Cross-Government Prosperity Fund
David Gauke Excerpts(7 years, 10 months ago)
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The Chief Secretary to the Treasury (Mr David Gauke)
In the 2015 Strategic Defence and Security Review (SDSR) the Prime Minister announced the creation of a new £1.3 billion Cross-Government Prosperity Fund. I am pleased to announce the publication on www.gov.uk of a short paper that details how the fund is operating. This paper can be found at: www.gov.uk/government/publications/cross-government-prosperity-fund-programme/cross-government-prosperity-fund-update.
The Prosperity Fund is a key part of our aid strategy. Using primarily Official Development Assistance (ODA) resources the fund will promote economic reform in developing countries contributing to a reduction in poverty.
The fund supports global and UK prosperity by removing barriers to trade, building prosperity partnerships, and supporting UK business in seizing new opportunities. It enables the UK to deepen relationships in countries across the globe.
Thematic, country and regional priorities for the Prosperity Fund are determined by a careful design and economic diagnosis process. Project design, management and evaluation ensures a strong focus on results and value for money. The fund is investing in areas with the highest potential for inclusive growth, strengthening the golden thread of robust institutions, good governance and reduced corruption.
The fund is accountable to the National Security Council (NSC) and to a ministerial board made up of relevant UK Government Departments. The fund supports a fully joined-up approach to prosperity delivery across Departments and through the Government’s overseas network.
All ODA projects and programmes under the Prosperity Fund comply with the International Development Act, meet the OECD Development Assistance Committee (DAC) ODA criteria, are untied, and meet the UK Government transparency commitments on ODA spend.
The Prosperity Fund is one of two cross-Government funding instruments overseen by the National Security Advisor, Sir Mark Lyall Grant. An update to Parliament on the Conflict, Stability and Security Fund (CSSF) will be provided in parallel.
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ECOFIN
David Gauke Excerpts(7 years, 10 months ago)
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The Chief Secretary to the Treasury (Mr David Gauke)
I attended this meeting in my capacity as the Financial Secretary to the Treasury. A meeting of the Economic and Financial Affairs Council was held in Brussels on 12 July 2016. EU Finance Ministers discussed the following items:
Anti-money laundering
The Commission presented its proposals to amend parts of the fourth anti-money laundering directive (4AMLD), on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, followed by an exchange of views.
Communication on further measures to enhance transparency and the fight against tax evasion and avoidance
ECOFIN heard a presentation from the Commission on further measures to enhance transparency and the fight against tax evasion and avoidance. This was followed by an exchange of views.
Presentation of the work programme of the Slovak presidency
The presidency presented its work programme, this was followed by an exchange of views.
Implementation of the banking union
The Commission gave an update on the transposition of several dossiers linked to the banking union: the single resolution fund, the bank recovery and resolution directive and the deposit guarantee scheme directive.
European semester-country-specific recommendations
The Council adopted the 2016 country-specific recommendations as part of the European semester process.
Implementation of the stability and growth pact
The Council endorsed the draft decisions regarding the performance of Spain and Portugal under the excessive deficit procedure (EDP), based on recommendations by the Commission. The Council agreed with the Commission’s recommendation that Spain and Portugal have not taken effective action against their current targets. As these decisions cover euro area member states, the UK did not have a vote.
Third pillar of the investment plan for Europe—thematic discussions on investment barriers
The Commission presented on the third pillar investment plan, this was followed by an exchange of views.
Preparation of the G20 Finance Ministers meeting in Chengdu on 23-24 July 2016
The EU Terms of Reference (ToR) were presented to ECOFIN Finance Ministers for endorsement.
Convergence reports from the Commission and the European Central Bank
There was an exchange of views on the convergence reports which concluded that none of the seven EU member states who are obligated to join the euro fulfil the conditions for adopting the euro.
State of play on finalising the Basel Committee’s post-crisis banking reform agenda
Council conclusions were adopted on the Basel Committee’s post-crisis banking reform agenda.
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Charter for Budget Responsibility
David Gauke Excerpts(7 years, 10 months ago)
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The Chief Secretary to the Treasury (Mr David Gauke)
This Government have been clear that we will not waver in our determination to take every opportunity to stabilise and strengthen the British economy. Ever since we were elected in 2010, we have been resolute in carrying out our plan to build a more resilient economy—one where we invest in our future growth; one where we return the public finances to a sustainable position; and, therefore, one where we are ready for whatever comes our way.
It has not always been an easy course to follow. The Government and the British people have worked hard to fix the public finances. We have had to make tough choices and difficult decisions.
We can be proud of what we have all achieved over the past six years. We have brought down the deficit by almost two thirds from its post-war peak in 2009-10. We have the highest employment on record and the lowest rate of unemployment in more than a decade. There are almost 1 million new businesses in our country since 2010 and, working with the Bank of England, we have strengthened the financial system. That is a long way to have come.
The second thing that we can all be proud of are the strengths that we still have in this country. We are still one of the best places in the world to do business, one of the best places in the world to invest, and one of the most innovative, forward facing and outward-facing countries in the world.
It is because of that hard-won recovery, and because of our hard-working families and businesses and the enduring strengths that we still have here in the UK, that we are all now in a position, and are as ready as we could possibly be, to see out whatever challenges come our way next.
Jeremy Quin
On the question of the UK being a great place to do business, does my right hon. Friend agree that cutting corporation tax, which was referred to by the proposer of the motion, is a very positive sign and a way of attracting businesses to locate and invest in this country?
Mr Gauke
I completely agree with my hon. Friend. Our record on corporation tax—we cut it from 28% in 2010, it is now 20%, and we have legislated to reduce it to 17%—has made the UK much more attractive. The likes of the OECD have made it clear that corporation tax is one of the most distorting and, therefore, least growth-friendly taxes. The fact that we have moved so dramatically in this era—during which we have also put the public finances on a sounder footing—to make our business taxes much stronger puts us in a much stronger position than we would otherwise be. It is striking that, in survey after survey of international businesses, the position of the UK has improved in terms of our reputation as a place to do business. In particular, our tax reforms have helped attract investment here. I know from the meetings that I have had with international businesses when they are choosing where to locate activity that the fact that our corporation tax regime is more competitive is a factor that helps to drive investment to the UK.
Alongside that, we have taken significant steps to ensure that the international tax system is such that businesses pay the taxes that are due, but it is absolutely right that the UK positions itself as a more competitive place, and that is what we have done.
John McDonnell
For clarification—I raised this in my speech—is it still Government policy and in their plans to move towards 15%?
Mr Gauke
The Chancellor has made it clear that he will look at all the options when it comes to the autumn statement. It is the case that we have legislated to move to 17%, and it continues to be the case that we want to send out a signal that the UK is open for business and that we will still have a competitive tax system. My hon. Friend the Member for Horsham (Jeremy Quin) has already raised that important point. The precise policies we will follow at the autumn statement are a matter for the Chancellor to announce then, but Government Members are united in our belief that the steps we have taken on corporation tax have made us much better prepared for the uncertainties of the future.
Alex Cunningham
I welcome the right hon. Gentleman to his position. I also welcome the Financial Secretary to her position, and I believe that the Exchequer’s gain is the Department of Health’s loss. The Chief Secretary talks about this country being the place to do business. He heard me talk about carbon capture and storage in an earlier intervention. Will the Government now commit to doing more to help energy-intensive industries—with energy costs, but also by dealing with some of the carbon taxes they face—and commit to greater support for carbon capture and storage?
Mr Gauke
I entirely agree, in relation to my hon. Friend the Financial Secretary, that the Treasury’s gain is the Department of Health’s loss. I will not pre-empt any autumn statement announcements on energy-intensive industries or any other area. I would point to the steps we have taken as a Government to help energy-intensive industries. We have responded to the points made to us by that sector with support for energy costs and so on. No doubt, the hon. Gentleman will continue to make his case on behalf of those industries.
James Cartlidge
I want to follow up the point made by my hon. Friend the Member for Horsham (Jeremy Quin). On cutting corporation tax, does the Chief Secretary not agree that the key point is that, although many people are calling for huge investment programmes by the Government, the investment we need must come from the private sector, and that if the private sector pays less tax, it will invest more?
Mr Gauke
My hon. Friend makes a very important point. In particular, in the context of corporation tax—after all, it is a tax on profits and on the return on investment—if we lower the rate and increase the return on investment, we would expect, all other things being equal, to see an increase in investment by such companies. In recent years, we have seen increases in business investment and in foreign direct investment. I would argue that we face some immediate challenges as a consequence of the Brexit vote, but I remain convinced—the evidence is very strong—that the steps we have taken on corporation tax will ensure that we are better prepared than we would otherwise have been.
In the context of the challenges we face, whatever one’s views—remain or leave—I think everyone predicted that a vote to leave would result in some short-term turbulence in our economy. As the Prime Minister has rightly said, Brexit means Brexit, but we have to get through this immediate period, in which some of the risks that exist will crystallise. Since the referendum, the value of our currency has dropped by a tenth compared with the dollar, and independent commentators expect to see a general slowing of investment, exports and business decisions. However, if we do all we can to stabilise our economy and set it back on a clear path, I believe we can prosper in the new circumstances.
Andrew Gwynne
Are we not missing a trick here? The Chief Secretary will know that bond yields are at an all-time low. Private sector growth is not as strong as it perhaps ought to be. There are really good projects that are ready to be invested in and there are companies that are desperate for investment. Is it not now time for the Government to redouble their efforts to refocus their economic policy on a proper programme of investment in growth?
Mr Gauke
I do not think the hon. Gentleman gives the Government the credit we are due for what we are doing on infrastructure. I understand the argument that we need to do more to improve our infrastructure, but let us remember what we have done: more than a quarter of a trillion pounds has been invested in infrastructure since 2010, the average annual investment in the last Parliament was 17% higher than in the preceding one and we have set out plans to invest more than £100 billion in infrastructure by the end of this Parliament.
We are taking measures on infrastructure, but we must put those in context. We also have to ensure that we have sound public finances. The immediate response to the shock of leaving the European Union has to be to work closely with the Bank of England as it carries out its role of providing stability and confidence in our economy. Monetary policy should be the first means of response to an economic shock such as this. We will use the summer period ahead to assess the situation, based on the economic data, and come the autumn we will report back to the House, setting out how we will respond on spending and taxation.
Let me be clear with the House: we continue to believe in fiscal responsibility. This country should not, as it did in the earlier part of this century, make itself vulnerable to economic shocks by letting public spending get out of control. As the Chancellor has made clear—and, indeed, as the previous Chancellor, my right hon. Friend the Member for Tatton (Mr Osborne), made clear—our target to reach a surplus by 2019-20 should not be sought in the economic circumstances we now face.
As hon. Members know, our fiscal plans to reach a surplus always came with a clear caveat: if our economic circumstances were to alter significantly and the independent Office for Budget Responsibility were to forecast less than 1% real growth on a rolling four quarter on four quarter basis, that target would be reviewed. With expert forecasters suggesting that we are highly likely to see that risk to our growth crystallise in the time ahead, we have announced that we will no longer seek to bring the budget into balance by 2019-20. As the Chancellor has said to the House, that does not mean that we can go forward without a clear framework for achieving fiscal balance over an appropriate timeframe. We will address that issue in the autumn statement.
I hear the argument that we should go for growth, but fiscal responsibility does not preclude our achieving economic growth. As has been pointed out in this debate, the UK has grown pretty well as strongly as any other major western economy over the past six years, even though we have undertaken a period of getting the public finances under control. The idea that there is a straightforward tension between economic growth and fiscal responsibility simply is not true. Indeed, it is by pursuing a policy of fiscal stability that we have maintained the confidence not just of the markets, as a consequence of which our gilt rates are lower than they would otherwise be, but of the general public, who know that in the end, if we keep borrowing and keep borrowing and keep borrowing, they will have to pick up the tab.
Stewart Hosie (Dundee East) (SNP)
For the sake of completeness, the Chief Secretary will probably want to thank the central Bank for its quantitative easing programme—flooding the market with money by buying Government gilts—because that is a substantial reason for the very low yields the market is seeing.
Mr Gauke
I understand the point that the hon. Gentleman is making about gilt yields, but none the less the Government’s credibility because of our determination to address the public finances—with a degree of pragmatism on timing that I fully acknowledge—has helped to ensure that the UK has not been drawn into a sovereign debt crisis or indeed anything like one. That is a significant achievement for this country.
