agreed with an officer of HMRC. In addition, HMRC will develop a digital tool to replace the submission of paper returns. HMRC’s guidance will be strengthened and updated, in order to reduce errors and provide certainty for employers.
The Government are committed to reducing the administrative burden for employers. In line with recommendations made by the OTS, clause 6 will help to simplify the PSA process and provide certainty and stability for employers. I therefore move that this clause stands part of the Bill.
Peter Dowd
Although the Opposition have not tabled an amendment on this clause, Members will be aware that we have wider concerns about the overall intention of the measure and, for example, its relationship to the Government’s wider digital tax strategy. We have been clear that, although we support the gradual digitisation of taxation and the capacity it has to remove the administrative burden from HMRC, the self-employed, small and medium-sized businesses and larger companies that have to submit tax returns, we are concerned about the Government’s rush to introduce this timetable, which in our view is ill thought-out—as we have said many times.
In principle, we agree with the aims of the measure, which appears to allow employers the ability to settle income tax liabilities for certain benefits and expenses in a more efficient and timely manner. I do not think any of us would want to argue with that. However, we are concerned about the removal, without assurances, of the agreement of the officers of HMRC in this process. I am sure that that is mere coincidence, given that the measure is being introduced at a time when the Government have reduced HMRC staffing levels by 17% since 2010. I would like to take it on good faith from the Minister that the removal of the need for agreement with an officer of HMRC has little to do with the falling numbers of staff.
The clause explicitly states that this measure aligns with the principles of HMRC’s wider digital transformation strategy and therefore it seems impossible to discuss the clause without also referring to clauses 60 to 62, which introduce the digital reporting of VAT and income tax. Given that link, I would like to take the opportunity to ask the Minister about the overall digital transformation strategy at HMRC.
First, how far along is HMRC with this new digital solution that the Government plan to develop? How many pilots have been run of the new software needed at HMRC? How many of those pilots were successful? What is the cost to HMRC of the new software? What is the cost to an employer of using that software? How will HMRC be able to intervene manually to mitigate compliance risk?
The Government have made much of the huge administrative burden that employers face, and of how this measure, along with others, will ensure that employers can submit their PAYE settlement agreement requests at the end of the year and make ad hoc requests during the year, but that is surely completely inconsistent with the Government’s plans to mandate quarterly digital reporting for income tax and VAT. It will remove some administrative burdens for employers with regard to income tax on the one hand, but add further burdens on the other. I would be grateful if the Minister helped us out with that.
Mel Stride
As we have set out, clause 6 makes changes to simplify the PSA process. I am grateful that the hon. Member for Bootle appears to welcome those changes. The Government believe that it is extremely important to lower the burdens on our businesses, which create the wealth and pay the taxes that pay for the public services that, as a civilised society, we all want.
The hon. Gentleman raised making tax digital and the digital changes to the way that tax will be reported. He will know that I laid a written ministerial statement a little while ago that set out a changed timescale for the roll-out of that element. Consequently, no businesses will be involved in making tax digital until 2019 at the earliest, and even then only those at or above the VAT threshold will be involved, and only in respect of VAT reporting. No further roll-out will occur in any other areas until 2020 at the earliest. The Government are in listening mode, and we have listened extremely carefully and reacted extremely positively to feedback from businesses.
The hon. Gentleman raised several pertinent and legitimate questions about the piloting of the making tax digital process. They were very specific, and I do not think for a moment that he expects me to have all the answers in my head, talented though I am.
Mel Stride
And modest—quite. I will ensure that we write to the hon. Member for Bootle to answer the specific questions that he asked in that context.
Peter Dowd
I take the Minister’s assurances. I am sure that he has all the answers in his head, but he does not want to share them at this point. I will be able to read the letter that he sends over a nice cup of tea.
Question put and agreed to.
Clause 6 accordingly ordered to stand part of the Bill.
Clause 7
Money purchase annual allowance
Peter Dowd
The money purchase allowance has its roots in the latter days of the previous Chancellor’s tenure at the Treasury. The pension flexibility measures that were introduced in 2015 gave pensioners those flexibilities if they wished to pay anything further into a defined-contribution pension, but restricted the contributions on which they could receive tax relief. The Government set the money purchase allowance at £10,000, limiting the tax relief that pensioners could receive. The clause will cut that drastically, to £4,000.
The Minister says that the clause is, in effect, an attempt to stop individuals who have already accessed pension savings recycling that cash back into pensions, thereby benefiting from tax relief a second time. I completely acknowledge the concern about that, but a number of pensioners will no doubt be caught by the change. In fact, the submissions that we all received by email and were circulated today allude to that, and I will come to that in a bit more detail.
How much notice have pensioners been given of this planned change? What marketing and targeted awareness campaigns have the Government conducted to ensure pensioners are aware of the change? How much has the Treasury or other Departments spent to ensure that pensioners are aware of the change? I come back to the point I made earlier that this is about the security of people’s retirement. People have planned and are planning for retirement and, what with Brexit and lots of other things going on in the world, we want to keep the uncertainty in life to an absolute minimum. I am sure that everybody agrees with that.
How much does the Financial Secretary believe that the measure will raise? The Opposition feel that there is a clear need for the level of the money purchase annual allowance to be reviewed, and many of the stakeholders who have written to us agree. It is important that the Government take the necessary steps to ensure that pensioners who are caught out by the change are not at an unfair disadvantage.
One submission to Members in the bundle that has been circulated indicates:
“The reduction of the Money Purchase Annual Allowance to £4,000:
a. will create an anomalous position
b. may encourage manipulation of pension arrangements to use the small pots rules to circumvent the MPAA rules
c. will create a differential position between members of occupational arrangements and personal schemes”.
The submission gives a perfectly reasonable example of that, which I will not go into now.
Another organisation, the Low Incomes Tax Reform Group, also has concerns. It was set up by the Chartered Institute of Taxation to give “a voice to the unrepresented”. I will quote from its submission, because it is pertinent:
“The money purchase annual allowance of £10,000 is very unlikely to catch out too many people who might do this. But reducing it to £4,000 from April 2017–equating to savings of £333 a month–is much more likely to cause problems for these people; especially if thinking about it in terms of someone choosing to save money they might have previously been paying on a mortgage. This is even easier to see as being a problem if we consider that the net of basic rate tax contribution–the amount the individual pays–would be £3,200, ie £266 per month. Such a monthly sum could well be half the person’s previous mortgage repayments and therefore an easy sum to find for topping up their pensions”.
The review laid out in our amendment seeks to review the effectiveness of the measure, how many people it affects and the impact of cutting the money purchase allowance on the overall level of pension contributions.
To conclude, I cannot reiterate this point too much. I do not think it is necessarily a question of our wanting to replace the £10,000 with £4,000, £6,000 or £8,000 or any other figure, for that matter. If the Government have made that decision—and it is reasonable to adjust the figure up or down, whatever it might be—given that this is about people’s pensions and their future in retirement, it is important that we are clear what the impact is going to be. That is why we ask for the review. We all need to satisfy ourselves that when we are dealing with this area, for which people have planned, they are not going to be detrimentally affected at a time in their lives when they may be vulnerable.
Mel Stride
Amendment 17 would require the Government to undertake a review of the effect of the change to the money purchase annual allowance under clause 7. Before I set out why that review would be unnecessary, I want first to remind Committee members of the background to clause 7, and what it seeks to achieve. The historic pension freedoms introduced in April 2015 have given people with savings in money purchase arrangements greater flexibility to get access to their pension savings. Once a person has accessed their pension savings flexibly, further tax-relieved contributions are restricted to the money purchase annual allowance.
Kirsty Blackman
I hear the hon. Lady’s words, but I would probably go even further. We do not agree that the change should be made to the dividend nil rate for a number of reasons. To begin with, those people who are self-employed may have been planning their self-employment for some time and may have been relying on the fact that the dividend nil rate is currently £5,000 in their financial planning. I do not think that there is enough notice for those people who have been making plans to become self-employed. It is not good enough from the Government. There is not enough notice, and the change they are making is pretty rubbish. People on pretty low incomes are going to be hit by some of the change. It is really important that, for example, people who are becoming self-employed for the first time have the nil rate allowance that they thought they were going to have. Those people have not been given enough time to make considerations.
The point raised by the hon. Lady in relation to getting through to HMRC is relevant, particularly given the closures of tax offices and the difficulty that my constituents are having when trying to contact HMRC. The guidance and forms on its website tend to be black and white, but the answer might be somewhere grey in the middle, so people have to phone to get the advice they need to fill in the form online appropriately. As I said, one of our concerns about the general movement towards making tax digital is how people can get advice on filling in online forms, never mind anything else. It is difficult for people to get through to HMRC, and that is a relevant consideration. We are inclined to vote against clause stand part when that comes. However, we would support the amendment, were it to be pressed to a vote.
Mel Stride
Before I respond to the amendment as well as the other points raised in the debate, let me first remind the Committee of what the clause seeks to achieve. As we have heard, it reduces the tax-free dividend allowance from £5,000 to £2,000 from April 2018. The change will ensure that support for investors is more effectively targeted and helps to deliver a fairer and more sustainable tax system. It will also help to reduce the tax differential between individuals working through their own company and those working as employees and self-employed. Crucially, it raises revenue to invest in our public services, raising approximately £2.6 billion out to 2021-22.
Since the tax-free dividend allowance was first announced, the landscape for small business owners, savers and investors has changed. The hon. Member for Oxford East specifically asked about support for businesses in the context of these changes. I can assure her that, as the party of business, we are wholeheartedly behind businesses. First, we have supported businesses by reducing the main corporation tax rate to 19%, which is now the lowest rate in the G20. Secondly, for savers, we have increased the amount of money that an individual can save or invest tax-free through an ISA, by the largest amount ever, to £20,000, nearly doubling the limit since 2010. Thirdly, we have continued to increase the personal allowance to £11,500 this April. We have committed to increasing it further, to £12,500, helping individuals keep more of the money that they earn.
The hon. Member for Aberdeen North raised a specific point about response rates from HMRC to telephone contact. That is one of the measures that we are constantly looking at—how good are customer services—and I reassure her that it is one measure where HMRC performance has been relatively strong recently.
The clause should be considered in the context of that wider support for business and the need to deliver a tax system that works for everyone. We also need to take account of the ongoing trends in the different ways in which people are working. The design of the current tax system means that individuals who work through a company can pay significantly less tax than individuals who are self-employed or who work as employees. That can be true even when those individuals are doing very similar work.
At the autumn statement last year, the Office for Budget Responsibility estimated that the faster growth of new incorporations, compared with the growth of employment, would reduce tax receipts by an additional £3.5 billion in 2021-22. By that year, HMRC estimated that the cost to the public finances of the existing company population will be more than £6 billion.
The Government are committed to helping all businesses to succeed, large and small, and in all parts of the United Kingdom, but to deliver and maintain low taxes for everyone, we need a tax base that is sustainable. The cost to the public finances of the growth in incorporation is clearly not sustainable. It is, therefore, right to make the small but sensible change to reduce some of the distortions to which I have referred.
As we have heard from the hon. Member for Oxford East, amendment 18 would commit HMRC to undertake a formal review of the effect of this change to the dividend nil rate by the end of June 2019. It has been specifically proposed that such a review should consider in particular the effect of the change on the self-employed. Such a formal review is not necessary.
As I have mentioned, the change needs to be considered in the context of the wider support that the Government have provided to business owners all across the United Kingdom, from reducing the rate of corporation tax to giving the self-employed the same access to the state pension as employees, worth almost £1,900 more per year, to introducing successive increases to the personal allowance, which is available in addition to the dividend allowance.
Indeed, the Government have given careful consideration to the impact of reducing the dividend allowance. A £2,000 allowance ensures that support is more effectively targeted following this change. Around 65% of all recipients of dividend income will continue to pay no tax on such income. That includes around 80% of all general investors. Typically, a general investor will still be able to invest around £50,000 without paying any tax on the resulting dividend income. Those investors who are affected will have, on average, investments worth around £100,000, which will put them in the top 10% of wealthiest households in the country. I therefore invite the hon. Lady to withdraw the amendment.
The Government are delivering a tax system that works for everyone, including businesses, savers and investors. As the OBR has highlighted, there is a rising and unsustainable cost to the public finances of the growth in incorporation. The clause would help to address that by reducing the tax differential between those who work for a company structure and pay themselves in dividends and those who work as employees or self-employed, while ensuring that support for investors is more effectively targeted. I, therefore, urge the hon. Lady to withdraw amendment 18, while I commend clause 8 to the Committee.
Anneliese Dodds
I am grateful to the Minister for his comments. However, we still feel that this is a substantial change. Despite his helpful comments, it does not appear that there has been sufficient consideration, specifically of the impact of this new measure on the income of the very entrepreneurs we should support, especially when they are beginning the life cycle of their new firm. We are concerned that, in effect, many of those live off the income from dividends at the beginning of their business and we do not feel that we have had the assurances that we require that there will not be a negative impact on their income. Therefore, we would like to push this amendment to a vote.