Rob Marris (Wolverhampton South West) (Lab)
I congratulate the right hon. Gentleman on his well-deserved promotion. The employment figures are fantastic and what the Government have done on tax avoidance is very laudable, but before he gets too self-congratulatory I caution him to bear in mind that we have had six years of falling living standards, with a bubble of household debt and a house price bubble; and in those six years the national debt has gone up by 60%. As my hon. Friend the Member for Denton and Reddish (Andrew Gwynne) said, we need capital stimulation through the state spending money, on house building in particular. That is politically acceptable to the vast majority of the population of the United Kingdom, because we would have council houses owned by the state—the state would be borrowing money to invest in bricks and mortar, just as everyone else in this country does if they can buy their own house. The national debt is up 60% and we do not have a lot to show for that; let us put it up a bit higher while interest rates are low and have some houses to show for it.
Mr Gauke
There are those who will argue, in the light of Brexit, that we should not worry about borrowing and debt. They are usually—not always, and I certainly exclude the hon. Gentleman from this—the same people who have argued consistently for the past 10 years that we should not worry about borrowing and debt; it is the reasons that have tended to change. First, they argued that we need not worry about borrowing because the business cycle had been abolished and there would be no downturn, so that was all right. Then their argument was that we should borrow because we needed a fiscal stimulus, and then because gilt rates were so low. But with debt last year at almost 84% of our GDP, maintaining fiscal credibility must absolutely remain our priority. If we had not taken the measures we have on public finance over the past few years, we would be in a far worse position still. Analysis shows that from 2010 to 2020, if the structural deficit had remained the same we would have borrowed an additional £930 billion. That is a huge sum to add to our current debt total.
We have already set out our plans for finding departmental savings and in my new role I will be working closely with my fellow Ministers to make sure we stick to those plans. We have a strong record on delivering such commitments—we have done so every single year we have been in government, and we are not going to let up in our efforts now.
I am also determined to look at what further scope there is for delivering the value for money that the taxpayer deserves. I have spent the past six years working hard to make sure we get the tax revenues in, so am not about to see those revenues spent without delivering as much for our money as possible. I will therefore also take forward our work on finding further efficiencies across the public sector. That work was announced at the last Budget and I will be taking it forward straightaway, to explore all avenues for making innovations, finding reforms and saving time and money across the public sector.
This is without doubt a time of considerable uncertainty. That has its own implications for the current stability of our economy. We anticipated short-term turbulence in the event of a decision to leave the European Union, and that has been reflected in the economic developments that have unfolded. It is clear that we must pursue policies that help us grow in the future. That means pursuing pro-business tax policies, improving our skills and our infrastructure, and looking out to the world, enabling us to trade and benefit from globalisation, as there are real signs of opportunities ahead from such an outward-facing approach.
Mr Mak
I congratulate the Chief Secretary to the Treasury and the Financial Secretary on their promotions. Does my right hon. Friend join me in welcoming the Prime Minister’s proposals for infrastructure bonds, which will boost economic growth and give the country vital infrastructure?
Mr Gauke
My hon. Friend raises an important point about how the Government are doing all they can to support infrastructure in this country. As I said, we have a proud record on that, and an infrastructure pipeline worth, I think, £480 billion. We have taken steps to reform our planning system to help infrastructure, and established the National Infrastructure Commission. My hon. Friend is right to highlight the proposals set out by the Prime Minister in that area.
We can take measures to help improve infrastructure in this country, but all measures to help growth—whether our outward-looking approach to trade, our pro-business tax policies, or improving infrastructure or skills—can and must go hand in hand with the need to take our public finances seriously, and the Government will pursue that balanced approach.
What we hear from the Labour party continues to be unbalanced, and there is a failure to take into account the need for credibility with the public finances. Labour may have changed a lot of its personnel, but I fear that there is a degree of continuity in the failure to face up to challenges in the public finances, and the motion reflects that. I therefore urge the House to oppose the case for fiscal indiscipline that we have heard today, and to oppose the motion before us.
Oral Answers to Questions
David Gauke Excerpts(7 years, 10 months ago)
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Andrew Stephenson (Pendle) (Con)
4. What steps he is taking to support infrastructure development in the north- west.
The Chief Secretary to the Treasury (Mr David Gauke)
There are 40 schemes in the west midlands in the infrastructure pipeline, with a total value of £7.6 billion. More than 300 infrastructure schemes have been delivered in the west midlands since 2010. There are 88 projects in the north-west in the infrastructure pipeline, with a total value of £34.5 billion. More than 240 infrastructure schemes have been delivered in the north-west since 2010.
Amanda Milling
I congratulate my right hon. Friend on his new role. The Rugeley B power station site is truly a hub of connectivity, where the national grid, broadband and rail infrastructure all come together, and it is an ideal location for redevelopment. Will my right hon. Friend outline the assistance that the Government can provide to ensure the speedy redevelopment of the site, and will he meet me to discuss the possibility of creating a Rugeley enterprise zone on this strategically important site in the west midlands?
Mr Gauke
I thank my hon. Friend for her kinds words, and for her question. It is not the first representation that I have received in the few days in which I have been doing this job, and I suspect that it might not be the last I receive today. I would be delighted to meet her to discuss the enterprise zone and the site that she talks about. It is important that we have world-class infrastructure. If we can bring that together in various forms on particular sites, it will enable us to make further and faster progress. I look forward to discussing that with her in future.
Andrew Stephenson
May I too congratulate my right hon. Friend on his promotion? The recently announced infrastructure bonds will help to improve productivity and promote economic growth across the north-west. Will he outline the projects that could be eligible for this funding?
Mr Gauke
I am not sure that this morning is the point at which I can provide specific examples, but I can say that this Government are very ambitious about infrastructure. As my right hon. Friend the Chancellor has pointed out, infrastructure is one of the ways in which we can drive up productivity. That is one of the great challenges that we face, but we as a Government are determined to address it.
Valerie Vaz (Walsall South) (Lab)
The Minister has reeled off a list of moneys going to infrastructure projects in the west midlands. Will he publish a list of all those moneys that he is delivering? Who is going to be accountable for this public money—the local enterprise partnerships, the combined authorities, the local authorities, or HS2 Ltd?
Mr Gauke
It was not just the money—I also rattled off the numbers. I would be delighted to provide the hon. Lady with details of the projects that have been delivered, with, as I say, 300 infrastructure schemes delivered in the west midlands and 240 infrastructure schemes delivered in the north-west. Accountability depends on the specific nature of the schemes. Clearly, over the past six years we have delivered on infrastructure, but there is more to do and we are determined to do it.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
One of the absurdities of the previous Chancellor’s tenure was the fiscal rule that forbade borrowing money for infrastructure investment even when the return on that investment would have grossly exceeded the cost of the borrowing. Instead, the former Chancellor ended up borrowing billions to compensate for low growth and the cost of failure. That orthodoxy was strongly challenged in the Conservative leadership election, so will we now see a more rational approach from this Chancellor’s team?
Mr Gauke
As my right hon. Friend the Chancellor has made clear, and as, indeed, the previous Chancellor made clear, in circumstances where there is a projection of growth less than 1% over a 12-month period, that fiscal rule does not apply. The fact is that we inherited a very high deficit, and we have shown very strong determination over the past six years to bring that deficit down. As we face the challenges that we now face in terms of Brexit, had we not taken the tough decisions on public spending over the past six years, we would be in a much more vulnerable position than we are now.
Mike Wood (Dudley South) (Con)
The previous Chancellor announced a new light rail link between the midland metro and the new enterprise zone in Brierley Hill in my constituency. Will my right hon. Friend meet me to discuss how we can extend that to the main line rail link at Stourbridge so that we can support businesses, communities and jobs in my constituency?
John McDonnell (Hayes and Harlington) (Lab)
I, too, welcome the Chancellor to his position, and I welcome his whole team. It is a deserved promotion for the Chief Secretary, whom I believe I promoted only a month ago in a speech to the House.
EU funding for the regions comes to £10 billion a year. At the recent Local Government Association conference, councillors from all parties expressed their concern over the potential loss of these structural funds. Will the Chief Secretary clarify whether he plans to make funding provision equivalent to that received through the EU structural funds in the event of the UK leaving the EU?
Mr Gauke
First, I thank the shadow Chancellor for his kind words. Yes, his description of me as Chief Secretary last month proved to be ahead of its time. That is not a phrase I often use about the shadow Chancellor, but he was right on this occasion.
On the structural funds, of course we need to make an assessment of value for money and so on. We will make announcements in due course. I recognise the case for wanting to address uncertainty, but it is right that we follow due process before we make any announcements.
John McDonnell
I am grateful for that, but may I ask the Chief Secretary that, in the interests of local government stability, that statement is made sooner rather than later?
The vote to leave also affects the UK’s access to European Investment Bank funds, which last year came to £6.5 billion across the country. With business investment falling even before the vote to leave, and with Government investment scheduled to fall until the end of this Parliament, what action is the Chancellor taking to ensure that Britain retains its stake in the European Investment Bank?
Mr Gauke
First, on the general point, I recognise what the hon. Gentleman is driving at in terms of uncertainty and the desirability to resolve the issue sooner rather than later.
It is the case that the UK did very well from the European Investment Bank in recent months in terms of attracting investment. There is no evidence as yet that the UK will be discriminated against during the period that we remain members of the EU, but the hon. Gentleman is right to raise the issue. We will continue to monitor the situation and we want to ensure that we continue to do well from the EIB.
Maria Caulfield (Lewes) (Con)
5. What fiscal steps he is taking to support businesses.
Julian Sturdy (York Outer) (Con)
10. What progress he has made on the establishment of the northern powerhouse.
The Chief Secretary to the Treasury (Mr David Gauke)
A northern powerhouse will be built by connecting up the cities in the north so that the whole is greater than the parts. We have committed billions to new transport investment and devolved powers to the cities, and we are promoting science and culture. According to one recent survey, the result is that the number of foreign direct investment projects in the north is up by 127% since 2014. The employment rate is now close to its record high, and unemployment has fallen faster than in the south.
Julian Sturdy
May I add my congratulations to the new Front-Bench team? In medieval times, the north was ruled from the great city of York. Even in Yorkshire, things do move on, but the need for well-connected transport links is still fundamental for every thriving city. Will my right hon. Friend ensure that sufficient funding is in place to deliver the key infrastructure needs, such as the upgrading of the York northern ring road, which will allow the city to fulfil its true potential in the new enterprise zone?
Mr Gauke
This Government are determined to ensure that we have strong transport infrastructure in the north of England, but I very much hear the points my hon. Friend has made. We have committed to investing an extra £161 million to accelerate the transformation of the M62, and £75 million to improve other road links, including the A66 and the A69. We very much recognise the case he is making and, as I say, as a Government we are determined to ensure that the north of England can fulfil its potential.
Helen Goodman (Bishop Auckland) (Lab)
May I congratulate the right hon. Gentleman on his promotion to the Cabinet? Earlier, he was very vague about the European structural funds. Some £800 million of European structural funds were part of the north-east devolution deal. Without a guarantee from the Government, the loss of that money will drive a coach and horses through the deal. [Interruption.] I will give the Minister time to listen to what the Chancellor is saying in the hope that he can come to the Dispatch Box and say that the Government will guarantee the £800 million.
Mr Gauke
As I said earlier, we recognise the need to bring any uncertainty to an end as soon as we possibly can. In the circumstances, it is right that we take a moment before making any guarantees, but let me be absolutely clear that as a Government we remain committed to doing everything we can to strengthen the northern powerhouse and to ensure that the north of England fulfils its full potential, which includes transport infrastructure. On the specific point, we will make an announcement in the not-too-distant future.
Mr Speaker
Despite his sudden shyness, the man in the cream suit has an identical question, and I want to give him his opportunity. Mr Alec Shelbrooke.
John Healey (Wentworth and Dearne) (Lab)
The northern powerhouse plans in south Yorkshire are at risk. In the 1980s, our economic regeneration was kick-started by funding from Europe and it still supports small businesses, training and apprenticeships, so may I give the Chief Secretary another chance? Will he guarantee that the £174 million that has been pledged to south Yorkshire under the current programme will be paid in full?
Mr Gauke
The right hon. Gentleman will understand, as a former Treasury Minister, that there is a need for consistency. My answer remains that we will make an announcement soon. We recognise the point that he is making and the desire to remove uncertainty, but I am not in a position to make an announcement this morning.
Graham Evans (Weaver Vale) (Con)
21. There are nine enterprise zones in the north-west of England, including the magnificent Sci-Tech Daresbury in Weaver Vale, which employs more than 500 scientists. Does my right hon. Friend agree that enterprise zones are essential to the Government’s commitment to rebalance the economy, close the north-south divide and build a great northern powerhouse?