Anneliese Dodds
Clause 9 removes tax liability where wholly disproportionate gains inadvertently are made from surrendering life insurance. We can understand the motivation behind the measure. We know that the clause aims to introduce an application by which policyholders who part surrendered or part assigned their life insurance policies, including capital redemption policies and contracts for life annuities, and generated a wholly disproportionate taxable gain, can apply to HMRC to have their gain recalculated on a just and reasonable basis. None the less, we are concerned about the lack of key safeguards and the exercise of what is essentially a discretionary remedy by HMRC. The measure is not backed by the fundamental safeguard of a statutory right of appeal to a first-tier tribunal of the officer’s decision on what constitutes a just and reasonable basis for the calculation. It would be helpful if the Minister explained the reasoning for not making express legislative provision for a right of appeal, which we feel is a fundamental safeguard in the exercise of a discretionary remedy. Therefore, our amendment asks for greater consideration of that and other issues through a review, and I hope the Government will accept that request.
Mel Stride
Clause 9 makes changes to ensure that policyholders who take value from their ongoing life insurance policies in such a way that a wholly disproportionate gain is generated, as the hon. Member for Oxford East pointed out, can apply to HMRC to have the gain recalculated on a just and reasonable basis. Recent litigation has exposed circumstances in which cash withdrawals from life insurance policies, known as part surrenders, can give rise to a wholly disproportionate taxable gain. That could also occur following an early sale of part of a policy, also known as a part assignment. In particular, large early withdrawals of cash from a policy that shows little or no underlying economic growth can generate taxable gains that are wholly disproportionate in size and effect. Usually, if cash had been taken by a different method, little or no gain would have arisen.
At Budget 2016, the Government announced their intention to change the tax rules on part surrenders and part assignments of life insurance policies. The changes made by clause 9 will introduce an application process through which policyholders who trigger wholly disproportionate gains can apply to HMRC to have their gain recalculated on a just and reasonable basis.
The hon. Lady raised the issue of appeals. Although taxpayers do not have a right of appeal, they have strong safeguards through the complaints procedure, which provides a simple and straightforward way for policyholders to express dissatisfaction with a decision and have it scrutinised independently. Recalculation applications will be dealt with by a small team in HMRC, ensuring consistency and quality of approach. If taxpayers are unhappy with the decision made, they can complain, and any complaint will be dealt with fairly and impartially by someone independent of the original decision maker. If taxpayers are still not satisfied, the complaint can be referred to the adjudicator or the Parliamentary and Health Service Ombudsman.
The changes will provide a fair outcome for policyholders who inadvertently generate disproportionate gains. An important point is that the measure is expected to affect fewer than 10 policyholders per year and to have a negligible cost to the Exchequer. The impact on life insurance companies, which broadly support the measure, is also expected to be negligible.
The Opposition amendment would require HMRC to complete a review of the operation of these changes by June 2020. The proposed changes in the clause provide a fair outcome for the very small number of policyholders—around 10—who inadvertently generate these gains. As mentioned earlier, we expect fewer than 10 policyholders to be affected. A formal mandated review, followed by a report to the House of Commons, would be an excessive requirement for changes so narrow in scope and for such a small number of individuals affected. I therefore ask the Committee to resist the amendment.
To conclude, clause 9 will provide a fairer outcome for a small number of policyholders who generate wholly disproportionate gains. I invite the hon. Lady not to press her amendment, and I commend the clause to the Committee.
Anneliese Dodds
We are willing to withdraw the amendment, but we want to ensure above all that the information and advice about the provisions are definitely made available to the albeit small number of policyholders. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 9 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Graham Stuart.)
Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Finance Bill (Second sitting)
Mel Stride ExcerptsTuesday 17th October 2017
(6 years, 6 months ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 17 October 2017 - (17 Oct 2017)
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.
Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Finance Bill (Third sitting)
Mel Stride ExcerptsThursday 19th October 2017
(6 years, 6 months ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 October 2017 - (19 Oct 2017)
Kelvin Hopkins (Luton North) (Lab)
It is a pleasure to serve under your chairmanship, Mr Howarth. Rather than speak specifically to the amendment, I want to make a comment. My hon. Friend the Member for Walthamstow has raised some very important issues about PFI, but from the beginning it has been an outrageous rip-off of the public purse and the citizens of this country. It should be abandoned. Indeed, in his speech at our party conference, the shadow Chancellor suggested that we should take PFI contracts into public ownership, saving billions for the public purse over time. That is what I want. I have spoken against, voted against and written a chapter of a book against PFI, because it is utterly ridiculous and total nonsense. It is driven by ideology to try to drive as much of the public sector as possible into the private sector. That is what PFI is really about: it puts vast sums of public money into rich private pockets. I will pursue that view vigorously over the next few years.
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.
Kelvin Hopkins
Rather than having another elaborate PFI system, would it not be simpler, in the health service and in the education sector, to build by traditional public borrowing, which is extremely cheap and would save billions for the taxpayer?
Mel Stride
With great respect to the hon. Gentleman, I think that is probably a little out of scope of the issues being dealt with in the Bill. I make the point that his party is committed to bringing a lot of these back in, as it has described. That is a fine idea in principle, but it will cost a huge amount of money and there has been no suggestion from his party as to how it would be raised, what taxes will have to be raised as a consequence, or what additional borrowing will have to occur in order to do that.
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.
Mel Stride
I thank hon. Members for their contributions to this important and interesting debate. To come back on a few of the points made by the hon. Member for Walthamstow, at the heart of this there is a distinction. She kept raising the issue of how PFI organisations should have taken into account that tax treatments could change. To some degree that is a fair argument, but there is a distinction for a company that is involved in highly leveraged infrastructure projects, which after all is delivering to public services. While she might be right that many PFI contracts have been very lucrative, not all of them have been; some are far more marginal. She has to conjure with the possibility that, if we go down the road she suggests, some may fail. That is an important point for her to consider.
On the hon. Lady’s second point, it may be the case that part of the rationale for entering into PFI agreements was an assumption about what future taxes may be paid under the pre-chapter 8 system. However, such a decision would have been taken at that time, on that basis, and that is nothing other than what she would expect them to do. An important point is that after the announcement of these arrangements all PFI arrangements will not be subject to chapter 8; they will be under the arrangements we discussed previously.
The hon. Lady talks about smoke and mirrors in relation to overseas businesses effectively brass-plating over here, with all the profits being diverted elsewhere. There is plenty of anti-avoidance legislation out there, including the diverted profits tax, to address those matters.
The hon. Member for Oxford East raised the BEPS project and recommendation 4. She is right that there is a corridor—a range of percentages that could be applied for the corporate interest restriction—and that is between 10% and 30%. The Government have a balance to strike because of the importance of the UK remaining competitive. Germany, Italy and Spain have all elected to go for 30%. It should not be overlooked that these measures are bringing in £1 billion extra every year in which they operate, which is a considerable increase in the tax take. The Bill will bring in about £16 billion across the scorecard period, about £5 billion of which will be from this one measure. On that basis, I ask the Committee to reject the amendments and to support the clause and the schedule.
Question put and agreed to.
Clause 20 accordingly ordered to stand part of the Bill.
Schedule 5
Corporate interest restriction
Amendment proposed: 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.”—(Stella Creasy.)
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.
Question put, That the amendment be made.
The Chair
With this it will be convenient to discuss the following:
Amendment 29, in schedule 6, page 479, line 15, at end insert—
“Chapter 7
Review and policy statement
1218ZFB Review of operation of this Part and policy statement
(1) No later than 30 September 2020, the Chancellor of the Exchequer shall lay before the House of Commons a report of a review and a policy statement in accordance with the provisions of this section.
(2) The review shall consider—
(a) the number of touring exhibitions benefiting from the relief,
(b) the number of other exhibitions benefiting from the relief,
(c) an assessment of the operation of the provisions.
(3) The policy statement shall set our proposals for the continuation, discontinuation or modification of the relief from 2022 onwards.”
This amendment would make statutory provision for the 2020 review of the operation of the new museums and galleries tax relief, including consideration of its effects and its future beyond 2022.
That schedule 6 be the Sixth schedule to the Bill.
Mel Stride
The Government recognise the cultural value of museums and galleries across the United Kingdom, and understand the role they play in local communities. Clause 21 and schedule 6 provide support to those institutions across the country by introducing a corporation tax relief for the production of new exhibitions. The relief will encourage large and small museums and galleries to develop creative new exhibitions and to display their collections to a wider audience. To provide further incentive for institutions to tour their best exhibitions across the UK and abroad, there will be a higher rate of relief for touring exhibitions.
There are more than 1,700 officially accredited museums and galleries in the United Kingdom, as well as many other galleries without permanent collections. The relief introduced by clause 21 recognises the importance of new, creative exhibitions to those cultural institutions.
The Government originally intended the relief to be available solely on temporary and touring exhibitions. However, a consultation over autumn 2016 made it clear that that would not be accessible to a number of smaller museums and galleries. To ensure a wide range of institutions across the country are able to access the relief, autumn statement 2016 announced that it would be extended to permanent exhibitions. Given that they can at times be much more expensive than temporary exhibitions, the relief will be capped at the equivalent of £500,000 of qualifying expenditure per exhibition, to allow the change without significantly increasing costs to the Exchequer.
Following the responses to a consultation document released shortly after the autumn statement, the Government have also amended the legislation to include exhibitions with an element of live performance where that is not the main focus. Through constructive and positive engagement with the industry, we have been able to design a relief that will work across the sector.
Clause 21 introduces a new corporation tax relief and payable tax credit for the qualifying cost to museums and galleries of producing a new exhibition. It will allow qualifying museums and galleries to claim a payable tax credit worth up to 25% of the cost of developing a touring exhibition and 20% of the cost of a non-touring exhibition. The clause will take effect from 1 April this year, allowing museums and galleries to benefit from the date that was announced and expected.
The relief is aimed at museums and galleries with charitable or educational objectives. Across the country, such institutions play a major role in society by maintaining important objects and educating people about different cultures or local history. For that reason, the relief will only be available to charitable or local authority-owned museums. Exhibitions that are not open to the general public or that are run purely to advertise or sell goods or services will not be eligible.
The Chair
The hon. Gentleman has a tendency in this Committee to lead us down paths beyond the scope of the amendments he addresses. That being a matter of broadening our cultural horizons, I have been very lenient with him, but I hope he will in future stick to the matter at hand.
Mel Stride
I thank Opposition Members for their contributions. The hon. Member for Bootle calls once again for a review. We seem to be having a review-fest. Of course, there are always some arguments for having a review, but the critical thing is whether it is proportionate and sensible, given the measures we are taking on consultation. We will, of course, keep all these issues and the concerns he raised about the possible misuse of the provisions for the purposes of tax avoidance closely under review.
Peter Dowd
I understand where the Minister is coming from in his reference to a review-fest. I referred earlier to the size of the Bill, which is one of the longest Finance Bills in the history of Parliament. Given that the Government have started the festival off with the size of the Bill, we are perfectly entitled to a festival on reviews of that huge Bill. I am sure the Minister agrees with that.
The Chair
I do not think we want to get bogged down in the length of the Bill itself, but should rather confine ourselves to the amendments.
Mel Stride
Quite right, Mr Howarth. I think we should just agree that I will see you at Glastonbury next year. Sorry—I will see the hon. Gentleman there; I might see you there as well, Mr Howarth.
On the specific point the hon. Gentleman raised about ensuring that relief is not abused, anti-avoidance rules are clearly critical to the long-term success and stability of the museums and galleries exhibition tax relief. The Government will include rules similar to those applied under the film tax relief to prevent artificial inflation claims. In addition, there will be a general anti-avoidance rule, based on the general anti-abuse rule, denying relief where there are any tax avoidance arrangements relating to the production. During the consultation, respondents generally said that the strategy appeared robust and did not identify any additional opportunities for abuse. Of course, as I have said previously, HMRC will continue to monitor these important matters. On that basis, I hope that the hon. Gentleman will not press his amendment.
Question put and agreed to.
Clause 21 accordingly ordered to stand part of the Bill.
Schedule 6 agreed to.
Clause 22
Grassroots sport
Anneliese Dodds
I beg to move amendment 30, in clause 22, page 27, line 25, at end insert—
“217E Review of operation of this Part
(1) Within fifteen months of the coming into force of this Part, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review about the operation its provisions (including in relation to different eligible sports).
(2) The review shall, so far as practical, identify the extent to which the provisions have benefitted particular eligible sports.
(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 would make statutory provision for a review of the new relief for grassroots sport, including identification of benefits to particular sports where possible.
Anneliese Dodds
I should at the start declare an interest in this topic: my partner is an amateur football referee in the Uhlsport Hellenic League and others.
First, we need to be clear that the measures have been introduced, according to the Government’s consultation of last year, at least partly due to a lack of other funding sources for sport. That is obviously rather worrying, particularly following widespread concern that the legacy of the Olympic games has not been capitalised on to build the habitual involvement of the wider population in sport.
We also need to consider this measure in the context of other taxation measures that affect sports facilities, not least the changes to business rates and the fact that there was such a long postponement of the uprating. That has had a significant impact on many clubs, whose headquarters or area of operation is also that of a small business; I am particularly thinking about riding schools, for example, which may have seen a substantial increase in their business rate. There is also an unfortunate interaction between small business rate relief and the relief provided through the community amateur sports clubs relief. I mention that because it is important that we do not look at this issue entirely in isolation, because corporate support for sport can be enormously fickle; it will relate to the nature of the business environment. Many smaller sports clubs—exactly those the measure seeks to support—need reliable funding over the long term, and they particularly need to know that their premises will be supported over the long term.
For those reasons and others, we believe that there needs to be a thorough review of the benefits of this proposed relief for grassroots sports. We think it particularly important that that review examines which sports would be supported through the mechanism. That is especially important when it is clear that there are funding gaps in certain areas of sport in Britain, compared with other countries. For example, the provision of athletics facilities outside the capital is very patchy, particularly for amateur athletics. That is why we request a review of the measure.
Mel Stride
Before I speak to the amendment, I will set out for Committee members the general background and aims of the clause. Clause 22 introduces a new tax relief to support investment in grassroots sports by companies and our sports national governing bodies. It will help governing bodies channel their profits into grassroots sports and will give companies a simple means of making valuable contributions to support grassroots sport activity.
The changes made by the clause will allow qualifying expenditure on grassroots sports as a deduction from the company’s total profits in calculating their corporation tax profits. Sport governing bodies and their subsidiaries will be able to make deductions for all their contributions to grassroots sports. Companies will be able to make deductions for all contributions to grassroots sports through sport governing bodies, and deductions of up to £2,500 in total annually for direct contributions to grassroots sports. The relief has been designed to be simple to make it attractive to potential contributors and to allow as many organisations that support grassroots sports to benefit as possible.
Contributions must facilitate participation in eligible amateur sport, and the activities must be open to a sufficiently broad section of the public. The hon. Member for Oxford East asked who would be included and excluded. I am happy to write to her on that matter so that she has all the information she needs. No payments to participators will be allowed, other than to cover the reasonable cost of participation. Such requirements will ensure that payments are made for the intended purposes and will prevent payments from being made for personal benefit.
Following the calling of the general election, clause 22 was removed from the original Bill. The clause will take effect from 1 April 2017 so that taxpayers can still benefit from the changes being made from the original commencement date.
I do not want to dwell too long on amendment 30 because I am conscious that we are eager to make progress on what is a very lengthy Bill. On the issue that the hon. Lady raised about the interplay between business rate relief and sports club reliefs, if she writes to me with her questions I will be happy to provide the information to her. However, I can reassure hon. Members that the Government ran a full consultation on the policy and the legislation prior to its inclusion in the Bill. During that process, there was extensive engagement with key stakeholders to ensure that the legislation is well designed and targeted at meeting its policy objectives. I was pleased to see a recent article in World Sports Advocate welcoming this new relief as
“a welcome incentive to support community sport for everyone”.
An important aspect of the legislation is that it has been deliberately designed to be as simple as possible to operate. There is no new reporting requirement and we want the new relief, particularly the relief for small deductions by companies, to benefit a wide range of sports in the UK without added administration burdens and costs. The Department for Digital, Culture, Media and Sport will of course continue to liaise closely with the sports governing bodies on a range of issues through their existing processes. A review, particularly to the timescale proposed, is neither practical nor necessary, and I hope that Opposition Members will not press their amendment to a vote.
Anneliese Dodds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 22 ordered to stand part of the Bill.
Clause 23
Profits from the exploitation of patents: cost-sharing arrangements
Mel Stride
The Opposition amendment would require the Government to review the effects of the changes to cost-sharing arrangements made in clause 23. Before I set out why that review would be inappropriate, I will remind Committee members of the background of the clause and what it is designed to achieve.
The clause introduces provisions for companies undertaking R and D collaboratively under a cost-sharing arrangement that will ensure that those companies are neither advantaged nor disadvantaged compared with those undertaking R and D outside such an arrangement. Following the calling of the general election and subsequent wash-up negotiations between the Government and the Opposition, clause 23 was removed from the Bill that became the Finance Act 2017. The Government propose that the provisions in the clause will apply from 1 April 2017 as originally intended and announced.
The UK patent box was introduced by the coalition Government in 2012. It provides a reduced rate of tax to companies exploiting intellectual property, such as patents, to incentivise them to grow their businesses and to create jobs in the UK. The Finance Act 2016 included changes to the patent box rules in line with the new international framework agreed by the OECD for intellectual property regimes, as part of the BEPS action plan. The main change was the introduction of the R and D fraction, which connects the amount of profit from an item of intellectual property that can benefit from the patent box to the proportion of the R and D activity undertaken by the claimant company.
The 2016 Act did not directly address R and D undertaken as part of cost-sharing arrangements, as it required further consultation to ensure that, as the hon. Member for Oxford East pointed out, very complex collaborative arrangements are appropriately addressed. Following completion of the consultation, the clause now adds specific provisions to deal with cost-sharing arrangements.
Under a cost-sharing arrangement, typically companies agree to undertake a proportion of R and D activity as part of a collaborative project, therefore receiving a commensurate proportion of income if the project is successful. That means that the calculation of the R and D fraction must take into account how the company has discharged its proportion of the R and D costs throughout the life of the arrangement.
The arrangements create specific challenges in the application of the OECD framework. Over the life of the arrangement, the claimant’s R and D activity may fluctuate year on year and trigger additional top-up contributions—balancing payments—payable to and from the claimant company to other companies in the cost-sharing agreement. Although at the end of the project the claimant may have met its agreed proportion of R and D costs, the interim position can differ greatly. Without providing a specific mechanism to deal with the treatment of the payments, the claimant’s R and D fraction would be unduly depressed, putting it at a comparative disadvantage to claimants undertaking R and D outside a cost-sharing arrangement. The changes made by clause 23 are therefore exclusively focused on addressing that issue. Specifically, balancing payments made by the claimant will generally be treated as if subcontracted to the other member of the cost-sharing arrangement, so the impact on the fraction will depend on whether the two parties are connected.
It might be helpful at this stage to remind the Committee that under the revised patent box rules, payments to connected subcontractors reduce the R&D fraction, as does spending on acquired intellectual property, in line with the OECD guidelines. Balancing payments received by the claimant—that is, receipts—will be offset against outgoing payments, again depending on the relationship between the parties.
The hon. Lady raised the question whether that could be used for the purposes of tax avoidance. My comment is that the OECD base erosion and profit shifting project agreed an acceptable framework for intellectual property regimes that would address concerns about profit shifting, and the UK patent box regime was revised in the Finance Act 2016 to align with that framework. The changes ensure that the amount of profit and benefit from the patent box is restricted to the proportion of research and development undertaken by the company when compared with the total research and development. As a result of the changes, the payments and receipts should net out to ensure that, at the end of the project, the claimant’s R&D fraction reflects only the costs it has incurred to meet its agreed share of R&D activity.
Amendment 31 would impose a requirement on the Government to undertake a review of the effects of these changes to the patent box regime. However, the Government have carefully considered the regime and consulted extensively with stakeholders to ensure that the changes comply with the relevant international frameworks and provide no opportunities for abuse. The Government regularly publish statistics on the patent box and will continue to monitor the impacts of both the patent box and these legislative changes. On those grounds, I urge the hon. Members to reject the amendment.
Anneliese Dodds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 23 ordered to stand part of the Bill.
Clause 24 ordered to stand part of the Bill.
Schedule 7 agreed to.
Clause 26 ordered to stand part of the Bill.
Clause 27
Substantial shareholding exemption
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Government amendments 1 and 2.
Clause 28 stand part.
Mel Stride
Clauses 27 and 28 deal with the exemption from corporation tax on gains and losses arising on certain disposals of shares, known as the substantial shareholding exemption, or SSE. Clause 27 simplifies the substantial shareholding exemption by removing some conditions that impose unnecessary administrative burdens. Amendments 1 and 2 to clause 28 together ensure that the definition of a substantial shareholding in companies owned by institutional investors applies for the whole of the SSE rules, as intended. Clause 28 introduces a new and simpler SSE for companies owned by some tax-exempt institutional investors; it will help to promote the UK as a place where global investors can establish and manage their investments in trading businesses, infrastructure projects and real estate.
The exemption was originally introduced in 2002, with the aim of eliminating the potential double taxation of trading profits when a corporate shareholder disposes of a large shareholding in a trading company or sub-group. That allows a group of companies to restructure its trading operations without facing a further tax charge. The value of the shares being sold generally reflects profits that have already been taxed, so a tax on disposal of the shareholding would amount to another layer of taxation. The Government announced a consultation on the existing rules at Budget 2016, with the aim of simplifying the rules and making the UK more competitive globally.
The changes made by clause 27 will simplify the regime in a number of ways, affording greater certainty to the business community at negligible cost. Those changes include removing the onerous condition that the company making the share disposal must show that it, and any group of which it is a part, does not have substantial non-trading activity. Previously, the company making the disposal would have had to establish the level of trading activity across a group, which could be worldwide. The change ensures that all companies holding large shareholdings in trading companies can benefit from the exemption, with a reduced administrative burden. They also extend the ownership period in which a substantial shareholding must be held in order to qualify. That ensures that companies can continue to benefit from the exemption in instances where shareholdings are disposed of in tranches over many years, or where an initially large stake in a growing company is diluted to below 10% by new share issues.
The changes made by clause 28 provide a simpler exemption for companies owned by a specific class of investor, defined as qualifying institutional investors. Those include pension funds, widely marketed UK investment funds, life assurance funds and other large international investors that would be exempted from UK tax on their chargeable gains if they held shares directly. The clause allows them to organise their investments through UK holding companies by removing tax barriers. At present, most choose to locate their holding companies in a variety of other European jurisdictions that have effective share exemption regimes. Clause 28 provides an exemption without regard to the nature of the business activities of either the company making the disposal or the company in which it has a substantial shareholding.
Government amendments 1 and 2 are essential to ensure that institutional investments in shares costing at least £20 million always qualify for SSE. That is an extension of the general SSE threshold that requires holdings to be at least 10% of the shares. Unless an amendment is made, the £20 million rule would apply to investments in real estate or other non-trade activities but not to other activities that are equally important to the UK, such as investments in major infrastructure projects or other trading companies.
The changes introduced by the clauses will make the UK tax regime more competitive globally and will incentivise these institutional investors to hold and manage their investments from the UK, with negligible cost to the Exchequer. Following the calling of the general election, these clauses were removed from the Finance Act 2017. The changes are almost wholly relieving and so the Bill provides for them to take effect retrospectively, so that taxpayers can still benefit from the changes being made from the original commencement date. The clauses simplify the corporation tax regime and make the UK a more attractive location for investment. I urge the Committee to accept amendments 1 and 2 and commend clauses 27 and 28.
Anneliese Dodds
I have a couple of brief questions. Clause 27 provides the Treasury with new powers to regulate the list of approved investors that qualify for the substantial shareholding exemption. It would therefore be helpful to know what checks will be placed on the Treasury’s use of those new powers. In its assessment of the measure, the Treasury said that the financial impact would be negligible, which sounds slightly peculiar. Any further information about that would be gratefully received.
I understand the rationale for the measure in clause 28, which will shift the qualifying conditions for exemption from the activities of the disposing company or the company being disposed of to instead focus on, as described by the Minister, the shareholding for which the disposal is made and to the other shareholders of the company disposed of. I would be interested to learn whether the Minister believes that the new measures will extend beyond trading companies to encompass, for example, commercial real estate. What assessment has he made of the likely impact that might have?
More broadly, I am keen to learn how the Government are trying to balance the need to ensure that tax treatments do not artificially impact on commercial decision making with the need to prevent any potential for abuse.
Mel Stride
The hon. Lady asks a large number of technical questions, which are gratefully received, but I hope she will forgive me if I drop her a note on the more specific points. The measures have been scored by the Office for Budget Responsibility as having a negligible cost. They are independently assessed and scored by that authority. I hope on that basis we can move forward.
Question put and agreed to.
Clause 27 accordingly ordered to stand part of the Bill.
Clause 28
Substantial shareholding exemption: institutional investors
Amendments made: 1, in clause 28, page 38, line 5, leave out from “applies” to “in” in line 6.
Amendment 2, in clause 28, page 38, line 10, leave out “paragraph 7” and insert “this Schedule”.—(Mel Stride.)
Clause 28, as amended, ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Graham Stuart.)
Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Finance Bill (Fourth sitting)
Mel Stride ExcerptsThursday 19th October 2017
(6 years, 6 months ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 19 October 2017 - (19 Oct 2017)
Peter Dowd
What we need is a fair taxation system—that is the key. I do not think it is beyond the wit of this Government or any Government, for that matter, to deal with that. That is not to say that we have not moved some. That would not be appropriate. We have moved on.
The Financial Secretary to the Treasury (Mel Stride)
In terms of having moved some, as the hon. Gentleman puts it, does he accept that with the current proposals we have gone much further in the direction he seeks than was the case under any previous Labour Government?
Peter Dowd
It is a moving feast. Dealing with tax avoidance is—to use the old hackneyed phrase—a process, not an event. That process, at different times over the decades, moves along at different paces and with varying levels of enthusiasm. We have to set the tone and send the message from this place that we will tackle tax avoidance wherever we see it occurring. We should all do that as robustly as we can. It is not a beauty contest between which party has done the most. The reality is that we all have to stick together in tackling tax avoidance. That is the reason for our proposal, which would move this process further on, regardless of what may or may not have happened in the past.