Mr Gauke
My hon. Friend makes a very good point. Enterprise zones, which were reintroduced by the Government in the last Parliament, are important in creating a clustering effect and a culture of enterprise. They are making a big contribution to the northern powerhouse and playing a role in the increase in investment in the north of England.
Peter Dowd (Bootle) (Lab)
May I welcome the new Ministers to the Front Bench? Five northern powerhouse combined authority leaders have requested a meeting with the Prime Minister in Manchester to discuss the serious implications of Brexit for the northern economy, given its massive contribution to the country as a whole. In advance of the Brexit vote, will the Chief Secretary tell the House how many civil servants were working on regional plans, or any other plans for that matter, for such an eventuality?
Mr Gauke
First, I thank the hon. Gentleman and welcome him to his post. I am delighted to see that the shadow Front Bench is almost up to full complement.
We obviously face a number of challenges in terms of the new situation, but there are also a number of opportunities. As I have made clear repeatedly today, the Government are determined to ensure that, whatever the consequences of the Brexit vote, we will enable the northern cities to prosper and work together. That remains a Government priority.
Mr Graham Allen (Nottingham North) (Lab)
11. If he will commission research on the potential long-term savings to the public purse of greater investment in cross-departmental schemes to promote early intervention; and if he will make a statement.
The Chief Secretary to the Treasury (Mr David Gauke)
The Government recognise the benefits of early intervention to ensure that all children and young people receive the best possible start in life. The Government worked with the hon. Gentleman and others to establish the Early Intervention Foundation. We continue to provide funding to the foundation to develop and share the evidence base in this area. The Government have also invested £770 million in the troubled families programme, which aims to achieve sustained positive outcomes for 400,000 families with multiple complex problems by 2020.
Mr Allen
I welcome the new Treasury Front Benchers to their duties. I hope that they will take the opportunity over the summer to reorient the Treasury’s thinking away from late intervention, firefighting and paying excessively to put things right, and consider an early intervention philosophy that allows the Treasury to invest early and make a lot of money. They should look at Big Society Capital and its terms of reference, and consider the possibility of improving the market for social investment bonds. Will the Chief Secretary meet me and colleagues from all parties to discuss those issues?
Mr Gauke
I am very happy to meet the hon. Gentleman to discuss those issues. To be fair to the Government, we introduced social impact bonds and the troubled families programme, which seems to be working. There are good signs in terms of improved school attendance and reduced youth crime and antisocial behaviour. We do recognise the benefits of early intervention, but I am happy to discuss it with him at greater length over the weeks ahead.
Tim Loughton (East Worthing and Shoreham) (Con)
I add my congratulations to the Chief Secretary and commend to him last year’s “Building Great Britons” report by the all-party parliamentary group for the first 1,001 critical days, which I chair. The report revealed that the cost of getting it wrong on perinatal mental health and child neglect is some £23 billion. Does he agree that investing in young people at an early stage is every bit as beneficial to the economy as investing in roads and infrastructure? Will he allow the all-party group to give him a presentation on how we can save him and the country a great deal of money and give our children a better future?
Mr Gauke
I would be interested in seeing such a presentation, whether with the hon. Member for Nottingham North (Mr Allen) or separately—I am happy either way. The Government have already demonstrated a willingness to look at any such case and will respond to the evidence, which I look forward to hearing.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
13. What steps his Department has taken to tackle global tax evasion.
Huw Merriman (Bexhill and Battle) (Con)
T2. Last year, the former Chancellor came to Hastings and committed to extending high-speed rail from Ashford to Hastings and Bexhill. This investment is the key to delivering local housing, a labour market and business expansion. I welcome the Chancellor to his position and ask for his commitment to this vital project.
The Chief Secretary to the Treasury (Mr David Gauke)
I am grateful to my hon. Friend for his question. On the particular proposal he sets out, he is a strong champion for his constituents. If he will forgive me, in my new position of trying to control the purse strings all such matters have to be looked at. As I have made very clear, however, the Government are committed to improving transport infrastructure throughout the country, including in Sussex.
Mark Durkan (Foyle) (SDLP)
T4. I voice my compliments to the new Front-Bench team and my acknowledgement of the old. The prospect of moving to an ultra-low corporation tax rate has already been aired. That, of course, has huge implications for the revenues of developing countries. Will the Chancellor undertake to carry out and publish a spill-over analysis of the effect of UK tax rates and rules on developing countries, as the Governments of Ireland and Netherlands have done?
Mr Gauke
The position of the UK Government on corporation tax and the impact on developing countries is very clear. We believe in taxing the profits of economic activity that occur here, and that is as far as it goes. Over the last six years, we have consistently helped to build up tax capacity in developing countries and provided support to their revenue authorities so that they might be better able to collect the taxes that are due. The international system is moving towards helping those countries as well.
Suella Fernandes (Fareham) (Con)
T3. I congratulate the Chancellor on his appointment and ask that when he looks through his in-tray, he pick up the recent report from the all-party group on financial education for young people. I chaired the inquiry that produced the report, which concluded that while it was a positive step that financial education was included in the national curriculum, delivery was still too patchy, meaning that millions of children were ill-equipped to deal with money when they left school. Will my right hon. Friend commit to making that issue a priority?
Robert Jenrick (Newark) (Con)
T5. The Chancellor got his first job in my constituency, so it is a pleasure to welcome him to his latest job. The borough of Rushcliffe has now produced two excellent Chancellors of the Exchequer. In truth, however, Britain has not had a Chancellor since Nigel Lawson who has taken tax simplification seriously. As we prepare the economy for Brexit, will my right hon. Friend make it one of his priorities and consider, in the eight months before the next Budget, creating a commission on tax simplification?
Mr Gauke
We have created the Office of Tax Simplification and are currently legislating in the Finance Bill to put it on a legislative basis. It is setting out more and more ambitious plans for how the tax system could be simplified, and a large number of its recommendations have already been implemented, but there is still more to be done.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
T7. As a proud Londoner, I believe that we must have greater control over taxes and public services, especially in the light of Brexit. I know that my friend Sadiq Khan has ambitious plans for London. Will the Chancellor commit to an initial devolution deal for London in his first autumn statement?
Mr Gauke
Some of the numbers quoted on regional impact do not take into account national projects such as HS2, which clearly benefit a number of regions. Let me be clear that, as I set out earlier, we have a very large commitment to infrastructure projects in the north of England, with something like 240 in the north-west and 300 in the midlands.
Ben Howlett (Bath) (Con)
As part of the west of England devolution deal, business rates will be devolved to a combined authority. Will my right hon. Friend commit to full implementation of the previous deal on business rates and recognise the importance of this deal to the regional economy?
Rebecca Pow (Taunton Deane) (Con)
I add my welcome to the Chancellor and the new Treasury team.
There is a great need in the south-west to provide more high-skilled jobs to boost productivity. In order to do that, we need to attract the right businesses. In this post-EU world, could the Chancellor kindly give his commitment, much praised so far, to the A358 upgrade for those in Somerset?
Hannah Bardell (Livingston) (SNP)
Given the Supreme Court’s ruling earlier this year, does the Chancellor have plans to review the Financial Conduct Authority’s failure to enforce the prospectus rules in the Lloyd’s enhanced capital notes case? One of my constituents has been fighting hard for pensioners, who have lost over £3.3 billion.
Marcus Fysh (Yeovil) (Con)
Given the fall in long-term borrowing costs, the ability of infrastructure investment to show that we mean business and the enthusiasm shown by the Front-Bench team, will Ministers meet me to discuss an acceleration of the dualling of the A303?
Catherine McKinnell (Newcastle upon Tyne North) (Lab)
Two infrastructure projects are critical to the north-east: increased airport capacity at Heathrow, and an expanded Metro system. What funding commitment can the Government make to those projects today?
Mr Gauke
As I think has been made clear, a statement on airport capacity in the south-east will be made in the autumn. As for the Metro, I cannot add much to what I have said before, but the Government obviously want to support transport infrastructure throughout the country, and are looking at all good projects.
Several hon. Members rose—
Ecofin
David Gauke Excerpts(7 years, 10 months ago)
Written StatementsRead Full debate Read Hansard Text Read Debate Ministerial Extracts
The Financial Secretary to the Treasury (Mr David Gauke)
A meeting of the Economic and Financial Affairs Council took place in Luxembourg on 17 June 2016. EU Finance Ministers discussed the following items:
Anti-tax avoidance directive
The Council reached political agreement to the anti-tax avoidance directive.
Financial transaction tax
A brief update was provided on the progress regarding implementing a financial transaction tax in participating member states. The UK is not taking part in the financial transaction tax.
Strengthening the banking union
Council conclusions were agreed on measures to strengthen the banking union.
Current legislative proposals
The presidency updated the Council on the state of play regarding a number of financial services dossiers.
State of play of the banking union
Belgium provided an update on its transposition of the bank resolution and recovery directive and the deposit guarantee scheme directive as the only remaining member state yet to complete this.
Analysis by the Commission on temporary VAT derogations (reverse charge mechanism)
The Commission agreed to bring forward a legislative proposal to allow certain member states to apply a generalised reversal of liability for VAT payments.
Implementation of the stability and growth pact
The Council endorsed decisions to close the excessive deficit procedures for Cyprus, Ireland and Slovenia.
Report of the European Court of Auditors on the excessive deficit procedure
The Council adopted conclusions on a report of the European Court of Auditors regarding the excessive deficit procedure. This item moved to an “A” point with no discussion.
Contribution to the European Council meeting on 28-29 June 2016
The Council prepared a number of items ahead of June European Council. Specifically, Ministers endorsed the 2016 country specific recommendations, part of the European semester process.
Following this, views were exchanged on a number of issues including economic and fiscal governance and the investment plan for Europe. The item on national productivity boards moved to an “A” point with no discussion.
[HCWS93]
Draft Major Sporting Events (Income Tax Exemption) Regulations 2016
David Gauke Excerpts(7 years, 10 months ago)
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The Financial Secretary to the Treasury (Mr David Gauke)
I beg to move,
That the Committee has considered the draft Major Sporting Events (Income Tax Exemption) Regulations 2016.
It is a pleasure to serve under your chairmanship, Sir Edward. The draft regulations will provide an income tax exemption for overseas sportspeople competing in the London anniversary games 2016 and the world athletics championships 2017. The exemption will apply only to competitors resident outside the United Kingdom; it will apply to any income that a competitor receives while competing in the events or from activities that they perform to promote or support them.
Both the anniversary games and the world athletics championships are events of the highest international standard and will attract the greatest athletes in the world. Both events will be hosted in the Queen Elizabeth Olympic park in Stratford, the iconic venue of the extraordinarily successful 2012 London Olympic and Paralympic games. Members of the Committee will be aware that it has been the policy of successive Governments to provide an income tax exemption for visiting athletes in such major sporting events. In recent years, tax exemptions have been granted for competitors in a series of high-profile events, so it is entirely appropriate for the Government to provide similar exemptions for these two major international events.
The draft regulations mark an important departure by providing the exemptions through secondary legislation. The power to do so was introduced by the Finance Act 2014 and these regulations mark the first occasion on which that power has been exercised. I emphasise that, although the process for granting tax exemptions has changed, the reason for granting them remains the same. As I have said on previous occasions, the policy criteria for sport tax exemptions fall into two broad categories: first, where such an exemption is a necessary condition of a bid to host an internationally mobile event at the highest level of world sport; and secondly, where the event in question provides an exceptional opportunity to prolong the legacy of the 2012 Olympic and Paralympic games. The 2017 world athletics championships fall squarely within the first category, and the 2016 London anniversary games are entirely consistent with the second. This year’s anniversary games will run from 22 to 23 July and the 2017 world athletics and para-athletics championships will run from 14 July to 13 August.
Similar exemptions were put in place for the London anniversary games in 2013 and 2015. However, as the 2016 Olympics will start in Rio de Janeiro next month and so bring to an end the four-year Olympic cycle, it is appropriate that, as the Government announced in the autumn statement last year, this will be the last year in which the exemption will be granted for the London anniversary games.
The exemptions provided by the draft regulations demonstrate the Government’s continuing commitment to ensuring that the UK is an attractive location for major international sporting events. I commend them to the Committee.
Mr Gauke
I thank the hon. Member for Salford and Eccles for essentially supporting the regulations. She raises several questions, at the heart of quite a lot of which is a point about the criteria that apply to these tax exemptions, so let me set those out briefly. I direct her to the explanatory notes published alongside the 2014 Finance Bill, which state:
“The Government’s policy is to grant certain tax exemptions for sporting events if the event is: world-class, internationally mobile, and where exemption by the host country is a requirement of a bid to host the event. In addition the Government has provided exemptions for events which were or are exceptionally well-placed to extend and preserve the legacy of the London 2012 Olympic and Paralympic Games.”