The contention between the Opposition and the Government on this part of the Bill highlights a fundamental problem with parliamentary procedure around financial legislation. Some argue—I do not necessarily agree—that it is ludicrous that the Government can introduce a measure that claims to abolish non-dom status with an exemption for offshore trusts, and that the Opposition are unable to push through an amendment that would remove it. That goes back to the point I made earlier when the Minister referred to a review-fest. That is one of the only tools the Opposition have in this situation, given the nature of proceedings.
I do not criticise that at all. We are where we are. It would be better if we were not here, in some regards, but we are. We are trying, with the tools available to us, to move the debate on. I understand the limited scope that the Opposition have to amend financial legislation, particularly on bringing more people into tax or raising revenue. That may have to be looked at, especially in the light of the Minister’s concern that we are partying too much on this issue.
Mel Stride
Again, it is a pleasure to serve under your chairmanship, Mr Walker.
Members of the Committee are now turning their attention to clauses 29 to 32, which with schedules 8 and 9 bring an end to permanent non-dom status in the United Kingdom. This historic change was announced by the Government at the 2015 summer Budget. The provisions were then introduced in the Finance Bill in the last Parliament, but were removed at the Opposition’s request following the calling of the general election. At the time, the Government announced they would return to legislate these proposals at the earliest opportunity, and I am pleased to be able to deliver on that promise and introduce the changes from April 2017, as originally intended. I should perhaps pick up the comments by the hon. Member for Bootle, who suggested that the delays, such as they are, may in some way have favoured non-doms by delaying the introduction of these measures. These measures will be introduced, as we have always indicated, in April this year. In that sense, they are retrospective in a way in which I am sure he will approve.
As the Committee will be aware, individuals who are non-domiciled in the UK for tax purposes enjoy two significant advantages. The first is that where such individuals are resident in the UK, they have access to the remittance basis of taxation. That allows them to defer tax on any of their income and gains arising overseas until they are brought into the United Kingdom. The second big advantage is an inheritance tax rule, whereby those who are domiciled overseas need pay tax on only their assets that are situated in the UK, rather than on their assets worldwide. Those advantages have been a feature of the UK tax system for many years. As successive Governments have recognised, the advantages have played a big role in ensuring that the UK is an attractive place to live and work for people from around the world, and it should not be forgotten that non-doms have actually brought in around £9 billion each year in much-needed revenue for the Exchequer.
None the less, the Government recognise that there are some unfairnesses in the current rules for non-doms that need to be addressed. For example, the Government believe that it is unfair that someone can live in the UK for lengthy periods of time—in some cases, virtually their entire life—and continue to enjoy tax advantages that are not available to the vast majority of people who live and work in the UK. These provisions seek to address that unfairness, and I am sure that will enjoy cross-party support.
The changes being made by clause 29 will bring an end to the permanent non-dom status for the purposes of both income tax and capital gains tax. That means that from April 2017 anyone who has been resident in the UK for 15 or more of the previous 20 years can no longer be treated as a non-dom for tax purposes. They will instead be taxed in the same way as everybody else and pay tax on their worldwide income and gains. Likewise, anyone who was born here with a UK domicile of origin will also become deemed domiciled whenever they are resident in the UK. The clause fundamentally changes the way that non-doms pay tax in the UK, raising a further £1.6 billion over the next five years to fund our vital public services.
Clause 30 sets out how the deeming rules apply for the purposes of inheritance tax, ensuring that all those who become deemed domiciled under the new provisions are liable for UK inheritance tax in the same way as UK residents. Clause 31 ensures that individuals who become deemed domiciled under the new provisions pay the right amount of tax on any benefits they receive from overseas trusts that they set up while they were domiciled outside the UK. Finally, clause 32 ensures that a double charge is prevented by excluding gains that represent carried interest from the trust charging provisions.
The hon. Member for Bootle wants the removal of what he terms “the exemptions” from off-shore trusts for those who have become deemed domiciled under these new proposals. I assure him, and he should reflect on the fact, that any moneys coming out of those trusts for whatever purpose will be taxed once an individual becomes deemed domiciled.
There is also an important matter of proportionality here. As I have already indicated, the Exchequer raises around £9 billion per year from those who are non-domiciled in the United Kingdom. That is a huge amount of money, which goes some way to paying for our doctors and nurses, our armed forces and so on. These measures will raise a further £1.6 billion over the scorecard period, as I have indicated.
Ruth George
How can the Treasury be so sure of the projected future income of £1.6 billion when there is a loophole for transferring money to offshore trusts that could be used to avoid the taxation? How can those future projections possibly be calculated?
Mel Stride
I am clearly not in a position to share with the hon. Lady the entire ins and outs of all the intricacies of calculating such figures, but I can assure her that the numbers are looked at in great detail and are scored by the independent Office for Budget Responsibility. They are robust figures, albeit that no figures are entirely, absolutely guaranteed in cast iron ahead of time—but they are robust.
During the debate, the hon. Lady raised an important issue about transparency of trust arrangements. The UK is right at the forefront of greater transparency. We spearheaded an initiative to systematically share information on beneficial ownership arrangements with more than 50 countries. That will help law enforcement to unravel complex, cross-border changes in companies and trusts. Following our work with international partners, by September 2018 more than 100 jurisdictions will be sharing information with the UK under the common reporting standard, which will provide HMRC with taxpayer information from tax authorities around the world, enabling it to better target tax evaders.
That brings me to my next point. The hon. Member for Bootle would have us believe two things: that we are only on the side of the wealthy and that we are not actually that interested in clamping down on tax avoidance. On the first point, I remind the Committee that the top 1% of earners in this country pay 27% of all taxes. That is virtually at an historic high, and is certainly higher than was the case under the previous Labour Government.
Anneliese Dodds (Oxford East) (Lab/Co-op)
Does that not reflect the wealth of the very richest in our society? Surely it would be more appropriate to assess the ratio of tax against their whole income and wealth. In that case, most studies would suggest that the very worst-off people pay much more of their income in tax than the very best-off. That figure does not suggest that we have a more progressive tax system—it does not give us any indication of the progressivity of the tax system.
Mel Stride
I hate to disagree with the hon. Lady, but I have to. If she checks something called the Gini coefficient, which is about income inequality—
Anneliese Dodds
With all due respect, the Gini coefficient does not reflect the impact of tax on people’s incomes. I repeat my point: if we are looking at the progressivity of the tax system, considering the overall tax that is contributed by the 1% is not helpful. The two are independent.
Mel Stride
With respect, the first point is that income inequality is at its lowest level for 30 years. That is a simple fact. Secondly, in terms of how progressive the tax system is, we are the Government that, since 2010, have raised the personal allowance to £11,500, which has taken about 3 million people out of tax altogether, and we have a manifesto commitment to raise that still further, by 2020, to £12,500. Much that we are doing is extremely progressive.
It is also a fact that the wealthiest 3,000 in this country pay as much tax as the poorest 9 million, just to put some of those figures into perspective.
Anneliese Dodds
That is clearly a reflection of very severe income inequality. If we focus on income, rather than on tax, which the Minister is trying to pull us towards, and look at the overall impact to the fiscal system, taking into account that fact that working tax credits are being folded into universal credit, we will see that the very poorest people in Britain are much worse off now than in previous years.
The Chair
Order. We will indulge the Minister with one more response. We might then have to make a little progress.
Mel Stride
A very quick one—perhaps we should leave it there, but no. The national living wage is another example of doing things for those who are less well-off. There are many things to consider.
David Linden (Glasgow East) (SNP)
Does the Minister accept that the national living wage that he is trumpeting is in fact a con trick, because it does not apply to under-25s?
Mel Stride
I do not think that is true, because we have a national minimum wage that certainly applies to under-25s. However, as Mr Walker has suggested, we are probably going slightly beyond the scope—fun though it is—of the actual matter in hand.
Mel Stride
If the hon. Lady will let me make a little progress, perhaps we will have time later.
Another point the hon. Member for Bootle raised was the suggestion that we are somehow slack or not concerned about tax avoidance. This Government have clamped down on avoidance to the extent that we have brought in £160 billion in revenue by clamping down on tax avoidance, evasion and non-compliance. We have done that despite his constant assertions that HMRC is under-resourced and incapable of acting. We are bringing in record levels of compliance income at the moment.
Peter Dowd
I think the Minister misrepresents what I was saying. I was trying to say that we need to push harder. The reality is that HMRC does as good a job as it possibly can given its resource. I suspect that if its resource were returned to the previous level, HMRC would do an even better job.
Mel Stride
Given the resource that HMRC has, which the hon. Gentleman suggests is inadequate, the tax gap—the amount of tax that we have failed to collect by not bearing down on avoidance—is at its lowest level for many, many years, including every year under the last Government. It is 6.5% compared with, I think, 8.3% in 2005-06. In terms of bearing down on avoidance, we are doing our bit.
Mel Stride
Mr Walker, you are right, as you always are. Let me now turn to new clause 3, tabled by the Opposition, which is the subject of debate at the moment. The new clause would commit the Government to publish a review of the effects of the provisions for protecting overseas trusts from the deemed domicile changes set out in schedule 8.
The provisions outlined in schedule 8 relate to trusts that were created before an individual became deemed domiciled under the new rules. As I am sure members of the Committee will appreciate, many non-doms will have set up family structures in their home country long before they ever considered moving to the UK. That is an important point. The Government believe that it would be unreasonable to expect individuals in such circumstances to pay UK tax on all the money in such a structure as it arose. The provisions therefore protect such trusts from unintended consequences and ensure that the UK remains an attractive place for those individuals to live and work.
Let me be clear: even with those protections in place, those non-doms who do become deemed UK-domiciled will only be protected on income and gains that remain inside the trust. Any moneys withdrawn, or benefits provided, will lead to a tax charge.
The Government recognise that non-doms make an important contribution to the UK’s economy. In terms of tax alone, as I have already stated, they contribute more than £9 billion to the Exchequer per year. It is therefore vital that these changes are not introduced in a way that would drive non-doms out of the UK altogether.
Kirsty Blackman (Aberdeen North) (SNP)
I promise that I will stick to the topic of the debate. For the avoidance of doubt, we will support the Opposition’s new clause 3. I heard what the Minister said about previous family structures, but that does not give us enough reassurance that the system that is being set up for overseas trusts is the correct one.
Mel Stride
I thank the hon. Lady for making her intentions so clear.
These changes are fair, and they have been carefully considered and consulted on since they were announced more than two years ago. With regard to a review of the legislation, as stated in the tax information and impact note published in December 2016, HMRC will monitor the effects of the provisions through information collected in tax returns. I therefore urge the Opposition not to press new clause 3.
The changes introduced by clauses 29 to 32 and schedules 8 and 9 will bring an end to permanent non-domicile tax status. When people live in the UK permanently, it is right that they should pay the same tax as everyone else. This is the biggest and most fundamental change to non-dom taxation in history, and strikes the right balance between raising £1.6 billion of much-needed revenue and ensuring that the UK tax system remains internationally competitive.
Peter Dowd
In the light of what has been said today, we may want to tease out the matter of non-doms further at a later date, but let us be clear: there is nothing wrong with being a non-dom. It is not an illness or a disease. It is not something that we want to eradicate absolutely. We do not want to tell non-doms to go home or to go back to where they lived. This is not about that; it is about fairness in comparison with people who are not non-doms. That is what it comes down to.
We recognise that non-doms contribute to our economy. I do not think that anyone is denying that at all. Non-doms have existed in this country since Napoleonic times, in effect. That is the essence of their origin. After 200 years, we might think, notwithstanding the fact that we are coming out of Europe, that we should have done something about them sooner. The bottom line is that there is nothing wrong with being a non-dom. There are issues vis-à-vis the status of parents of non-doms, too, which we will no doubt come back to in due course.
We have made our point for today’s purposes. As I alluded to, new clause 3 seeks to have a review in relation to non-doms. I do not think that there is anything wrong with asking for a review of how this proposal will work. That is our job, and we will persist with it. We are determined to raise this issue time and again.
The Chair
With this it will be convenient to consider that schedule 10 be the Tenth schedule to the Bill.
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.
The Chair
With this it will be convenient to discuss the following:
That schedule 11 be the Eleventh schedule to the Bill.
Clause 35 stand part.
That schedule 12 be the Twelfth schedule to the Bill.
Mel Stride
Clause 34 introduces schedule 11, which makes changes to ensure that businesses and individuals who have used disguised remuneration tax avoidance schemes pay their fair share of income tax and national insurance contributions. Clause 35 and schedule 12 follow on from clause 34 in tackling similar avoidance schemes used by the self-employed, introducing new rules to make those schemes ineffective and ensuring that individuals pay the tax they owe.
Disguised remuneration schemes claim to avoid tax and national insurance contributions by paying individuals through third parties in ways that promoters claim are not taxable, such as loans. These schemes are highly artificial, and it is the Government’s firm view that they have never worked. The coalition Government began tackling the schemes in 2011, introducing legislation to successfully stop the schemes that existed at that time. Since then, HMRC has collected more than £1.8 billion in settlements from scheme users.