That is the basis on which decisions are made. Tax exemptions for major sporting events are considered on a case-by-case basis and those criteria are applied. There is certainly no discrimination against women’s sports. There is no gender inequality in the sense that any event that meets the relevant criteria and qualifies for an exemption will get an exemption. I hope that that reassures the hon. Lady.
The hon. Lady also raised the issue of a tax information and impact note. There is in fact such a note for the regulations, which sets out our thinking and assessment of their impact. I hope that that is helpful.
The regulations will help to ensure that we provide certainty and that the two events to which they relate, in which both men and women compete, are successful. I will be grateful if the Committee supports the draft regulations.
Question put and agreed to.
Finance Bill (Fifth sitting)
David Gauke Excerpts(7 years, 10 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Rebecca Long Bailey (Salford and Eccles) (Lab)
I will keep my comments brief on this clause, which amends the Value Added Tax Act 1994 to enable public bodies to get VAT refunds when they enter into cost-sharing arrangements. I hope that the Minister can address a few points. First, the explanatory note indicates that some bodies will lose some of their existing funding as a result of the clause. It would be helpful if he could explain the criteria that the Government will apply. Secondly, can he give us more detail on the areas where the Government are encouraging shared services specifically? The tax information and impact note states:
“To date these services have mainly been in the fields of HR, recruitment and training, and IT services.”
Will the Minister confirm whether the Government plan to encourage shared services in other areas?
The Financial Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to welcome you back to the Chair, Sir Roger. As we have heard, the clause will allow named non-departmental public bodies and similar bodies to claim a refund on VAT they incur as part of a shared service arrangement. That will encourage public bodies to share back-office services where doing so results in greater efficiencies of scale. Non-departmental public bodies such as the research councils and some NHS bodies cannot always recover the VAT they pay on the purchase of goods and supplies because they do not always undertake business activities—for example, those activities where an onward charge is made. That includes VAT charged when one such body supplies services to others under a shared services arrangement.
Current UK VAT legislation allows Government Departments and NHS bodies to recover the VAT they pay on outsourced or shared services, and we are now extending that scheme to non-departmental public bodies and similar arm’s length bodies. That will ensure VAT does not act as a barrier to those organisations outsourcing and sharing services, which will encourage efficiency savings and deliver better value for taxpayers’ money.
Tax liabilities, including VAT, are catered for in departmental spending settlements. To ensure that there is no double counting, it will be necessary for the Treasury to be satisfied that public funding of those bodies is adjusted where VAT has already been compensated for. Otherwise, the Exchequer could be paying twice. We will also require eligible bodies to claim VAT in the same financial year in which the purchase was made, and not in a later year. The change will affect around 124 departmental bodies.
The hon. Member for Salford and Eccles asked whether some bodies will lose funding. If a non-departmental public body gets its VAT back, the Department’s spending profile will be adjusted accordingly, making it revenue-neutral. Bodies are therefore not losing out as a consequence of the clause. She also asked for more details on how the Government are encouraging shared services. We will accept bids and make decisions on a case-by-case basis. It is difficult for me to say much more at this point, but if efficiencies can be found, any sensible Government would want to find them, and we would not want the VAT system to get in the way.
The clause will allow named non-departmental and similar bodies to claim a refund of the VAT they incur as part of a shared service arrangement used to support their non-business activities, which will ensure that VAT is not a disincentive for public bodies to share back-office services and will encourage better value for money.
Question put and agreed to.
Clause 111 accordingly ordered to stand part of the Bill.
Clause 112
VAT: representatives and security
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
These clauses are part of a package of anti-fraud measures announced at Budget 2016 to address online VAT fraud, of which I have direct experience. A business in my constituency has suffered from overseas sellers on platforms such as Amazon and eBay undercutting its prices by avoiding payment of VAT. Indeed, I have corresponded directly with the Minister on that issue, so I am pleased that the Government have decided to take note of my concerns.
Clause 112 will allow Her Majesty’s Revenue and Customs to require a person established in a country outside the EU to appoint a representative to account for VAT on sales to consumers and non-taxable persons in the UK. It will also permit HMRC to require security from the seller for payment of the tax. The appointment of a representative to account for VAT is used in other circumstances, so the change simply extends the circumstances in which HMRC can exercise that power.
The Opposition have long called on the Government to go faster and further in cracking down on tax evasion, so we welcome the intention. However, we are concerned that the measure might not be fully effective because HMRC first has to identify that a person is not accounting for VAT on sales into the UK and then it has to direct them to appoint a representative who is prepared to act. That may be difficult because the representative will then be responsible for accounting for VAT if the supplier does not do so and may be liable for the tax. It would be helpful if the Minister could specifically address that point. Furthermore, it seems possible for a determined fraudster to use different companies or aliases to avoid the impact of an HMRC direction. Will the Minister tell us today how the Government intend HMRC to take effective enforcement action on that?
Clause 113 will impose joint and several liability on the operators of online marketplaces to account for VAT on sales by overseas sellers to UK consumers and non-taxable persons. As with clause 112, the clause suffers from the defect that HMRC’s powers take effect only if the overseas seller has failed to comply with VAT rules and if HMRC issues a direction, which essentially means that VAT is likely to be lost, and may continue to be lost for some time, before HMRC acts. Will the Minister tell us today how he intends to address that problem?
Also of note is that clause 113 applies to any overseas business—in other words, other EU and non-EU businesses—but the measures are meant to be targeted at non-EU businesses only. HMRC states that, in practice, it will use the power only
“where overseas businesses do not have a genuine business establishment in the EU.”
However, there is a view that the legislation should reflect what is intended in practice and that the current drafting raises the question of whether the measure is actually compatible with EU law. EU-established businesses could be caught by the legislation despite there already being local rules for them to comply with and mutual assistance procedures for the UK to use. Can the Minister assure us that such businesses will not be affected? One way to address the situation would be to amend clause 113 to mirror clause 112 to cover only non-EU established businesses. What is the Minister’s view on that suggestion? Are the Government considering any further amendments?
A consultation was launched alongside these two clauses at Budget 2016 as part of a package of measures to address the issue. It was a live consultation on what due diligence should be undertaken by online marketplaces to ensure that overseas sellers are registered for VAT and account for it on their sales. We support HMRC taking action to target abuse and non-compliance in this area, but business groups have expressed concern that the primary target should be those who seek to evade the tax, rather than legitimate businesses that unwittingly deal with them. Can the Minister reassure those businesses on that point?
Her Majesty’s Treasury estimates the VAT loss attributable to sales by overseas businesses via online marketplaces to have been as much as £1 billion to £1.5 billion in 2015-16. Acknowledging that the amounts involved are only estimated, but still significant, it would be helpful if the Government could expand on how that estimate has been reached.
The Labour party is prepared to offer support for a crackdown on VAT fraud but, given the understandable concerns of business about the administrative burdens, the Government need to be very clear about the amounts involved and the benefits to the taxpayer. Similarly, we hope that Ministers will report back to Parliament on the success of the scheme as well as on wider action to narrow the tax gap so that we can measure such success. Although the Government have estimated that they will receive an additional £365 million in revenue as a result of the measures by the end of the Parliament, that figure is obviously some way short of £1 billion. Will the Minister tell us why such a gap will remain and what further action the Government are considering?
On the detail of the proposed due diligence scheme, the primary concern that businesses expressed to us is that the scheme targets intermediaries in the supply chain, not those failing to comply. That places an additional burden on legitimate business and, although that may be justifiable to collect tax owed, there is a danger that it gives a message to potential tax evaders that they will not be pursued by HMRC. We support HMRC’s aim of minimising the burdens on legitimate business arising from the scheme and limiting them to only those that are necessary and proportionate, but HMRC should also take account of the resources available to different businesses to meet the compliance burden. For example, small and medium-sized enterprises might struggle with compliance and need special protection to avoid an adverse impact on cross-border trade.
It is clear that enforcement is a fundamental issue for HMRC. Although there is a risk of missing trader fraud and misdeclarations in any VAT system, there can be no substitute for HMRC providing effective monitoring and enforcement. For the measures to be effective, HMRC must retain the role of primary enforcer, and it needs to be sufficiently resourced to monitor, investigate and administer trade in the area. With that in mind, does the Minister believe that HMRC currently has adequate resources to do that, given the cuts it has borne?
The Minister will be aware that in some EU member states the problem is avoided by making the online marketplace responsible for accounting for VAT. That is likely to be effective where the marketplace actually collects the selling price for the seller. Of course, it may not be effective if all the marketplace does is act as an intermediary.
Finally, there may be anomalies, for example when an overseas individual sells personal goods, which are not subject to VAT, to UK purchasers, as VAT should not be charged in such circumstances. Any thoughts that the Minister has on lessons from elsewhere and the Government’s evaluation of other systems for collecting VAT would be helpful for us to consider.
Opposition Members are pleased that the Government are taking action to tackle online VAT fraud, and we are fully supportive of the clauses in principle. However, I would be grateful if the Minister addressed some of the many issues I have raised with the legislation and the wider strategy for tackling online fraud generally.
Mr Gauke
As we have heard from the hon. Member for Salford and Eccles, the clauses make changes to ensure that the high street and online businesses that pay UK VAT can compete on a level playing field with overseas sellers that, on occasion, do not. The clauses will ensure that more VAT is paid by overseas sellers who store their goods in UK fulfilment houses and sell those goods via online marketplaces, will give HMRC stronger powers to make overseas business appoint a UK tax representative, and will ensure that online marketplaces are part of the solution to the problem. The measures are forecast to reduce VAT evasion and raise £875 million in extra tax over the next five years, as certified by the independent Office for Budget Responsibility.
A recent survey by the British Retail Consortium shows that more than 20% of non-food retail spending now occurs online, which means that the UK public can now buy goods faster and cheaper than ever before. British businesses also have an online platform to enter markets they could normally never have imagined. A small village business can now supply high-quality local goods across the United Kingdom and even the world. However, that small business is competing with thousands of online sellers overseas, some of which are evading VAT. That abuse has grown significantly and now costs the UK taxpayer between £1 billion and £1.5 billion per year. Those overseas sellers are competing with all businesses trading in the UK, abusing the trust of UK consumers and depriving the Exchequer of significant revenue.
Rebecca Long Bailey
Committee members will be pleased to know that my comments on this clause will be very brief. The clause simply puts it beyond doubt that charities in the Isle of Man jurisdiction may qualify for the VAT release available to other charities in the UK. This provision gives effect to the principal VAT directive and the 1979 customs and excise agreement with the Isle of Man. It would be helpful if the Minister could confirm whether he has yet had any discussions with the Government that suggest that, following Brexit, the principal VAT directive will not—subject, of course, to the terms of any subsequent trade deal—apply to the UK.
The Minister may also like to clarify any early thinking about how Brexit may affect general trade relations, such as those with the Isle of Man, which is not a member of the EU or the European economic area. It has access to the single market in goods only, and only through its relationship with the UK. Presumably, the Government have no plans to alter the customs and excise agreement, but it would be helpful if the Minister could briefly expand on that point in relation to matters within the scope of the Bill.
The clause is largely a technical provision designed to clarify rather than change the law, and we take no issue with it.
Mr Gauke
Clause 114 makes changes to ensure that charities subject to the jurisdiction of the High Court of the Isle of Man are able to obtain the same VAT release as charities in the United Kingdom. As the hon. Lady says, it is a largely technical clause, and I am not surprised that it is uncontroversial.
The hon. Lady raises the perfectly fair issue of the future of VAT in the light of the Brexit vote. That is indeed one of the issues that we will have to wrestle with. All I can say at the moment is that it is something that we will have to consider. It will depend very much on the nature of the relationship that we have with the European Union, and of course that will be a matter for negotiation, and for decision by the next Prime Minister. Although the hon. Lady raises a fair question, and her point is well made, I fear at this point I am not able to provide any clarity for her.
Question put and agreed to.
Clause 114 accordingly ordered to stand part of the Bill.
Clause 115
VAT: women’s sanitary products
Kirsty Blackman (Aberdeen North) (SNP)
I beg to move amendment 1, in clause 115, page 162, line 8, leave out from “liners” to end of line 9.
Rebecca Long Bailey
Clause 115 is designed to implement the Government’s pledge to abolish the so-called tampon tax, following a long-standing campaign by women’s groups, as well as by my hon. Friend the Member for Dewsbury (Paula Sherriff) and other Members from all parties. As we have heard, among those other Members was the hon. Member for Glasgow Central, who represented the Scottish National party on last year’s Finance Bill Committee, and whom I will describe as “the hon. sister” for today’s purposes.
It has taken us some time to get where we are. The EU rules have allowed countries to keep VAT exemptions and reduced rates—including zero rates—where those rates and exemptions were negotiated at the point of their joining the EU. However, there were significant restrictions on removing goods and services from VAT, which meant that under existing rules the UK had been able to reduce VAT to 5% but not remove it altogether. That is what the previous Labour Government chose to do for women’s sanitary products; following a campaign by women Labour MPs, the then Paymaster General, Dawn Primarolo, reduced the rate to the 5% minimum—but that 5% rate was left in force.
More recently, there was a grassroots campaign to remove the VAT. Prominent in that campaign was a petition, started by feminist campaigner Laura Coryton, that attracted hundreds of thousands of signatures. Similar campaigns have been run in other countries. The issue was raised in this place by the hon. Member for Glasgow Central in the Finance Bill Committee last year, and by my hon. Friend the Member for Dewsbury, who then tabled an amendment to the Bill on Report. That amendment attracted considerable cross-party support, including from several Conservative Members.
The Government announced some concessions, which included finally starting negotiations on the issue at European level. Nevertheless, the matter was largely ignored during the Prime Minister’s EU renegotiation, as the Government focused on issues such as defending the interests of the City of London. The issue was finally addressed only when Ministers were staring into the face of defeat over the ultra-shambles Budget. I know that the Minister will appreciate my saying that the Chancellor became the first in history to accept not one but two amendments to his own Budget resolution: one was in my name, on green energy VAT, and the other was, of course, in the name of my hon. Friend the Member for Dewsbury. Do not worry, I have more to say on green energy VAT later in Committee.
The amendment to the Budget resolution led to the Minister raising the issue at the European Council and it being addressed in the Council communiqué. In April, the European Commission published an action plan on VAT. That was a move further towards a single European VAT system based on the destination principle—the principle that goods and services are taxed in the country where they are consumed. The European Commission also announced a consultation with member states on proposals to allow countries to vary their reduced VAT rates on items including women’s sanitary products. One option would see the establishment of a list of goods and services on which reduced—including zero—rates could be introduced by any country. Another option would simply give member states complete freedom to select any goods they favour for reduced rates.
Of course, those steps at European level have been somewhat overtaken by the vote to leave the EU, although, as we know, European law may remain in force for some years to come. None the less, the EU VAT action plan anticipated concluding the reforms by 2018, even if we had not completed the process of leaving by that stage, so it would be helpful if the Minister could say whether the UK will now have a say on the options put forward in the EU VAT action plan and, if so, what option is favoured. I hope that he can confirm that in either case, the tampon tax would be abolished, full stop.
A pledge to abolish the tampon tax was made by the Vote Leave campaign during the referendum campaigning season. It was even suggested that that would be included in a mini-Queen’s Speech following a Brexit vote. However, as we have the Bill before us today, we can take steps without that being strictly necessary; I am sure that the Minister understands the clear, basic point.
The explanatory notes, which were of course written before the referendum vote, state :
“This clause reduces the VAT rate on the supply of women's sanitary products from 5% to zero %.”
However, I hope that the Minister will acknowledge that that is not really the case. The clause does not zero-rate women’s sanitary products; it merely provides the Treasury with enabling powers to do so, if it chooses to, at a time of its choosing. The clause leaves open the question of not only when it will do so, but whether it will so so.
That is the issue dealt with in amendment 5, which my hon. Friend the Member for Dewsbury tabled and which I have signed. There is no reason to leave the matter open-ended, given the possibility that Ministers will simply never get round to abolishing the tampon tax once the heat is off. The amendment would impose a hard deadline. If for any reason it could not be met—if we were still negotiating Brexit and the EU VAT action plan had not been concluded with the necessary reform—the Government would have to return the matter to the House by way of an amendment to a future Finance Bill, and explain why they had failed to follow through at that stage. A firm date will hold the Government’s feet to the fire and set a clear objective and a legislative backdrop, to prevent sliding.
Sadly, my hon. Friend the Member for Dewsbury was of course not chosen for this Committee. I will not press the amendment to a vote if the Minister does not accept it, but I think my hon. Friend will want to raise the issue later, depending on the Minister’s response. It is only fair to add that I suspect that the whole House will not provide the Government with a majority as solid as the one that the Minister has in Committee. I hope that he will give some sort of positive answer today, because the change was a key pledge of the Vote Leave campaign. Other pledges seem to be unravelling fast. I hope that Conservative Members who supported Brexit will at the very least feel an obligation to follow through on the pledge. Otherwise they will be judged very badly by constituents who voted in the referendum.
It would be helpful if the Minister would address another issue, although we have not at this stage tabled an amendment on it. It is about the women’s charities that received funding from the tampon tax fund. It is understandable that many people criticised the use of a tax on women to pay for support that they often needed as a result of male violence. None the less, that money was still better than nothing while the tax continued. Now that it will be abolished, what consideration has the Treasury given to ensuring that there will in the future be stable funding for the vital work of the organisations in question?
My hon. Friend the Member for Dewsbury previously raised another issue with the Minister, and I want to press him on that again today. That is the fact that the benefit of zero rates is not always passed on to consumers in full. It depends largely on the market. There is evidence, for example, that in France a similar tax cut was not passed on to women, but simply bolstered the profits of retailers and manufacturers. When the rate of VAT on sanitary products was reduced to 5%, the Government said they would monitor whether the benefits were passed on to consumers here. It would be interesting, if possible, to compare the margins at that time with the margins now, to see whether that happened. Can the Minister give any information about that today, or by way of a written response later, and provide the full data from any assessment?
My hon. Friend the Member for Dewsbury, in her usual hands-on manner, has grasped the issue directly, and has herself negotiated a deal with leading retailers: they will pass on the cut in full. I understand, however, that some smaller retailers have yet to make that commitment, and there are others in the supply chain who could also benefit, theoretically. Will the Minister join me in urging these businesses to pass on the tax cut in full and to sign up to the arrangement that my hon. Friend has reached? Will the Minister also outline what he intends to do where companies do not pass on the benefits to women? Will he speak out against them and make it clear that the Government anticipate that this tax cut will benefit female customers, not big business shareholders, and will he consider tougher sanctions if they do not pass on the benefits? For example, is there an argument for including an enabling provision for a windfall tax in this Bill? Even if there is no current intention to use such a power, it might have a useful effect if companies know that the option to use it is in the Bill. It is sometimes easier for politicians to talk quietly if they carry a big stick. The Minister is a very effective talker, even though he does not have his stick with him this week. His thoughts on this issue would be very welcome.
We note that the Scottish National party has tabled two amendments, and the arguments for them were put forward articulately today. The amendments seek to expand the definition of “women’s sanitary products” for VAT purposes. We start from a position of sympathy, and we will support any amendments on these matters that the SNP Members choose to push to a vote.
In conclusion, we will support the clause, which has come about largely as a consequence of the campaigning of Labour Members and other Members in this House. The Government are not right to say, “job done.” On the contrary, this is a case of, “We now have the tools, and we may do the job later if we feel like it”, and that really is not good enough to meet the promises made by European leaders, the Prime Minister, his Government and the winning side in the recent referendum. It is not good enough for women. I hope that the Minister will accept the amendment tabled by my hon. Friend the Member for Dewsbury. I look forward to hearing what he has to say on the other issues that I have raised.
Mr Gauke
Clause 115 makes provision to ensure that women’s sanitary products will be zero-rated for VAT as soon as possible after the Finance Bill receives Royal Assent. Introducing a zero rate of VAT on sanitary products has been an issue raised and supported by hon. Members from all parties in the House. The Government have listened to their views, and we accept the argument put forward by many hon. Members that we should not apply VAT, even at the current 5% reduced rate, to these products.
We have been active in pursuing this change in the European Union. In the autumn statement in 2015, the Chancellor announced that while the UK sought to change the rules for the application of VAT zero rates with the EU, £15 million a year—an amount equivalent to the revenue accrued from VAT on these products—would be spent on supporting women’s charities. So far, this fund has supported 25 charities that are making a significant impact on the lives of women and girls in the United Kingdom.
The Chancellor announced in the autumn statement that initial donations from the tampon tax fund, totalling £5 million, would support the Eve Appeal, Safelives, Women’s Aid, and the Haven. Further grants totalling £12 million were announced at the Budget this year to support a range of charities. This included £5.2 million allocated to Comic Relief and Rosa to disburse over the coming year to a range of grassroots women’s organisations across the UK.
The Prime Minister took this issue to the European Council in March and secured the agreement of all EU Heads of State, who welcomed Commission action in this area, including giving member states the option of zero-rating sanitary products. In May, ECOFIN unanimously agreed that the Commission should bring forward proposals as soon as possible to allow member states to apply a zero rate to women’s sanitary products. The next step in the process is for a proposal to be published by the Commission, which it has committed to do before the end of this year. We are working with the Commission to expedite that process, so that the proposal is brought forward as soon as possible. To ensure that there is no delay in zero-rating women’s sanitary products for VAT at the earliest opportunity, we have included this clause in this year’s Bill.
Let me turn to amendments 1 and 2, the case for which was argued today by the hon. Member for Aberdeen North. She proposes that the provisions in the clause be extended to pads used to absorb breast milk and other products. The Government have taken decisive action to gain agreement across the EU on bringing forward a proposal on VAT on sanitary products, but it needs to be remembered that VAT applies to the vast majority of purchases of goods and supplies, including everyday items such as toilet paper, and it makes a significant contribution to the public finances. Extending the relief in the way that the amendment proposes is not possible under any feasible proposal from the Commission. Seeking to extend the scope of any new zero rate would introduce further complications to what are already delicate and complex discussions with the European Commission.
Rebecca Long Bailey
Clauses 116 and 121 introduce changes to the way stamp duty land tax is calculated for non-residential property transactions and transactions involving a mixture of residential and non-residential properties. I do not plan to go into a lot of detail, but there are a few questions that I want to ask the Minister. According to the policy paper, the change is expected to increase Exchequer revenue by £385 million in this financial year, rising to £590 million by 2020-21. The paper states:
“There are approximately 100,000 non-residential and mixed property transactions per year… As a result of these changes over 90% of non-residential property transactions will pay the same or less in SDLT.”
It also says:
“All non-residential freehold and lease premium transactions worth less than £1.05 million will pay the same SDLT or less compared to the current system. For leasehold…transactions, those with a NPV of up to £5 million will pay the same in SDLT as under the current system.”
Will the Minister confirm what the Government expect the impact to be on the remaining 10% who pay more in SDLT? What assessments have been carried out?
Clause 121 makes minor consequential amendments and we are quite happy to accept clauses 116 and 121. However, the Chartered Institute of Taxation has highlighted that the changes made by the clauses were introduced without consultation. I understand that the measures are transitional provision, but perhaps the Minister will take the opportunity to ease stakeholders’ concerns and identify what the consultative process entailed.
Mr Gauke
Clause 116 makes changes to the non-residential rates of stamp duty land tax. In the 2014 autumn statement the Government announced a radical reform of residential SDLT, which improved the efficiency of the tax by removing the distortive slab structure that led to large increases in SDLT when homeowners pay just £1 over a tax threshold. The changes to non-residential SDLT follow on from those successful reforms and also form part of the business tax roadmap, which sets out the Government’s plans for business taxes over the Parliament and will give businesses the clarity they need to invest with confidence. Tackling the deficit is essential for businesses, which can only grow and thrive if we have economic security.
The UK’s commercial property market was worth £787 billion in 2014, having experienced 15% growth in that year alone. As that market develops, the Government must ensure that non-residential SDLT is modern, efficient and helps the commercial property market to continue to grow. The clause improves the economic efficiency of SDLT and will provide a tax cut for the large majority of businesses purchasing commercial property. SDLT on non-residential property transactions contains two elements, depending on whether property is purchased or leased with payment upfront, or whether payment is via rental payments over time. The clause makes changes to both aspects and changes will raise just over £2.5 billion over the scorecard period.
Since 17 March, SDLT on freehold and lease premium non-residential transactions has been payable on the portion of the transaction value that falls within each tax band, rather than the tax being due at one rate on the entire value. The new structure has a nil-rate band up to £150,000; a 2% rate between £150,001 and £250,000; and a top rate of 5% above £250,000. SDLT on leasehold rent transactions has also changed to include the new 2% rate for transactions in which the NPV—net present value—of the rental payments is above £5 million. The new structure will have a nil-rate band of up to £150,000; a 1% band between £150,001 and £5 million; and a top rate of 2% for those high-value leasings with an NPV above £5 million.