However, not every scheme user settled, and since 2011 the tax avoidance industry has created and sold more than 70 new and different schemes aimed at sidestepping the 2011 legislation. These schemes are generally more contrived and aggressive than those that existed before and are growing in popularity, including with the self-employed. These schemes deprive the Exchequer of hundreds of millions of pounds each year and have been used by up to 65,000 companies and individuals. The Government’s firm view is that they do not work. We therefore need to take further action to tackle this avoidance and ensure that scheme users pay their fair share.
The Government introduced legislation in the Finance Act 2017 to put it beyond doubt that new employment income schemes are caught within the existing rules. Schedule 11 will tackle the existing use of schemes by introducing a new charge on loans outstanding from these arrangements on 5 April 2019. Affected scheme users can avoid the loan charge by repaying the loan and replacing it with a commercial loan, or by settling the tax due with HMRC. The Government will bring forward further measures in the coming year’s Finance Bill to ensure that the rules are appropriately targeted.
Clause 35 will put it beyond doubt that these schemes do not work for the self-employed. Where there is an arrangement of this type, the receipt will be taxed as a trading receipt, no matter what form it is received in by the self-employed individual. The clause applies from 6 April 2017 to protect Exchequer revenue and ensure that scheme users pay their fair share. Schedule 12 introduces a new charge on loans outstanding from self-employed schemes on 5 April 2019 in a similar way to schedule 11.
It is right that everyone should pay their fair share of tax and make a contribution to public services. These changes will ensure that users of disguised remuneration schemes pay the tax they owe and will help to bring in more than £3 billion by 2020-21.
Anneliese Dodds
I will first address clause 34 and schedule 11 before moving on to clause 35, given that both were created at the same time. As I understand it, clause 34 and schedule 11 re-characterise loans as remuneration for tax purposes, but in some cases they would be doing so many years after the original transaction. The Opposition want to see change in this area, because abuses have been clearly documented.
However, this measure comes after a long period of relative inaction, at least in the areas where this legislation is focused. That has meant that many people believed the arrangements they entered into were legal and did not constitute tax avoidance. The April 2019 change in these circumstances could, some have opined to us, cause significant problems, for example to individuals whose situation has changed such that they no longer have the funds to meet the tax charge. How will the Minister ensure that this measure will not cause hardship or injustice to individuals who planned on the basis of previous arrangements, and how will that be balanced against the clear and pressing need to prevent the abuse, which the measure is targeted at?
Clause 35 and schedule 12 aim to tackle avoidance by the self-employed and those trading through a partnership, where their taxable income has been replaced by loans and other non-taxable amounts in order to avoid tax. The pertinent question is how to ensure that the measure is not overly wide-ranging. In particular, how will it be ensured that a transaction entered into in the ordinary course of business, and on commercial arm’s length terms, is not caught within the definition of remuneration? The scope of the measure appears to be relatively wide, particularly when compared with others—for example, the Income Tax (Earnings and Pensions) Act 2003, which discards remuneration—where certain transactions are excluded, but they are not here. It would be helpful to have more specification on that.
Finally, there is a broader question: how will the Minister ensure that these measures are genuinely achieving their objective of ensuring that the full earnings of self-employment remain part of the individual’s taxable income, subject to income tax and national insurance contributions, and that attempts to circumvent that position and still reward the individual are genuinely ignored?
Mel Stride
I thank the hon. Lady for her typically thoughtful contribution and important questions. She raised the issue of the retrospection or otherwise of these measures. We will certainly be looking at individuals who may have entered into these kinds of arrangements as far back as 1999. Critically, they have until 2019 to clean those arrangements up, if they wish to. If the schemes are legitimate and above board, they have no reason to be concerned because those schemes will stand the tests that we have set.
Mel Stride
Clause 38 introduces a new tax relief to support the development and installation of recharging equipment for electric vehicles. The first-year allowance of 100% allows businesses to deduct charge point investments from their pre-tax profits in the year of purchase. To ensure that businesses could take advantage of the changes as soon as possible, the legislation had effect from the date of its announcement, which was 23 November 2016.
The Government are committed to encouraging the uptake of cleaner, more efficient vehicles that can help improve air quality in our towns and cities. We are doing that in a number of ways through the tax system. First, from 2020-21 company car tax rates for ultra-low emission vehicles will be lowered to 2% to incentivise uptake of the cleanest cars. Under the new vehicle excise duty system for cars registered after 1 April 2017, people with the cleanest zero-emission cars will pay nothing in first-year rates.
The availability of electric charge points is key to encouraging further take-up of cleaner vehicles by giving ULEV drivers greater confidence about where and how far they can drive. There are already more than 11,000 charge points at more than 4,000 locations in the UK, but more are needed. It currently takes at least 30 minutes to charge an ultra-low emission vehicle, which gives a range of between 50 and 100 miles, compared with 30 seconds to fill a petrol-powered car for a similar mileage range. We need to make charge points a more common feature on our roads in order to make electric cars a more convenient and reliable mode of transport.
Clause 38 supports the development and installation of electric charge point equipment by introducing a new tax relief for eligible expenditure on charge point infrastructure. Businesses that invest in electric charge points can deduct the expenditure from their pre-tax profits, thereby benefiting from a lower tax bill. The tax relief complements existing reliefs that encourage the use of cleaner vehicles, including the 100% first-year allowance for cars with low carbon dioxide emissions and the 100% first-year allowance for equipment used by cars powered by natural gas, biogas and hydrogen. It will help to increase the number of electric charge points on our roads, improving the infrastructure for electric car drivers and encouraging further take-up of low-emission vehicles for a cleaner environment.
Ruth George
Like my hon. Friend, I am pleased to see decent allowance made for expenditure on electric vehicle charge points. It is much needed, particularly in my rural constituency, where it will be difficult to install the infrastructure in a way that business can comply with. I echo her point about small businesses. I understand that the Automated and Electric Vehicles Bill may introduce a requirement for service stations to install electric vehicle charge points. Many service stations are independently owned; it seems particularly hard on them that they will not receive tax incentives for installing charge points, but larger companies will.
Will the Minister explain why the cut-off date is 31 March 2019 for corporation tax and 5 April 2019 for income tax? The technology is already being produced but will change constantly over the next few years. It is important to ensure that companies can consider the full range of technology coming on the market and adapt their charging points to the most successful and future-proofed. For that reason, it seems odd to include an arbitrary time limit. Can the Minister explain that?
Mel Stride
I have a direct answer for the hon. Members for High Peak and for Oxford East: the relief will be available to businesses of all sizes. I take on board the point made by the hon. Member for High Peak about her own constituents in that context.
The hon. Member for Oxford East raised the general issue of whether the electricity going through the charging points would be green enough. It is probably not the purpose of the Committee to determine that, but I certainly share her aspiration that we should encourage as much green energy as possible, which is why we are investing so much in the shift from traditional power generation to greener alternatives. She also quoted the suggestion that the number of charging points was a drop in the ocean, which is why we hope that such tax reliefs will help set up charging points as quickly as possible.
The hon. Member for High Peak also asked about the March and April dates for tax year ends for the different categories.
Mel Stride
I thought the question was about March and April. The reason for March and April was that individuals and companies have different tax year ends in that respect.
Ruth George
May I clarify? I was simply asking why there was a 2019 cut-off, not why there were two dates of 31 March and 5 April, which I think is fairly widely understood.
Mel Stride
I believe that is the review date—the point at which we would naturally want to look again at the issue and see how the roll-out has occurred.
Question put and agreed to.
Clause 38 accordingly ordered to stand part of the Bill.
Clause 39 ordered to stand part of the Bill.
Clause 40
Co-ownership authorised contractual schemes: capital allowances
Anneliese Dodds
I beg to move amendment 32, in clause 40, page 58, line 31, at end insert—
“262AG Review of operation of co-ownership authorised contractual schemes
(1) Within fifteen months of the passing of the Finance (No. 2) Act 2017, the Commissioners for Her Majesty’s Revenue and Customs shall complete a review of the operation of the new provisions for co-ownership authorised contractual schemes.
(2) The review shall, in particular, consider the operation of these provisions in relation to master funds.
(3) In this section, “the new provisions for co-ownership authorised contractual schemes” means—
(a) sections 262AA to 262AF of this Act, and
(b) regulations made under sections 41 and 42 of the Finance (No. 2) Act 2017.
(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 make statutory provision for a review of the operation of the new provisions for co-ownership authorised contractual schemes.
Mel Stride
Before I respond to the amendment tabled by Labour Members, I would like to set out for members of the Committee the overall aims as they relate to this particular piece of legislation.
Clauses 40, 41 and 42 make changes to ensure that the tax system works effectively for investors in co-ownership authorised contractual schemes, which I will refer to as COACS for short. COACS are UK collective investment schemes authorised by the Financial Conduct Authority. They were introduced in 2013 to make the asset management industry more competitive internationally, to reduce industry costs and to increase returns to investors. These schemes are transparent for tax on income. That means that the income generated by the scheme is taxed on the investors, not on the scheme. Investors are taxed as if they had invested directly rather than through the scheme.
COACS have been welcomed by investors, which are predominantly institutions such as pension funds and life insurance companies. Following consultation last year, the Government are now making three changes to simplify the tax rules for investors in COACS and to align them with rules for other types of investment funds so far as is practical.
Amendment 32 would require HMRC to complete a review of the operation of COACS by early 2019. I reassure the hon. Member for Oxford East that the Government have consulted extensively on the measure. There was a formal consultation in summer 2016, in which the industry participated fully and constructively. The consultation process also included a well-attended open forum of interested parties in September 2016 to investigate and evaluate options. In addition, the Government have held regular discussions with industry representatives. It was in those discussions that the issue that clause 40 seeks to address was first highlighted. The Government will continue to engage with the sector on COACS and the practical implementation of the rules governing the schemes.
The hon. Lady referred to master funds, which are a fund structure where a fund has a number of separate feeder funds as its investors. They were not the subject of any response to the consultation, but HMRC stands ready to engage further with industry, should it have any questions related to COACS and master funds. The hon. Lady suggested that there may be a possible means of tax avoidance here. Income accruing to a master fund that is a co-ownership authorised contractual scheme is treated as the income of the investors, so UK investors cannot avoid tax on it. Clause 42 and its related secondary legislation will help to protect revenue. The measure as a whole is robust against potential tax avoidance, but HMRC will of course continue to be vigilant.
Kirsty Blackman
The Minister has been positive about the transference of accountability with COACS. I want to raise a query. Will he confirm that the changes being made will not erode the transparency and accountability of the scheme as it is? Will that be kept under review ?
Mel Stride
Absolutely. All these matters will be kept under review. It is not the Government’s belief that the changes will erode the scheme; we believe that the changes will facilitate and ease the operation of these particular schemes to the advantage of pension funds and others that typically make use of them.
In the light of the extensive consultation held and the Government’s continuing commitment to work with industry on the implementation of rules governing COACS, I hope that the hon. Member for Oxford East will withdraw the amendment.
I turn now to the background to the clauses. COACS are not subject to tax, but the operators of the schemes hold information needed by investors to complete their own tax returns and to claim any capital allowances to which they are entitled. The calculation of capital allowances falls in practice on the investors and can be extremely complex. In addition, operators hold information that would help HMRC to check that investors’ tax returns are accurate, but at the moment there is no statutory requirement for COACS to provide tax information to either investors or HMRC. That is one example of the easements, from the investors’ and HMRC’s point of view, that the hon. Member for Oxford East may be interested in. Further, where a COACS holds investments in offshore funds, the rules that normally apply to ensure that offshore income is taxed appropriately on UK investors do not work as they should.
Clause 40 introduces new rules that allow the operator of a COACS to elect to calculate any capital allowances due, benefiting investors by avoiding the need to exchange large amounts of information with the operator of the COACS. The election can be made for periods that start on or after 1 April 2017. Clause 41 enables the Treasury to make regulations that will do three things to help to ensure that the right tax is paid on investments in COACS. First, the regulations will require the operator of a COACS to provide sufficient information to investors for them to complete their own tax returns. Secondly, they will require the operator to provide information to HMRC about the income arising to investors each year, and provide HMRC with a power to request copies of any other information provided to investors. Thirdly, they will impose penalties if scheme operators do not comply.
Clause 42 enables the Treasury to make regulations that will require a COACS that has invested in an offshore fund to ensure that all of the offshore fund’s income is treated as its investors’ income, regardless of whether it is actually distributed to them. This removes the risk of income rolling up offshore without being taxed as it arises. It also brings the treatment of investors in COACS into line with the treatment of UK investors in offshore funds generally.
These targeted measures will help to ensure that the tax system works efficiently for investors in COACS, and that they pay the right tax on their investments. I hope that the hon. Lady will withdraw the amendment, and that clauses 40, 41 and 42 will stand part of the Bill unamended.
Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Finance Bill (Fifth sitting)
Mel Stride ExcerptsTuesday 24th October 2017
(6 years, 5 months ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 October 2017 - (24 Oct 2017)
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure once again to serve under your chairmanship, Mr Howarth. Clause 43 will ensure that rates of air passenger duty for the tax year 2018-19 increase in line with the retail prices index. The changes will ensure that the aviation sector continues to play a part in contributing towards general taxation.