As a result of the changes, over 90% of non-residential property transactions will pay the same or less in SDLT, as the hon. Lady has said. Businesses purchasing the most expensive properties have a contribution to make and the purchasers of the most expensive properties will pay more tax. However, the increase in SDLT at the top of the market is modest. The maximum tax increase from the reforms for a very expensive property is a tax rise of a single percentage point. In the context of the wider public finances and the performance of the commercial property market in recent years, I think that is reasonable.
With regard to consultation, the reforms to SDLT came into force from midnight following the Budget. That early introduction was needed to minimise any distortions in the commercial property market, including the impact on construction and development projects, that may have resulted from early announcement or consultation of a future change to non-residential SDLT. Recognising that some purchasers will have entered into legal agreements to purchase property, and to further minimise any potential market distortion, the Government are putting into place transitional rules for purchasers who have exchanged contracts but not completed their purchase before 17 March in order to ensure they do not lose out. The legislation for those changes is receiving scrutiny today. I hope that the Committee will support the clause, which will improve the economic efficiency of non-residential rates and builds on the successful changes that the Government have previously made to residential rates of SDLT.
Question put and agreed to.
Clause 116 accordingly ordered to stand part of the Bill.
Clause 117
SDLT: higher rates for additional dwellings etc
The Chair
With this it will be convenient to discuss the following:
Government amendments 30 to 42.
Clause stand part.
Mr Gauke
Let me say a word about clause 117, which introduces higher rates of stamp duty land tax on purchasers of additional residential properties. Owning a home is an aspiration for millions of people in our country. The Government are committed to helping people achieve that aspiration by supporting those who want to work hard, save and buy their own home. Home ownership is also a key part of the Government’s plan to provide economic security for working people at every stage of their lives.
In the previous Parliament the Government took significant steps to support housing supply and low-cost home ownership, and in the spending review and autumn statement in 2015 we went further by announcing a bold five-point plan for housing. The plan refocuses support for housing towards low-cost home ownership for first-time buyers. Alongside delivering 400,000 affordable housing starts by 2020-21, extending the right to buy to housing association tenants, accelerating housing supply and introducing the London Help to Buy scheme, the five-point plan includes the introduction of higher rates of SDLT on purchases of additional residential properties such as second homes and buy-to-let properties.
The higher rates are designed to help redress the balance between those people who are struggling to buy their first home and those who are able to invest in additional properties. The higher rates are 3% above the standard SDLT rate and took effect on 1 April 2016. The Government will use some of the additional tax collected to provide £60 million for communities in England where the impact of second homes is particularly acute. The tax receipts will also help towards doubling the affordable housing budget, which will help first-time buyers.
Rebecca Long Bailey
As we have heard, clause 117 implements the higher rates of SDLT, or the 3% surcharge, on the purchase of additional residential properties by individuals and the purchase of any residential properties by companies. The measure has effect from 1 April 2016. The Government’s stated intention is to support home ownership and first-time buyers. The measure is expected to bring in £3.7 billion in additional revenues between this financial year and 2020-21. Clearly it is an important measure and we are broadly supportive. However, as ever, clarification on some points would be welcome.
The Government have stated that they will use some of the tax take
“to provide £60 million for communities in England where the impact of second homes is particularly acute”
and that the receipts
“will help towards doubling the affordable housing budget.”
I would like to press the Minister on those points. As I am sure he knows, Labour Members are not impressed with the present and previous Governments’ track records on housing. They have presided over six years of failure to tackle the crisis in the market. There are 201,000 fewer home-owning households than in 2010, and home ownership has fallen from 67.4% in 2009-10 to 63.6% in 2014-15. Most drastically, the number of under-35s who own a home has fallen by 20% since 2009-10.
The Government’s record on affordable housing is equally disappointing. Last year the number of affordable homes built was the smallest in more than two decades: 9,590 homes for social rent, compared with 33,180 delivered during Labour’s last year in office. This Government have failed to deliver one-for-one replacements for homes sold through the right to buy; instead, only one is being built for every eight sold. Their “affordable rent” is not affordable for many families, particularly in London, where it could swallow up to 84% of the earnings of a family on the average income and require a salary of up to £74,000. Will the Minister clarify how the doubling of the affordable housing budget will be used effectively to support home ownership across the country? Will he also identify specifically which communities in England are in line for the £60 million fund, and in what form?
The Government conducted a consultation on these measures from December 2015 to February this year, a process that the Chartered Institute of Taxation has labelled inadequate. Stakeholders are concerned that the consultation ran for only five weeks and that the draft legislation was not published until two weeks before the measure took effect on 1 April 2016. Can the Minister provide some assurance that due consultation has taken place on these big changes to the SDLT regime?
Furthermore, there have been queries about what will happen in cases of joint purchase. If a property is purchased by more than one buyer and the higher rates apply to any one of them, the surcharge will apply to the whole of the chargeable consideration. The Government say that the measure is meant to support home ownership and first-time buyers, but does this provision not bring parents assisting their children to buy a first home into the scope of the surcharge, as the Institute of Chartered Accountants has suggested?
While Labour Members welcome efforts to cool the buy-to-let market in favour of first-time buyers, the new legislation will make an already-complex tax even more complex. It would be sensible to keep the issue of joint ownership by parents and children under review, as their options for assisting each other to purchase property are significantly restricted by the new legislation. I would welcome the Minister’s thoughts on that.
Finally, before I turn to Government amendments 29 to 42, clause 117(16)(1) provides that ownership of a dwelling outside the UK shall be taken into account in deciding whether the surcharge applies to the purchase of a dwelling in the UK. The Chartered Institute of Taxation highlighted some practical difficulties with determining ownership of a property in certain jurisdictions, and whether it is a main residence. I am therefore concerned about compliance. As we know, there is a large problem in the UK property market, especially in London, where non-UK nationals buying property are pushing up house prices. Will the Minister therefore confirm what measures are in place to ensure compliance by overseas property owners?
I note that Government amendments 29 to 39 take action to address the tax treatment of dwellings with annexes or granny flats, as discussed. The changes mean that the surcharge will not be applicable when a granny flat is the only reason the higher rate would apply. I am aware of what stakeholders say and of wider reports in the media about the issue, and I am pleased that the Government have taken steps to address it.
Government amendment 40 clarifies the situation for dwellings purchased under alternative finance arrangements, so that where the surcharge is applicable the higher rates apply to the person occupying the property, not to the financial institution. Again, that is sensible, and it mirrors the situation with annual tax on enveloped dwelling. Finally, Government amendments 41 and 42, according to the explanatory note, will give the Treasury powers to change the rules on what is a higher rates transaction for the purpose of removing transactions from the higher rates.
To conclude, we support all the measures in this group, although we do have some concerns, which I have highlighted. I hope that the Minister will provide assurance.
Mr Gauke
The hon. Lady made a number of points about housing that we could spend a long time debating. I will try to resist that temptation, but let me make one point: in the previous Parliament, more council homes were built than in the whole period of the previous two Labour Governments. We are committed to delivering a large number of affordable homes. Annual housing starts are at an eight-year high, and last year housing completions rose by more than 10%. A £1 billion loan fund will provide funds to small and medium-sized enterprises, such as small house builders. I could say more, but I will resist the temptation.
A number of technical points were made about the measures covered by this group. First, there was a point about how we deal with joint purchasers. We were asked why we do not use an apportionment approach for joint purchasers. A move to an apportionment system would increase complexity in the tax system and increase the risk of non-compliance. The Government’s approach is simpler than an apportionment system and has been settled on after careful consideration. Where a property is purchased jointly, the higher rates will apply if the property is an additional property of one or more purchasers.
As to whether that is unfair to parents trying to help their children on to the property ladder, I do not think so. Parents may help their children on to the property ladder without being subject to the higher rates of SDLT—for example, a parent can offer direct financial support, or become the guarantor of the child’s mortgage—but if the parent purchases a property jointly with the child, the transaction may be subject to the higher rate if the purchase is an additional property for the parent. Offering exemption for properties purchased jointly with children would add complexity to the tax system, reduce revenue and increase compliance risks.
On the impact on the buy-to-let market, the policy is not expected to have an effect on rents. SDLT will be paid only once, when the property is purchased. I was asked why the consultation period was short. Let me reassure the Committee that the consultation process was full and open, and that respondents’ views were taken into account. I accept that the consultation period was shorter than 12 weeks, but that was so that we could properly analyse the responses in time for the final policy design to be confirmed, and for the policy to be in force, by 1 April. We recognise the effects on the property market of pre-announcing changes to SDLT rules, so there was a careful balance to be struck between providing stakeholders with the chance to have their say and not prolonging market disruption.
On treating homes abroad in the same way as homes in the UK, SDLT is a self-assessed tax, and those making returns need to complete returns honestly. It would be unfair to treat those with first homes abroad more beneficially than those with first homes in the UK. Her Majesty’s Revenue and Customs monitors compliance and will check returns carefully.
The Department for Communities and Local Government is consulting on how the £60 million will be spent in communities with a large number of second homes. I am not sure that there is much more I can say on that at this point. It is a matter DCLG is leading on. I hope that those points are helpful to the hon. Member for Salford and Eccles and the Committee. I hope the clause and the amendments to it will stand part of the Bill.
Amendment 29 agreed to.
Amendments made: 30, in clause 117, page 167, line 21, at end insert
“meet conditions A, B and C”
Amendment 31, in clause 117, page 167, line 22, leave out
“Condition A is that the portion”
and insert
“A purchased dwelling meets condition A if the amount”
Amendment 32, in clause 117, page 167, line 25, leave out “Condition B is that” and insert
“A purchased dwelling meets condition B if”
Amendment 33, in clause 117, page 167, line 30, at end insert—
‘(4) A purchased dwelling meets condition C if it is not subsidiary to any of the other purchased dwellings.
(5) One of the purchased dwellings (“dwelling A”) is subsidiary to another of the purchased dwellings (“dwelling B”) if—
(a) dwelling A is situated within the grounds of, or within the same building as, dwelling B, and
(b) the amount of the chargeable consideration for the transaction which is attributable on a just and reasonable basis to dwelling B is equal to, or greater than, two thirds of the amount of the chargeable consideration for the transaction which is attributable on a just and reasonable basis to the following combined—
(i) dwelling A,
(ii) dwelling B, and
(iii) each of the other purchased dwellings (if any) which are situated within the grounds of, or within the same building as, dwelling B.”
Amendment 34, in clause 117, page 167, line 36, leave out from beginning to “one” and insert “only”.
Amendment 35, in clause 117, page 167, line 37, after “dwellings” insert
“meets conditions A, B and C”.
Amendment 36, in clause 117, page 167, line 38, leave out from “dwelling” to “is” in line 39 and insert “which meets those conditions”.
Amendment 37, in clause 117, page 167, line 48, at end insert—
‘( ) Sub-paragraphs (2) to (5) of paragraph 5 apply for the purposes of sub-paragraph (1)(c) of this paragraph as they apply for the purposes of sub-paragraph (1)(c) of that paragraph.”
Amendment 38, in clause 117, page 168, line 9, leave out from beginning to “at”.
Amendment 39, in clause 117, page 168, line 10, at end insert
“meets conditions A and B.
‘( ) Sub-paragraphs (2) and (3) of paragraph 5 apply for the purposes of sub-paragraph (1)(c) of this paragraph as they apply for the purposes of sub-paragraph (1)(c) of that paragraph.”
Amendment 40, in clause 117, page 171, line 8, at end insert—
“Alternative finance arrangements
14A (1) This paragraph applies in relation to a chargeable transaction which is the first transaction under an alternative finance arrangement entered into between a person and a financial institution.
(2) The person (rather than the institution) is to be treated for the purposes of this Schedule as the purchaser in relation to the transaction.
(3) In this paragraph—
“alternative finance arrangement” means an arrangement of a kind mentioned in section 71A(1) or 73(1);
“financial institution” has the meaning it has in those sections (see section 73BA);
“first transaction”, in relation to an alternative finance arrangement, has the meaning given by section 71A(1)(a) or (as the case may be) section 73(1)(a)(i).”
Amendment 41, in clause 117, page 173, line 23, at end insert—
“Power to modify this Schedule
18 (1) The Treasury may by regulations amend or otherwise modify this Schedule for the purpose of preventing certain chargeable transactions from being higher rates transactions for the purposes of paragraph 1.