APD forms an important part of Government revenue. The Government have raised APD by RPI each year since 2012, and the clause continues that trend. With no tax on aviation fuel or VAT on international and domestic flights, APD ensures that the aviation sector plays its part in contributing towards general taxation, raising £3.1 billion per annum. The aviation sector continues to perform strongly. The UK has the third largest aviation network in the world, and passenger numbers at UK airports have grown by more than 15% in the past five years.
Clause 43 sets the APD rates for the tax year 2018-19 in line with RPI. The changes will increase the long-haul reduced rate for economy class tickets by just £3 and the standard rate for all classes above economy by just £6. The rounding of APD rates to the nearest pound means that short-haul rates will remain frozen for the sixth year in a row. That will benefit 80% of all airline passengers. To give industry sufficient notice, we will announce APD rates for 2019-20 at the autumn Budget 2017, legislating in the corresponding Finance Bill.
APD is a fair and efficient tax, where the amount paid corresponds to the distance and class of travel of the passenger. The changes made by clause 43 will ensure that the aviation sector continues to play its part in contributing towards general taxation, raising £3.1 billion a year.
Anneliese Dodds (Oxford East) (Lab/Co-op)
It is a pleasure to serve under your chairmanship, Mr Howarth. I have a couple of questions. Air passenger duty is a matter of considerable public debate, and debate within the industry, so it is appropriate that we probe this.
First, can the Minister provide us with a little more understanding of what he views as the purpose of this tax? In his introductory remarks, he appeared to reduce it specifically to revenue raising. Others have seen the duty as a potential green tax as well, although clearly it is not hypothecated for that purpose. It would be helpful to know whether he believes the duty has any kind of deterrent effect.
Secondly, in the light of the Scottish Government’s policy approach, does the Minister anticipate a race to the bottom in relation to APD in future, particularly given the representations made by Newcastle airport and others about potential unfair competition from across the border?
Finally, mention has been made in some of the discussions on this duty of the potential impact on those with protected characteristics who might need to travel more frequently on long-haul flights, for example. It would be helpful to hear the Minister’s views on whether these changes might have a disproportionate impact on certain ethnic minorities. That has come up in some of the debates around APD.
Mel Stride
I thank the hon. Lady for her questions, which I will answer in order.
The purpose of APD is clearly, as the hon. Lady identified and as I explained in my opening remarks, to raise revenue—£3.1 billion in this instance. Like all taxes, it will also change behaviour to some degree, and to the extent that it makes flying a little bit more expensive, it could be expected to have the effect of diminishing demand for air travel. The lower rates for economy, which takes up more space on aircraft than first class, assist in ensuring that flights are as full as they can be.
The hon. Lady mentioned the Scottish Parliament and the devolution of APD, which will become air departure tax in Scotland. That tax has not yet been switched on, although devolution arrangements are in place, and we will of course monitor the issues that she has understandably raised in respect of competition with airports, particularly in the north of England. On long-haul flights and the impact on various groups, including ethnic minorities, I would be happy to write to the hon. Lady with any information that we have.
Kelvin Hopkins (Luton North) (Lab)
I am glad that the Minister has raised the question of ethnic minorities. My constituency has a large Caribbean community, who are concerned about air passenger duty’s effect on flights to the Caribbean to see family and so on. Has the Minister received any specific representations on that? The other question, of course, is about the airlines themselves. In Luton, we have London Luton airport. What representations have the airlines made to the Minister?
Mel Stride
If I may, I shall write to the hon. Gentleman on the specific questions that he has raised about the consultation on these measures.
Question put and agreed to.
Clause 43 accordingly ordered to stand part of the Bill.
Clause 44
Petroleum revenue tax: elections for oil fields to become non-taxable
Question proposed, That the clause stand part of the Bill.
Kirsty Blackman (Aberdeen North) (SNP)
It is welcome that the Government are looking to reduce the administrative burden in relation to elections for oilfields to become non-taxable. That is positive news. The Chancellor of the Exchequer has mentioned in two Budgets that there will be changes in the taxation system to make it easier for late-life assets to be transferred. I have heard noises from the Chancellor in recent times that he may not introduce that in the autumn statement this year, and I will just make this pitch to the Minister. This issue is incredibly important. The oil and gas industry is not asking at this moment for significant changes, but for the change in relation to the transfer of late-life assets. I would very much appreciate it if, in the context of reducing the administrative burden and making things easier for companies dealing with the very mature field in the North sea, the Minister would hear my case on that and make the case to the Chancellor.
Anneliese Dodds
I must admit to being slightly confused about the purported impact of this change. Some of the inputs from stakeholder bodies seem to imply that there will be some kind of Revenue impact as a result of the changes in relation to procedures for elections for oilfields to become non-taxable. For example, Oil & Gas UK has welcomed the change, saying that the move will reduce the headline rate of tax paid on UK oil and gas production. In contrast, Friends of the Earth has expressed disappointment at the tax cut. As I understand it, petroleum revenue tax was permanently zero-rated in 2016, and the Government’s assessment of the measure’s impact on the Exchequer is that it will be negligible. Therefore, can the Minister enlighten us on why some people appear to view the measure as potentially having an Exchequer impact, but the Government do not appear to have that view?
Mel Stride
Perhaps I should set the scene that I would have set had I realised that others were going to contribute to this debate, because I think that that will pick up some of the questions that have been raised. However, before I do that, I shall turn immediately to the question raised by the hon. Member for Aberdeen North about the transfer of long-life assets. I will take her remarks as a Budget representation, but I am sure that she understands that at this moment, in the run-up to the Budget, I will not comment further on specific taxes or arrangements relating thereto.
Clause 44 makes changes to simplify the process for opting oil and gas fields out of the petroleum revenue tax regime, reducing the administrative burdens on affected companies. To ensure that participators could take advantage of the changes as soon as possible, the legislation had effect from the date of its announcement, on 23 November 2016. I shall provide Committee members with some background to the measure.
At Budget 2016, as part of a £1 billion package of measures to support the oil and gas industry, the Government announced that PRT would be permanently zero-rated. That was to simplify the tax regime, to level the playing field between older fields and new developments and to increase the attractiveness of UK investment opportunities. It was decided that the tax should not be abolished completely, because some companies still require access to their tax history for carrying back trading losses and decommissioning costs. As a result, participators still have to submit returns, which many find complex, time consuming and expensive. Following consultation with industry, the Government are therefore simplifying the rules for opting fields out of the PRT regime. The changes made by clause 44 will allow the responsible person for a taxable oilfield to remove the field from the PRT regime simply by making an election to do so and then notifying HMRC. When coupled with the Government’s removal of other reporting requirements, these changes will save companies an estimated £620,000 in total ongoing costs per annum.
The clause builds on the Government’s support for the UK oil and gas industry, including the £2.3 billion package of fiscal reforms announced in the 2015-16 Budget. I therefore hope that the clause will stand part of the Bill.
Question put and agreed to.
Clause 44 accordingly ordered to stand part of the Bill.
Clauses 45 to 47 ordered to stand part of the Bill.
Clause 48
Carrying on a third country goods fulfilment business
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 49 to 55 stand part.
That schedule 13 be the Thirteenth schedule to the Bill.
Clauses 56 to 59 stand part.
New clause 5—Annual report on powers in relation to third country goods fulfilment businesses—
‘(1) The Commissioners must prepare a report on the operation of the provisions of Part 3 of this Act in relation to each tax year after their commencement within six months after the completion of that tax year.
(2) The Chancellor of the Exchequer shall lay a report under subsection (1) before the House of Commons.
(3) Each report under subsection (1) shall cover in particular—
(a) prosecutions for an offence under section 53,
(b) penalties imposed under Schedule 13,
(c) the effects on the operation of Part 3 of the United Kingdom’s withdrawal from the European Union or (as the case may be) preparations for that withdrawal,
(d) implications of the matters specified in sub-paragraph (c) for the activities and resource requirements of HMRC in connection with the provisions of this Part,
(e) implications of the matters specified in sub-paragraph (c) for the exercise of the powers to make regulations under Part 3, and
(f) HMRC’s assessment of the extent to which the operation of, or changes to the operation of, comparable provisions in other countries affect businesses in the United Kingdom.’
This new clause requires HMRC to produce an annual report on the operation of Part 3 relating to third party goods fulfilment businesses and specifies some of the information to be included in that annual report.
Kelvin Hopkins
It is a pleasure to serve under your chairmanship again this morning, Mr Howarth. When I first entered this House over 20 years ago, I visited my local VAT office and they said that if they had more VAT officers they could collect many more times their own salaries. That has been the case ever since. I am not so familiar with third country goods fulfilment businesses, but it nevertheless strikes me as something that requires a proper resource within the VAT component of HMRC. I wonder whether we are still understaffing VAT offices and whether we could collect much more by employing more staff. At that time, the ratio between the staff salary and the tax they collected was about 5:1. Every additional member of the VAT staff produced five times more than their own salary. If that is still the case today—it may be an even bigger ratio—it would be helpful to think about employing more staff.
Mel Stride
Clauses 48 to 59 and schedule 13 implement the fulfilment house due diligence scheme. The scheme will require that from 1 April 2018, fulfilment businesses in the UK that fulfil goods for traders based outside the EU must register with HMRC, keep certain records, and carry out robust due diligence checks on their overseas clients.
The fulfilment house due diligence scheme is part of a package of measures announced at Budget 2016 that will disrupt and deter VAT abuse by overseas traders who sell goods to UK consumers via online markets. To address the point raised by the hon. Member for Luton North, the measure is not one that requires lots of extra inspectors; it requires a different attitude and regime for the fulfilment houses that are facilitating this VAT fraud. We expect it to be effective in those terms, rather than needing large numbers of additional staff.
Together, these measures are expected to deliver £875 million for the Exchequer by 2021. Many overseas traders selling via online marketplaces import their goods en masse to fulfilment houses in the UK, in readiness to fulfil anticipated future orders from UK customers. Once imported, the fulfilment house businesses will store, pack and sometimes deliver these goods on their behalf. Currently, certain overseas traders do not comply with the obligation to charge VAT on their goods held at UK fulfilment houses, as the hon. Member for Luton North pointed out. This not only deprives the UK Government of a significant amount of revenue but allows these overseas traders to obtain an unfair competitive advantage over the honest majority of VAT-compliant businesses operating in our country.
Clauses 48 to 59 and schedule 13 implement the fulfilment house due diligence scheme. Clause 48 sets out that all UK fulfilment houses that fulfil goods owned by traders established outside the European Union will be within the scope of the new scheme. These are referred to throughout the legislation as “third country goods fulfilment businesses”.
Clause 49 sets out that, following commencement of the scheme, all third country goods fulfilment businesses in the UK will require approval from HMRC as a “fit and proper” person in order to continue operating legally.
Clause 50 outlines that HMRC will maintain a register of all such approved persons. It will publish such details from the register as it deems necessary to allow counterparties, such as those in the express deliveries industry, to check whether they are dealing with a compliant fulfilment business.
Kirsty Blackman
I agree. In Kingswells in my constituency, which is a large suburb of Scotland’s third city, there are significant issues about access to fast broadband. There is access to slow broadband, and it is sometimes intermittent, for reasons to do with historical infrastructure. Broadband companies were put on the grid to begin with and they now find it more difficult to upgrade the historical technology. I appreciate the point that the hon. Lady has made; it is important to note that for some people intermittent access can be as difficult as no access.
The third category of businesses we have chosen is those likely to be affected by the closure of HMRC offices. I have needed to do tax returns online only since I became an MP. The problem with some of the questions is that yes or no are the options but my answer has been “maybe” or “kind of”. Despite the fact that the online form was fairly clear, I needed to phone someone to get some advice on whether to tick yes or no. If businesses lack advice and information from HMRC about the correct option to choose in some cases, it will be more difficult for them to fill out the forms.
It is important that businesses should be given the advice, information and support they need to fill in the forms correctly online. I am sure that no businesses will be trying to make errors; they will be looking for advice. My concern, particularly regarding HMRC offices, is the lack of access to advice that people might have.
Mel Stride
The important point is that, for many years, people have not simply been walking into or getting an appointment at their local HMRC office. The fact that we are drawing offices together into 13 beefed-up regional centres is particularly important in the context of telephone advice, which the hon. Lady is alluding to and which will still very much be available for exactly the circumstances she describes.
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.
Mel Stride
These clauses introduce the requirements for making tax digital for businesses. That is a major step in our journey towards a system in which technology makes it easier for businesses to get their tax right. The majority of businesses, as we have heard, want to get their taxes right but, none the less, make honest and avoidable mistakes in fulfilling their tax obligations. Not only does that cause them concern and frustration when HMRC intervenes to put it right, but taxpayer error and failure to take reasonable care cost the Exchequer £8 billion a year.
VAT has been online since 2010 and more than 98% of registered businesses already send VAT returns to HMRC in this way; many do it themselves, some use agents to do it for them. Making tax digital will be voluntary for income tax and national insurance contributions for those who fall below the VAT threshold, even if they are registered for VAT. Hon. Members will note that provisions in the Bill relating to income tax—that is, clauses 60 and 61—cannot enter into force until an appointed day order is made by the Treasury. The Government have committed that that will not happen before 2020.
The hon. Member for Bootle very generously welcomed, as did other Members, the timetable changes that I announced in July. The hon. Gentleman suggested that we have not gone far enough. I would point him to the remarks of Mike Cherry, the FSB chairman, who welcomed the delay that I announced in July. He said that it makes
“the roll-out of the changes far more manageable for all of the nation’s small firms”.
Many similar comments were made by businesses and organisations representing businesses at that time.
Let me set out in detail a few aspects of the legislation for making tax digital and we can pick up some of the points made by hon. Members. Clause 60 provides the framework for a future extension of making tax digital to income tax and class 4 national insurance. It sets out to whom the rules would apply—broadly, any unincorporated trading business or landlord with turnover of more than £10,000 a year. Clause 60 provides that the regulations made using these powers cannot mandate the provision of information more frequently than once a quarter, so we can be very clear on the frequency issue in the legislation. That output will be generated automatically by software and sent at the press of a button to HMRC. There will be no requirement for businesses to pay income tax or national insurance alongside their final year update.
Clause 61 introduces schedule 14, which makes consequential amendments to the existing income tax administration rules. Clause 62 amends the powers in the VAT Act 1994, enabling HMRC to amend the existing VAT regulations to provide for digital record keeping and information reporting.
The hon. Member for Bootle has suggested a number of amendments to clauses 60 to 62. He also asked several questions relating to those clauses in Committee last week, which I hope to address today. Amendments 33 to 35 would have the effect of delaying making tax digital implementation until 2022 at the earliest. Having consulted widely and received feedback both from external stakeholders and Members, the clear message was that, although digitising tax was a positive step, some had concerns about the scope and pace of change.
As many Members have reflected today, on 13 July we announced significant changes to the scope and timetable for making tax digital, giving 3.5 million businesses more time in which to prepare. Businesses will not now be mandated to join making tax digital until April 2019, and then only to meet the VAT obligations. Businesses with a turnover below the VAT threshold will be exempt from making tax digital altogether. That change was widely welcomed—as I pointed out, it seems a realistic path to implementation. Trade representative bodies and other stakeholders who previously expressed concerns are now engaging with HMRC to ensure a successful roll-out of the programme. HMRC has already started piloting the changes for income tax, allowing for at least three years of testing on a voluntary basis before mandation.
Changing the timetable further would create uncertainty for businesses and undermine our ability to pilot the changes properly. Digital software is increasingly part of the way that businesses operate; further delay to making tax digital would result in increased divergence between the way that businesses run themselves and the way they do their tax. Making tax digital is about ensuring that businesses get their tax right and helping HMRC to address the £8.7 billion tax gap. We need to balance ensuring that businesses and agents have time to prepare with ensuring that everyone can experience the benefits of doing tax digitally at the earliest opportunity. I am confident that the current timetable strikes the right balance.
The hon. Member for Bootle also tabled an amendment to stipulate that there should be no requirement under MTD for mandatory quarterly updates for VAT. Under our current plans for MTD for VAT, no business will be required to provide updates to HMRC more frequently than they do now. Most already submit VAT returns quarterly and they will provide the same information with the same frequency. The difference is that the updates will be sent to HMRC from digital records.
The hon. Gentleman’s final amendment would require my right hon. Friend the Chancellor to lay a report relating to the software used for MTD before the House. HMRC has begun piloting MTD services and intends to test the system extensively. That pilot will be used to test the range of software products available to businesses. HMRC is working with the software developer industry and others to ensure that products are available to businesses and agents at a range of different price points. As it emerges from the pilots, HMRC will publish information about available software products on gov.uk to enable businesses to choose appropriate products.
The hon. Member for Walthamstow has tabled three amendments to clause 60—I would expect no less than three; it is very modest of her, on this occasion, though I think one amendment was submitted twice—which seek to ensure that businesses record service charges separately for each employee. As the hon. Lady knows and has pointed out, the Department for Business, Energy and Industrial Strategy has consulted on service charges on these matters. The issue is of course very important: I know that she has pursued it for a long time and given an eloquent and lengthy discourse on many of its byways and alleyways. As perhaps was demonstrated by the intervention of my hon. friend the Member for Hitchin and Harpenden, these particular matters are complex. It is the Government’s contention that this is not the right forum in which to start trying to address, tempting though it is, through making tax digital, some of what I accept may be iniquities in the operation of companies’ tips and service charge systems. We have to wait for the results of the BEIS consultation.
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.
Ruth George
Bearing in mind that national minimum wage legislation can be implemented by BEIS only on an individual basis, when an individual complains, and such cases can be settled only on an individual basis, does the Minister not agree that a wider remit than that of BEIS will be required to tackle substantive abuses that go across whole workforces, as described by my hon. Friend the Member for Walthamstow?
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.
Ruth George
Bearing in mind that individuals have to raise a complaint in order to secure an investigation by HMRC compliance, and that the workers we are talking about are some of the most vulnerable and most susceptible to exploitation, immediate dismissal or changes to their terms and conditions because they are often not in the workplace for a substantial length of time, does the Minister agree that it would be helpful if HMRC were able proactively to investigate these schemes, rather than having to wait for individual vulnerable employees to put themselves at risk by raising a complaint?
Mel Stride
The hon. Lady overlooks the fact that it is often possible for those who wish to complain to do so anonymously through their trade union or other representatives. That is what happens in many cases. HMRC does not have to rely on a specific complaint to conduct an investigation. It may have suspicions of its own for a variety of reasons. I do not think that we are in a position where people are unable to come forward, as she suggests.
The hon. Member for Aberdeen North has tabled two amendments that seek to review the impact of MTD on specific groups. I recognise her concerns, but the Government have been clear from the outset that businesses that are unable to go digital will not be required to do so.
If you will indulge me, Mr Howarth, it is worth looking at some of the detail of the Bill at this point. The hon. Lady has raised a very important point about potential digital exclusion. Clause 60 covers exemptions, as I am sure she is aware. New sub-paragraph (4) of paragraph 14 of schedule A1 states:
“The digital exclusion condition is met”—
for those who would not be required to put in their returns digitally—
“in relation to a person or partner if…for any reason (including age, disability or location)”—
the hon. Lady rightly raised rural localities—
“it is not reasonably practicable”—
that is not the same as completely impossible—
“for the person or partner to use electronic communications or to keep electronic records”.
I think that is a well-crafted clause to catch the kind of circumstances about which the hon. Lady and I are concerned.
Kirsty Blackman
The concern raised by the hon. Member for High Peak was about intermittency. The issue is not about people who do not have access to the internet at all, but those who have only intermittent access. The clause may not be lenient enough for them to make a case for not having digital access. Does the Minister have a view on that?
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?
Mel Stride
I refer the hon. Lady to my last reply: the customs Bill is not there to map out every single eventuality as to how VAT will be handled, what rules and regulations we may or may not operate with under World Trade Organisation rules or what agreement we will have with the EU on all the issues, including those she has raised, or otherwise. It will be a framework Bill that will ensure that we are in a position promptly and effectively to bring in whatever measures we need to move forward in the orderly manner she referred to. On that note, I think we have given her amendments a thorough examination.
The Government’s ambition is for the UK to be the best place in the world to start and grow a business, and for HMRC to be one of the most digitally advanced tax administrations in the world. Making tax digital will be a major step forward in the way that businesses conduct their record keeping and interact with HMRC. I commend the clauses to the Committee.
Question put, That the amendment be made.
The Chair
With this it will be convenient to consider the following:
Amendment 41, in schedule 16, page 609, line 4, leave out “may” and insert “must”.
This amendment would remove HMRC’s discretion over whether to publish information on people have incurred a penalty and the conditions of paragraph 46 have been met.
Amendment 42, in schedule 16, page 611, line 27, at end insert—
“Duty to publish information on operation of penalty regime
51A (1) The Commissioners must publish information about the operation of the penalty scheme in relation to each tax year within six months of the completion of that tax year.
(2) Such information shall cover in particular—
(a) the nature of the abusive tax arrangements giving rise to penalties,
(b) the extent to which such arrangements relate to offshore income, assets and activities,
(c) the extent to which people who would otherwise have been liable for a penalty under these provisions were not liable due to being convicted of a criminal offence in accordance with paragraph 52.”
This amendment would broaden the requirement for HMRC to publish information on penalties to cover the nature of the abusive tax arrangements, the extent to which they involve offshoring and the instances where successful criminal prosecution is used instead.
That schedule 16 be the Sixteenth schedule to the Bill.
Mel Stride
Clause 65 and schedule 16 introduce a new penalty for any person who enables the use of tax avoidance arrangements that are later defeated by HMRC. Currently, tax avoiders face significant financial costs when HMRC defeats them, but those who enable them bear little risk; they gain financially while their clients foot the bill. The purpose of the penalty is to deter people from enabling tax avoidance arrangements, reducing the number of schemes on the market.
Enablers of tax avoidance arrangements will now face penalties of 100% of the fees that they earned from the failed avoidance. The measures ensure that there are powers to tackle the full supply chain of avoidance arrangements. The penalty is designed to have a behavioural impact on the minority who continue to supply abusive avoidance arrangements, while ensuring that the vast majority of professionals who advise on genuine commercial arrangements are not affected. The measures are targeted carefully to capture abusive arrangements that no reasonable person could consider to be a reasonable course of action, and only those enablers who knowingly enable such arrangements that are later defeated.
The measure was developed after extensive consultation last year with representative bodies and large accountancy and law firms. Following the publication of draft legislation in December 2016, HMRC held a significant number of meetings with stakeholders to help refine the technical detail of the legislation. That engagement has been constructive, and stakeholders have welcomed HMRC’s collaborative approach, acknowledging that many of their concerns have been addressed.
For too long, those who enable tax avoiders have been able to gain financially from schemes, knowing that they face little sanction when their scheme is defeated. It is time that that is put right.
Anneliese Dodds
My hon. Friend makes a good point about the potential perverse incentives created by focusing uniquely on HMRC receiving payment from the client for the creation of such schemes and the enrolling of individuals and firms on to them, rather than on the activity of creating those schemes in the first place and, above all, on HMRC’s costs as a result of investigating them.
All of us, as Members of Parliament, are well aware of the kinds of schemes under discussion. It was interesting to hear the Minister mention the principle of eliminating those schemes that no reasonable person would think should be followed by taxpayers. We have voluminous evidence that that is not currently the case. We need only look at some of the flow charts produced and revealed during the Lux and Panama leaks to be aware that there clearly is an industry in creating such tax avoidance schemes.
We need very tough measures against those schemes. Given that they could be costing the Exchequer dearly, we feel it is appropriate to have a greater amount of information about the measures and, in particular, to compel HMRC and the Government to publish that information in full so that we can assess their efficacy.
Mel Stride
I make clear the Government’s total commitment to clamping down on tax avoidance. We have brought in £160 billion since 2010 by clamping down on avoidance, evasion and non-compliance. We have already introduced legislation that clamps down on those who generate abusive schemes, and the Bill seeks to catch up with those who have benefited or who expect to benefit from such schemes. That leaves us to deal with the enablers in the centre of the equation.
The hon. Member for Oxford East raised the issue of naming. The Bill will allow the flexibility to name those who have been enabling these schemes. We believe that a proportionality test should be applied to take account of how significant and widespread the abuse has been, but if a very serious level of abuse has occurred, there is provision for the individuals, partnership or company concerned to be named in the way she described.
The hon. Member for High Peak is entirely correct that HMRC should be encouraged to address these cases early, rather than letting them run on. The clause seeks not only to ensure that we can catch up with these things quickly, but to prevent them from happening in the first place. It is about behavioural change, which is so important. We have seen a lot of evidence that many of these schemes are beginning to close down because we are sending the right signals and getting tough and serious about it.
Anneliese Dodds
I am concerned about incentives. HMRC is not being given specific additional resources, and some of the investigations may be quite detailed. As my hon. Friend the Member for High Peak asks, where is the incentive to crack down on the schemes early? The funds receivable may be very small because the schemes are unlikely to be used by a large number of taxpayers. I am concerned that we may be making it difficult for HMRC to take action, because the Bill does not include a requirement to cover its costs.
Mel Stride
The incentive for HMRC and for the Government is to squeeze the tax gap and minimise the number of people avoiding tax. If we do not get on with clamping down on those individuals and companies in a timely fashion, we will make things worse right across the piece and generate less tax as a consequence. We have a clear incentive to ensure that these measures bite at the earliest opportunity. It is about changing behaviour. The very best approach to tax avoidance is to ensure that it does not happen in the first place.
Question put and agreed to.
Clause 65 accordingly ordered to stand part of the Bill.
Schedule 16
Penalties for enablers of defeated tax avoidance
Amendment proposed: 41, in schedule 16, page 609, line 4, leave out “may” and insert “must”.—(Anneliese Dodds.)
This amendment would remove HMRC’s discretion over whether to publish information on people have incurred a penalty and the conditions of paragraph 46 have been met.
Question put, That the amendment be made.