(2) The provision which may be included in regulations under this paragraph by reason of section 114(6)(c) includes incidental or consequential provision which may cause a chargeable transaction to be a higher rates transaction for the purposes of paragraph 1.”
Amendment 42, in clause 117, page 174, line 7, at end insert—
‘( ) Paragraph 14A of Schedule 4ZA to FA 2003 does not apply in relation to a land transaction of which the effective date is, or is before, the date on which this Act is passed if the effect of its application would be that the transaction is a higher rates transaction for the purposes of paragraph 1 of that Schedule.”—(Mr Gauke.)
Clause 117, as amended, ordered to stand part of the Bill.
Clause 118
SDLT higher rate: land purchased for commercial use
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss clauses 119 and 120 and 123 to 125 stand part.
Mr Gauke
Clause 118 to 120 and clauses 123 to 124 extend the reliefs available from the annual tax on enveloped dwellings—ATED—and the 15% higher rate of stamp duty land tax. Clause 125 corrects a minor technical amendment. ATED and the 15% rate of SDLT were introduced as part of a package of measures to tackle tax avoidance. They will ensure that individuals who envelope residential properties by owning or purchasing them through corporate structures without a commercial purpose pay a fair share of tax. The intention is to discourage future enveloping and encourage those who have enveloped to take the properties they own out of those structures. The 15% higher rate is charged on the enveloping of the property, and ATED is charged annually for as long as the property remains within the envelope.
There are a series of reliefs from ATED and the 15% rate, aimed at genuine commercial use of the property. If the conditions for any particular relief are met, the 15% rate is reduced to the rate of SDLT that would ordinarily apply, and the ATED charge can be reduced to nil. Initially, when these taxes were introduced, they applied to properties valued at more than £2 million. However, legislative changes introduced in the Finance Act 2014 reduced that threshold to £500,000 from 1 April 2016. Following that reduction in the threshold, certain legitimate business activities have been identified where these taxes can apply. The clauses intend to provide relief for those cases.
Clause 118 resolves a problem that arose only in relation to the 15% rate of SDLT. Currently, where a residential property is acquired with the intention of using it for business premises—for example, as offices from which to run the trade or business—or for conversion or demolition or use for one or more relievable purposes, the 15% rate applies. The clause will relieve those types of business activity from the 15% rate to guard against abuse. If, within a three-year period, the property is no longer held exclusively for a relievable purpose, relief is withdrawn.
Clauses 119 and 123 provide relief from both the 15% rate and ATED in situations where a residential property is acquired or held exclusively for the purposes of an equity release scheme, referred to as a regulated home reversion plan. Those plans are typically offered by insurance companies to older people. The company buys all or part of their property in exchange for an annuity and a lifetime tenancy. The result of that can be that by having an interest in a residential property, the insurance company can become liable to the 15% rate and ATED where the value exceeds £500,000. Clauses 119 and 123 relieve home reversion plans from the charges. However, in order to protect against abuse, where the conditions are no longer met, relief will not be available.
In relation to clauses 120 and 124, relief is currently given where a property is made available to an employee of a trade, or where a property is rented out. However, no relief is available where a property is used by an employee of a property rental business or where a tenant-run flat management company permits one of the flats to be occupied by a caretaker. These clauses extend the current reliefs to remove those gaps. Similarly, where the conditions are no longer met, relief will no longer be available. For the 15% rate, it will be withdrawn if the property is no longer held exclusively for a relievable purpose. Those changes came into effect on 1 April 2016.
Clause 125 ensures that the ATED regime continues to function effectively following the introduction of the land buildings transaction tax in Scotland.
Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)
Very briefly, I want to commend the Minister. We fully support clause 125.
Mr Gauke
I am grateful to the hon. Gentleman for putting that on the record.
These reliefs ensure that the 15% rate of SDLT and ATED work together effectively as intended to tackle avoidance, while supporting genuine businesses. I hope that these clauses can stand part of the Bill.
Question put and agreed to.
Clause 118 accordingly ordered to stand part of the Bill.
Clauses 119 to 121 ordered to stand part of the Bill.
Clause 122
SDLT: property authorised investment funds and co-ownership authorised contractual schemes
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
This clause and schedule introduce a relief from SDLT for certain property funds and co-ownership schemes. The relief aims to remove barriers to the use of particular ways of investing in property. The transfer of property into property authorised investment funds and co-ownership authorised contractual schemes is currently subject to stamp duty.
As set out in the HMRC policy paper, this clause and schedule introduce a 100% relief from stamp duty land tax for the initial transfer, or seeding, of properties into an authorised PAIF or COACS. The measure also introduces changes to the SDLT treatment of COACSs, so that there will not be a SDLT charge on transactions in units.
In the 2014 Budget, the Government announced that they would consult on the SDLT treatment of the seeding of property authorised investment funds and the wider SDLT treatment of co-ownership authorised contractual schemes. That was in reaction to stakeholder suggestions that relieving stamp duty
“in certain circumstances could encourage more property funds to set up in the UK and facilitate greater collective investment in UK property.”
The Government therefore carried out a consultation in July 2014, to seek views on the case for action on design features for a potential seeding relief and targeted stamp duty rules for co-ownership authorised contractual schemes. Subsequently, in the 2014 autumn statement, it was announced that those changes would be made subject to the resolution of potential avoidance issues.
The explanatory note to the clause states:
“The legislation includes anti-avoidance measures to limit the application of the relief to authorised funds with a broad base of investors and a sizeable portfolio of seeded properties. This aims to minimise SDLT avoidance via the ‘enveloping’ of properties within such funds.”
We do not seek to divide the Committee on this measure, but I would like the Minister to expand on that point. Can he explain what safeguards are in place to prevent the avoidance of stamp duty through this relief? What is the Treasury’s estimate of the risk of avoidance through this relief? Are there any plans in place to review the relief after a given time to assess whether the safeguards are working?
According to HMRC’s policy paper, this measure is expected to cost £10 million in this financial year, rising to £15 million next year, and then dropping to £5 million by 2019-20. The expected impact is minimal, other than on
“life and pension companies, charities and other tax exempt investors that invest in property. They will all benefit as a result of SDLT cost reductions which may subsequently be passed on to beneficiaries of these organisations.”
However, accountants Smith & Williamson noted that the measure is likely to affect only substantial property portfolios. It stated:
“it will be interesting to see whether it will be extended to other tax-favoured property investment vehicles such as real estate investment trusts”.
Do the Government have any plans to extend the relief in any way?
We do not oppose this clause and schedule, but I hope the Minister can assure me that this new relief will not be used as a tax-avoidance scam, and that the Government have taken all possible action to ensure that it will not be.
Mr Gauke
As we have heard, clause 122 makes changes to ensure that the tax system supports UK competitiveness and makes the UK a more attractive location for fund management and domicile. The UK investment management industry is an important and successful part of the economy. It is a significant employer that accounts for 1% of GDP and is a key part of the wider financial services sector.
Property funds are an important part of the industry, so it is right that they are taxed fairly and appropriately, and in a way that supports the aim of the Government’s investment management strategy. The Government have received many representations from the industry saying that SDLT rules do not work for two types of property funds: property authorised investment funds and co-ownership authorised contractual schemes.
Under current rules, an SDLT liability can arise even when economic ownership of properties has not changed and properties have not been bought or sold. That discourages the use of funds and is a barrier to UK competitiveness in this important area. The changes made by clause 122 and schedule 16 will ensure that property authorised investment funds and co-ownership authorised contractual schemes are treated fairly in the SDLT system.
A SDLT relief for property that is transferred into a new fund will be introduced where the underlying property has not changed economic ownership, and there will not be a SDLT charge when investors transfer units in a co-authorised contractual scheme. Those funds will continue to pay the appropriate levels of SDLT when purchasing property, but these changes will mean that SDLT will not be due when the underlying economic ownership of the property has not changed. That is an appropriate and fair outcome, costing £40 million over the scorecard period.
Under the previous Government, an SDLT exemption for the initial transfer of property to a unit trust scheme was repealed due to widespread tax avoidance and abuse of the rules. This Government are committed to addressing that kind of tax avoidance, and there are a number of crucial safeguards as part of the rules. For example, the property portfolio must be of a certain size and value to qualify for this relief. If units in the fund are sold to third-party investors within a three-year period, the SDLT relieved will be paid back to the Exchequer.
Those safeguards were not in place for the previous exemption for unit trusts and will minimise any potential tax avoidance issues. Of course, all taxes are kept under review in the normal way and the costings for this take into account the risk of avoidance.
An argument is sometimes made for extending such a measure to real estate investment trusts. Our view was that there was a clear benefit to the investment management industry and the wider economy from making these changes for the two types of funds that benefit. Evidence that similar effects would occur if the changes were extended to REITs has not yet been presented but, again, we keep all taxes under review.
In summary, the clause improves UK competitiveness in an important industry, encourages property funds to be managed and domiciled in the UK and to invest in UK property assets, and makes the UK tax system fairer. I hope that this clause and schedule can stand part of the Bill.
Question put and agreed to.
Clause 122 accordingly ordered to stand part of the Bill.
Schedule 16 agreed to.
Clauses 123 to 125 ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned.— (Mel Stride.)
Finance Bill (Sixth sitting)
David Gauke Excerpts(7 years, 10 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Rebecca Long Bailey (Salford and Eccles) (Lab)
These clauses relate to the rates of stamp duty and stamp duty reserve tax that are to be applied to share transactions and to options to buy and sell shares. Once again we are in the realm of financial derivatives, which members of the Committee will know I get quite excited about, given my remarks earlier in the week. I said that the Government need, for the national good, to identify the principles that will apply to the taxation and regulation of those markets after we leave the EU.
The clauses take steps to tackle tax avoidance by putting a stop to option arrangements that are being used to pay a lower rate of tax on the sale of shares. Such option arrangements are known as deep-in-the-money options—DITMs—which provide an option to buy shares with a strike price far below market value. DITMs are being used for tax avoidance purposes, as the Government’s tax information and impact note explains. Her Majesty’s Revenue and Customs is aware of an increasing amount of avoidance in which DITMs are created in order to transfer shares to depository receipt issuers and clearance services. The result of that avoidance is that tax is payable only on the very low strike price, rather than the full market value of the shares. The measure makes the tax system fairer by removing the opportunity for avoidance arising from the transfer of shares using a DITM.
In order to tackle that kind of avoidance, clauses 126 and 127 ensure that shares transferred to a depository receipt issuer or clearance service as a result of the exercise of an option will now be charged the 1.5% higher rate of stamp duty or SDRT based on either their market value or the option strike price—whichever is higher. The change has effect from 23 March 2016 and applies to options exercised on or after 23 March 2016 that were entered into on or after 25 November 2015. I am pleased that the Government have taken the time to consult on the provisions, which they did between 9 September 2015 and 3 February this year. However, a summary of the responses does not appear to be available. Will the Minister therefore provide some assurance that the legislation will reflect comments made by respondents in the consultation?
The Government’s impact note expects the measure to generate £200 million in Exchequer revenue by 2020-21. Given that Treasury receipts from stamp taxes on shares are expected to total £3 billion in this financial year, rising to £3.5 billion by 2020-21, the measure is relatively small fish. However, the Opposition really support it, along with any other measures to tackle tax avoidance, especially those that Ernst and Young suggests will have a significant impact on deep-in-the-money options activity. We therefore support clauses 126 and 127.
Finally, will the Minister address what appears to be something of a peculiarity of the modern age and tell me the rationale for having a lower rate of duty for transactions that involve certificates than for transactions that are completed digitally?
The Financial Secretary to the Treasury (Mr David Gauke)
As we have heard, clauses 126 and 127 make changes to stop the avoidance of stamp duty on shares, which will raise £155 million over the rest of this Parliament. They will ensure that the tax system operates fairly by closing an increasingly exploited loophole in which deep-in-the-money options are used to transfer shares to financial institutions or clearance services that then issue depository receipts that represent those shares and can be traded. The measure was announced by the Chancellor in the autumn statement. Stamp duty or stamp duty reserve tax, together referred to as stamp tax on shares, are charged on the purchase of shares in UK companies at 0.5% of their price. When shares are transferred to a depository receipt issuer or clearance service, a higher rate of 1.5% applies, reflecting the fact that subsequent transactions will no longer be taxed.