Mel Stride
Main Page: Mel Stride (Conservative - Central Devon)Department Debates - View all Mel Stride's debates with the HM Treasury
Finance Bill (Sixth sitting)
Mel Stride ExcerptsTuesday 24th October 2017
(6 years, 5 months ago)
Public Bill CommitteesRead Full debate Finance (No.2) Act 2017 Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 24 October 2017 - (24 Oct 2017)
Peter Dowd
It is a pleasure to serve under your stewardship, Mr Walker, notwithstanding the fact that you have just stolen my joke. I asked my daughter, who studied French, what the French for “dénouement” and “ambience” was, but she did not find that very amusing.
Clause 69 extends bulk data-gathering powers, which were given to HMRC in the Finance Act 2011, to money service businesses such as Western Union. The clause continues the Government’s plans to rapidly expand HMRC’s powers to collect bulk data from third parties. In the Finance Acts of 2011, 2013 and 2016, the powers were extended to merchant acquirers, and in 2016 they were extended to, to collect bulk data from providers of electronic stored-value payment services, also known as digital wallet transactions.
The powers are part of the Government’s strategy to tackle the hidden economy and reduce the tax gap. All Members agree that people operating within the hidden economy evade tax and gain an unfair competitive advantage over law-abiding, tax-paying individuals and businesses. Under anti-money laundering legislation, money service businesses are already required to conduct due diligence checks on customers, in certain circumstances at least. HMRC supervises the majority of money service businesses for compliance with that legislation, so it can request limited information from them as part of its supervision for anti-money laundering purposes. It can also use any information obtained for tax compliance purposes but cannot currently request that information with the original intention of checking the tax position of their customers. This clause would change that by requiring money service businesses to become data holders, to collect data from their users, and to pass that data on to HMRC when requested.
It is important to be clear about how a money service business would hand over a customer’s data to HMRC. First, HMRC would issue a notice to the data holder requiring it to provide HMRC with information. The data holder can respond and, if it rejects the notice, can appeal to the tribunal. The tribunal then makes its ruling. Under these provisions, any money service business that does not comply will be issued with a financial penalty. Similarly, HMRC has the power under this measure to apply directly to a tribunal for approval at a hearing without notice being given to the data holder—effectively going over its head.
At no point in the process is the individual or the business who used the money service business and whose information is being passed to HMRC notified, as I understand it. It seems that the clause is not open to individual appeal at any point in the judicial process. In fact, it rests solely on the shoulders of the money service business to appeal when necessary.
The Opposition fully support measures to clamp down on the hidden economy—on individuals and on businesses using unsavoury and slippery practices to avoid paying their fair share of tax—but we are talking about third parties collecting massive amounts of data to hand over to HMRC. Money service businesses are effectively being asked to pick up the slack for HMRC, which, in our view, is increasingly underfunded and under-resourced. I have said it before, and I will say it again: Government statistics show that since 2010, there has been a 17% reduction in HMRC staffing levels. The Minister needs to address the resources available to HMRC to crack down on the hidden economy. It appears that once again the Government are ambitious in the powers they wish to give themselves—through the back door, some would say—but not so enthusiastic about funding and resourcing their commitments.
The Minister will be aware that although most money service businesses keep records of due diligence checks on customers, they do not have the time—or, I suspect, the inclination—for the pretty onerous task of sifting through the data to provide HMRC with individual records. I therefore find it unlikely that they would refuse or appeal a notice, which is the supposed judicial check on this broad, sweeping power. What does the Minister think is a reasonable notice period for a money service business to process and respond to HMRC? Does he accept that there may be hidden costs for money service businesses that have to comply with these measures?
In the Government’s consultation, there was much debate about the substance of the information that would be transferred between money service businesses and HMRC. According to the Information Commissioner’s Office,
“it is clear that some of the information that may be provided to HMRC for the purposes of extending data gathering powers to money service businesses will constitute personal data in instances where the customer is an individual, a sole trader or a partnership… It will therefore be an important data protection obligation for the MSBs under the scope of the proposed legislation to provide their customers with privacy notices… The minimisation of the collection of personal data of individual consumers is an important privacy protection principle in financial transactions.”
I suspect the Minister will need to consider those concerns as part of a wider discussion about the scope of HMRC’s powers.
The privacy group Liberty has raised concerns that the practice of bulk data surveillance is suspicionless surveillance and constitutes a disproportionate interference with article 8 of the European convention on human rights, as enshrined in the Human Rights Act 1998: the right to respect for private and family life. Liberty’s concern is that bulk data surveillance inverts the traditional relationship between suspicion and surveillance that exists in UK law, because suspicion comes first to justify subsequent surveillance.
In the light of these concerns, our amendment calls for a review of the exercise of schedule 23 powers, with a particular emphasis on how they relate to data protection. The Government have the right to ensure that HMRC has the necessary powers to tackle the hidden economy, but they are also obliged to ensure proper judicial oversight and the protection of people’s rights.
I am reaching my dénouement. The Minister’s case for new bulk data-gathering powers rests on the need for third parties to help HMRC to catch customers who participate in the hidden economy, which costs the Treasury £6.2 billion a year, as I recall. However, he has rejected our attempts to introduce a register for offshore trusts, our calls to crack down on tax avoidance by removing the exemption for offshore trusts in the Government’s deemed domicile proposals, and any meaningful attempt to bring transparency and accountability to non-doms who abuse the UK tax system. I will not call it a double standard; that is not a fair assessment.
However, the Government are demanding all this information from money service businesses customers to ensure that they are not participating in the hidden economy—yet at the same time rejecting any sort of information being held on offshore trusts, which are used to shelter hundreds of billions from the UK Exchequer. As I said last week, there needs to be careful consideration of the balance between individual liberty and the powers of the state. Over the past few years, we have seen multiple Finance Bills whereby Government give HMRC sweeping data-gathering powers, from merchant banking to digital wallets. I believe there is a rational concern that though these powers can tackle criminality, they can also impede an individual’s right to privacy. Any Government need to ensure that the balance is struck fairly and proportionately—and we are not convinced that this does so. Otherwise, there is a real fear that, increasingly, only those who can afford to secure their financial privacy, or to shelter and shield their wealth and financial transactions from the state, will have any privacy. The Government should give more thought to that.
The Financial Secretary to the Treasury (Mel Stride)
It is a pleasure to serve again under your chairmanship, Mr Walker.
Clause 69 will extend HMRC’s data-gathering powers to money service businesses, allowing it to better identify and take action against businesses and individuals operating in the hidden economy. Money service businesses, or MSBs, are entities that provide money transmission, cheque cashing, or currency exchange services. They provide valuable financial services that are relied upon by many tax-compliant customers. However, these services are vulnerable to exploitation by those who want to disguise their income. Under the clause, data provided by MSBs to HMRC will allow HMRC to better identify non-compliant customers who are exploiting MSB services to hide their income and operate in the hidden economy.
The hidden economy is made up of those businesses that fail to register for tax, and individuals who fail to declare a source of income that should be taxed. By hiding their activity from HMRC, those operating in the hidden economy deprive the Government of vital funds to run public services. That places an unfair burden on the vast majority of people and businesses who pay their fair share of tax. Hidden economic activity also disadvantages compliant businesses. HMRC’s operational experience shows that non-compliant businesses and individuals can exploit the services offered by MSBs to disguise or dispose of undeclared income. They can do this, for example, by cashing a cheque for undeclared work. HMRC’s data-gathering powers allow it to collect data from certain third parties. Following public consultation and a Government response in 2016, the clause extends those powers to MSBs. It does that by introducing MSBs as a new category of data holder from whom HMRC may require data. MSBs are defined under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
“Credit institutions”, or, practically, banks and building societies, are excluded. The term MSB is generally taken to mean a business that provides money transmission, cheque cashing or currency exchange services without transacting through a bank account or providing general banking services. The clause is intended to cover those businesses. Supporting regulations will be made at Royal Assent, using an existing power to make regulations contained in schedule 23 of the Finance Act 2011. Those will provide detail of the types of data that can be requested. A draft of the regulations was published for consultation last year and regulations will subsequently be laid before the House, subject to the negative resolution procedure. The clause does not impose any additional record-keeping requirements on MSBs. HMRC cannot request data that an MSB does not hold. That is an important point and relates to the concern raised by the hon. Member for Bootle.
HMRC will work collaboratively with MSBs to minimise the administrative burden of complying with the new law. MSBs can appeal against a data notice issued by HMRC on the grounds that it is unduly onerous, or if they consider that the notice asks for data that is outside the scope of relevant regulations. HMRC can request data necessary to detect and quantify hidden economy tax risks. That includes information needed to identify an MSB’s customers and records that the MSB is required to keep under money laundering regulations. It also includes data about aggregate customer transactions. HMRC will not request data on individual transactions.
The hon. Member for Bootle raised an important point—what data can HMRC request under these provisions? The answer is aggregated data, which will not include data on the value of individual transactions made by customers.
Kelvin Hopkins (Luton North) (Lab)
I want to respond briefly to what the Minister said. It is a pleasure to serve under your chairmanship yet again, Mr Walker, possibly for the last time during this Committee.
I have always had a concern about the money service industry, particularly since many of my constituents send money to family members overseas. There are large immigrant minorities from every part of the world in my constituency. Some of the transactions have been insecure—we have seen companies where money has been lost, and I have long thought that there ought to be a much higher degree of regulation of that industry.
There is obviously an issue around charges. I suspect that charges vary widely and are often very high. It seems to me that what we really want is at least a state company doing this business, either instead of or alongside these organisations, which would be properly regulated, have fair charges, and be open and transparent, apart from personal secure information about transactions, which my hon. Friend the Member for Bootle talked about. Bringing the state actively into that area would be a great advance. Perhaps I speak from a left position that might not find favour with the Government, but we ought to look forward to a much more regulated industry with a strong state sector in the future.
Mel Stride
To reply briefly to the hon. Gentleman’s point: the issue of MSB ownership and state involvement is probably slightly beyond the scope of this Bill, but his points are noted. If he continues to work very hard, who knows what might happen? Much to our horror and dread, the state may end up owning just about everything in this country, if he and his merry men and women have their way.
Peter Dowd
I have accepted previous assurances provided by the Minister and we have withdrawn amendments appropriately, in good faith and good spirit. The issue under discussion goes beyond the technicalities and reaches into the very nature of a state that does not interfere in people’s affairs where it has no business to do so. That is not to say that the state has no business interfering; it does so with tax collection, which helps maintain the balance of society. It would not be appropriate for me to withdraw the amendment, because I think that many members of the Committee would like to err on the side of caution and accept it, even though they will not do so. We will therefore leave it hanging and I have no doubt that we will return to the issue of privacy at a future date.
Question put, That the amendment be made.
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.
Ruth George
Does the Minister agree that now that we are seeing residential property increasingly acquired by such complex structures, and that by eradicating the omission for commercial properties, it would simplify the legislation? HMRC would not have to establish whether a property was commercial or residential because there are so many grey areas, as my hon. Friend the Member for Walthamstow pointed out.
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.
Mel Stride
Mr Walker, having rocketed through this Bill, efficiently and I think in near-record time, it is only right that I say “thank you” to all those who have made our rapid progress possible. I start with yourself, Mr Walker. I thank you for your patience, good humour and of course for teaching us the right pronunciation of “schedule”. I also thank your co-Chair, Mr Howarth, for his sagacity, which is unrivalled on the Panel of Chairs, with perhaps the exception of yourself, Mr Walker.
I thank all members of the Committee. I thank Opposition Members for their pursuit of their duty of scrutiny of the Bill, although ultimately they were, rather pleasingly, unsuccessful in all the Divisions that we have had. However, we will not hold that against them; they did their job very thoroughly and very effectively indeed. I want to particularly and personally thank the hon. Members for Bootle, for Oxford East and for Aberdeen North for the very good-natured and decent way in which they have dealt with me personally and all the Government Members of the Committee; and, yes, I want to thank the hon. Member for Walthamstow as well, from the bottom of my heart. I genuinely respect her eloquence and determination, and I have enjoyed the mental contortions that she has put me through during the Committee.
I thank the Government Members of the Committee. Their contributions were slightly limited, but when they came they were of a quality that was unrivalled and unparalleled in the history of Committees. I thank the Whips on both sides: my hon. Friend the Member for Beverley and Holderness and the hon. Member for Manchester, Withington. As a former Whip, I know that often they are in the background but what they do really matters and they have ensured that this Committee has run in a very efficient and effective manner.
I thank those who gave evidence to the Committee, the Clerks, Hansard and the Doorkeepers. Most especially, I thank my own officials at the Treasury and HMRC, who in the short time that I have been a Minister have impressed me immensely with their knowledge, guidance and overall their patience and kindness towards me, in many, many hours of trying to explain what has been an extremely technical Bill.
Finally, on a personal note, if I might be indulged, I thank my two young daughters, Ophelia and Evelyn, who, in the last couple of weeks, while their father grappled in his dreams with this highly technical Bill, managed to stay out of their mother and father’s bed and to give them some sleep.
I look forward to Report. Of course, as someone has already mentioned, we have the delights of a further Finance Bill after the Budget, which I know we can hardly wait for.
Peter Dowd
May I completely concur with the sentiments of the Minister? I thank all my colleagues and Government Members for their patience and forbearance. I will just leave on this note because I am quite stunned: I have visions of the Minister grappling in bed. [Laughter.] Best to leave it on that note.