HMRC has become aware of a practice of deep-in-the-money options being used to avoid the higher rate charge and the Government have acted to stop it. A call option over shares gives their holder the right to buy the shares at a given price—the strike price—on or before a specified date. The price paid for the option is its premium. Deep-in-the-money call options have a strike price significantly below their market value and a high premium, which means the premium reflects the vast majority of the underlying value of the shares. When shares are transferred using an option, stamp tax is currently charged on the strike price and not on the premium, with the result that when purchasing shares using a deep-in-the-money option, tax could be based on the strike price of only a few pence when each share is really worth much more.
Deep-in-the-money options are being artificially created and then exercised immediately to transfer shares to depository receipt issuers or clearance services, avoiding a significant tax charge. Clearly that is not fair. As a result of the changes being made, the 1.5% higher rate stamp tax charge now applies to either the market value of the shares or the option strike price, whichever is greater. The measure applies to all options entered into on or after 25 November 2015 if they were exercised on or after 23 March 2016. This is a targeted response that will apply to a relatively small number of transactions where HMRC has identified clear evidence of tax avoidance. The change will apply only to transfers of shares to clearance services or depository receipt issuers and only when options are settled with shares, not cash. HMRC carried out public consultation following the autumn statement and no wider market impacts were identified.
The technical consultation was open from 9 December 2015 to 3 February 2016 and received three responses. Stakeholders questioned whether there was evidence of avoidance and the magnitude of the costing. HMRC has clear evidence that the Office for Budget Responsibility certified the costing so no changes were made as a result. Separately, meetings with industry bodies and depository receipt issuers have not indicated wider issues with the measure.
The rationale for costs for the differential rates is that stamp duty and stamp duty reserve tax apply the same rates to paper and electronic share transfers. I hope that that provides some clarity.
In conclusion, the Government have acted quickly to close a new tax loophole. Clauses 126 and 127 will stop avoidance of stamp tax on shares, raising a significant sum for the Exchequer and ensuring that the tax rules operate fairly.
Question put and agreed to.
Clause 126 accordingly ordered to stand part of the Bill.
Clauses 127 and 128 ordered to stand part of the Bill.
Kirsty Blackman (Aberdeen North) (SNP)
On a point of order, Mr Howarth. Should we not be dealing with new clauses 3 and 6 with clause 128, or will we vote on them at the end? You have taken clauses 127 and 128 together.
Mr Gauke
As we have heard, clause 155 and schedule 23 will provide a new power to allow HMRC to make an assessment of an individual’s income tax and capital gains tax liability without their first being required to complete a self-assessment return. Clause 157 will allow HMRC to withdraw a notice to file or cancel any related penalty for failure to make a return. Clause 156 will ensure that the time allowed for making a self-assessment when HMRC has served notice to file a return is clear.
I will speak first to clause 155 and schedule 23. In March 2015, HMRC published “Making tax easier: The end of the tax return”, which set out its vision to modernise the tax system by introducing digital tax accounts for individuals and businesses. That will lead to millions of HMRC customers no longer needing to fill in tax returns. At present, hundreds of thousands of people have to fill out a self-assessment tax return every year simply because they have a tax liability that cannot be collected through pay-as-you-earn. This is expensive and time-consuming for both the customer and HMRC. The measure will allow HMRC to send a tax calculation to customers along with a request for payment when HMRC already has enough information to make an accurate assessment of the tax due.
HMRC already holds a wide range of information, such as employment, pay and pension income, child benefit payments and savings income. That comes from a range of sources such as Government Departments, banks, building societies, employers, pension providers and information provided directly by taxpayers. Furthermore, HMRC already uses that information held on its systems to calculate an individual’s tax liabilities on an annual basis.
From 2016-17, this measure will allow HMRC to send customers with the simplest affairs a simple tax calculation and request for payment, meaning that they will not have to fill out a tax return. HMRC will consult on using the power to create tax bills for customers with more complicated affairs. It estimates that in time, up to 2 million individuals will benefit from the simple assessment. Individuals will have a simple customer experience, and fewer customers will incur a penalty or have to pay interest because they have not sent their return in on time.
HMRC intends the process for customers to be online and as simple as possible, and as such has aligned simple assessment with the payment dates and interest provisions that already exist for self-assessment. The current processes for hardship will continue. There will also be assistance for customers who have difficulty going online, including a paper process for customers who are unable to access digital accounts. As is the case now, customers should check that the information in their simple assessment tax calculation is correct. Customers will be able to challenge figures, and there will be a right of appeal if disputes cannot be resolved informally.
Furthermore, customers will still be able to fill out a self-assessment return if they wish or if they have to declare changes to their circumstances. Simple assessments will be used to collect the tax that is due based only on information already known about income and circumstances.
In order for the Government to facilitate the change that I have just discussed, and to enable as many people as possible to benefit from that simplification, clause 157 makes amendments to the Taxes Management Act 1970 and consequential amendments to one of its schedules to allow HMRC to withdraw a notice to file or to cancel related penalties. Under the income tax self-assessment system, anyone sent a notice to file a self-assessment tax return by HMRC is required to complete and return the assessment. HMRC does not want to unnecessarily oblige customers to complete a tax return if they do not need to be within self-assessment.
Rebecca Long Bailey
These clauses relate broadly to judgment debts, and they make the same provisions for Scotland, Northern Ireland, England and Wales. The Chartered Institute of Taxation has had no representations or comments from its members on the three clauses, apparently because they are completely uncontroversial. The legislation, however, seems complex, so I wondered whether the Minister has had any representations at all about its drafting. Otherwise, we have no issues with the clauses.
Mr Gauke
The clauses, as we have heard, deal with the rates of interest for all tax-related debts involving HMRC, ensuring that they are at the appropriate level, in accordance with tax legislation.
By way of background, section 52 of the Finance Act 2015 provided a set rate of judgment debt interest for England and Wales. Where HMRC is involved with a tax-related debt, the requirement is for the rates of interest to be those in tax legislation, and not those set out in a judgment debt or by a county court or others. Last summer, in the Finance Bill, we set out the rates of interest for England and Wales, but interest payable by or to HMRC following a court action in Scotland and Northern Ireland is set at a different rate. That is because we sought to consult with Scotland and Northern Ireland before extending the changes to them. They have since indicated that they are content for the legislation to be extended UK-wide.
To answer the hon. Lady’s question, we have not received any representations on the measure. It may be complex, but it appears to be uncontroversial, so I hope it can stand part of the Bill.
Question put and agreed to.
Clause 158 accordingly ordered to stand part of the Bill.
Clauses 159 and 160 ordered to stand part of the Bill.
Clause 161
Gift aid: power to impose penalties on charities and intermediaries
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
The clause relates to gift aid and will allow HMRC to impose penalties on intermediaries that fail to comply with new requirements on gift aid declarations, as set out in secondary legislation that has not yet been published. A technical consultation on those draft regulations is apparently being carried out later this year. To understand the clause, therefore, the Committee might find some background useful.
The Government want to make it easier to claim gift aid on donations given through digital channels. At the moment, a charity requires a gift aid declaration from a donor in order to be able to claim gift aid. Where donations are made by an intermediary—through a website such as justgiving.com, or by text—the situation is difficult, because the intermediary has to collect the declaration from the donor and then pass it on to the charity.
The Government therefore carried out a consultation on digital giving, which ran from July to September 2013, and published their response in April 2014. The consultation received more than 100 responses, and I understand that meetings have been held with representatives of both charities and intermediaries. The Government’s intention, as I understand it, is to allow gift aid declarations to be made by intermediaries representing individuals, and to allow charities to use such declarations to claim gift aid. The primary legislation that gave the Government the power to do that was enacted in the Finance Act 2014. Clause 161 simply amends that legislation so that the regulations, when published, may also include a penalty for intermediaries who fail to comply with the requirement, as well as a right of appeal against those penalties. Regulations for the requirements and penalties will be published later this year.
According to the policy paper, the Exchequer impact of the changes are not known, but the measure is expected to decrease net receipts, as there will be a higher level of gift aid on donations. The paper also states that the measure will affect only intermediaries who fail to comply with legislation, and that they may incur one-off costs to put systems in place to implement the changes. However, estimates of the impact will be made when details of the measure have been finalised.
We completely agree with making it easier for gift aid to be claimed on donations where it is complicated to do so, and we are happy to support the clause, but perhaps the Minister will provide more detail of what the regulations will contain and what the requirements on intermediaries will be.
Rebecca Long Bailey
Clause 164 looks at extending HMRC’s data-gathering powers for the growing digital economy, which we are happy to support. HMRC’s existing data-gathering powers were set out in schedule 23 to the Finance Act 2011. HMRC subsequently obtained new powers in section 228 of the Finance Act 2013 to request data from merchant acquirers—businesses—that process credit and debit card transactions.
More recently, HMRC completed a consultation, “Tackling the hidden economy: extension of data-gathering powers”, between July and October 2015, which has led to the detail of this clause. The clause recognises the rapid development of the digital economy and payments made through it, and the Government wish to enhance their ability to obtain data by adding two new categories of data holders to the existing legislation on data gathering.
Those categories are identified as electronic stored-value payment services—or digital wallets—and as other business intermediaries operating offline. The Financial Times recently reported research by Worldpay that asserted that the rise of digital wallets would mean that credit cards and debit cards would fall from accounting for two thirds of all payments to just half by 2019.
The same report found that $647 billion of consumer payments to businesses will be made globally through digital or e-wallets that year. It is in that context that the Government wish to cast their data-gathering net wider to include that growing sector. I am particularly interested in the Minister’s view of the possibility of increasing tax revenue through these powers. The economic impact in the policy paper suggests an increased take of approximately £200 million per year once these powers are embedded.
Roy Maugham, tax partner at UHY Hacker Young, said:
“The new powers HMRC are seeking indicate that they believe there is large-scale tax evasion in the ‘app economy’.”
Is the expectation that these powers will reveal new instances of tax evasion or tax avoidance? Will the Minister indicate what initial scoping or research has been possible to determine the likelihood of that? In the light of the consultation response from the Low Incomes Tax Reform Group, will the Minister guarantee that the powers will not be used in a way that disadvantages those on low incomes who run owner-managed businesses and who will find them a significant new administrative burden?
A number of submissions to the consultation and responses to the draft legislation, including from the Chartered Institute of Taxation and Payments UK, expressed concern about the definition of the two new categories. I believe that the comments from Payments UK on the definition of “providers of digital wallets” have largely been taken on board, with them now being referred to as
“providers of electronic stored-value payment services”.
The Chartered Institute of Taxation would like further clarification on the definition of “business intermediaries” as it is concerned that that will catch not only websites such as eBay, Etsy and Airbnb but traditional businesses such as insurance brokers and letting agents. Can the Minister shine some light on that today?
We are also happy to support clause 165, which addresses HMRC’s power to levy daily penalties on data holders that do not comply with a data information notice request. Under existing legislation, if a person fails to comply with a data holder notice, they are liable for an initial fixed penalty of £300 and daily default penalties of up to £60 a day. If that is unsuccessful, a tribunal can decide the amount of an increased daily default penalty, which cannot be more than £1,000 a day. The clause clarifies that the tribunal will be responsible for determining the maximum amount of an increased daily penalty, but HMRC will determine the penalty that applies.
Our main concern, once again raised by the Low Incomes Tax Reform Group, is that the proposed change to the law in clause 165 might move significant numbers into the scope of data holder notices and a penalty regime intended for large companies involved in established modes of transaction, such as companies that facilitate credit card transactions. Under the current data request regime, the requirement for the parties subject to a notice to produce the information demanded within 30 days, under threat of instant penalties, may be particularly demanding for lower-resourced parties. On that basis, I hope the Minister can give such companies some reassurance.
Aside from the points that I have outlined, we are more than happy to support clauses 164 and 165.
Mr Gauke
Clause 164 will extend HMRC’s existing bulk data-gathering powers, allowing it to require data from two additional categories of data holder. The first category relates to business intermediaries that facilitate transactions, particularly online, between a supplier and a customer. The category covers providers of electronic stored-value payment services, also known as digital wallet transactions, a method of transferring payments to a retailer or trader. Comparing those new data with information that it already holds will enable HMRC to identify businesses that have failed to register with it or that are not declaring the full amount of tax they owe. HMRC will not seek data about individual transactions.
Clause 165 makes minor technical corrections to schedule 23 to the Finance Act 2011, which covers the bulk data-gathering powers mentioned in clause 164. Businesses are increasingly using intermediaries to provide custom or take payments, in some cases without registering for tax. New payment models are evolving quickly and are moving away from cash and card transactions towards other electronic payment groups, which means that some businesses can trade digitally while remaining beyond HMRC’s view.
Clause 164 updates HMRC’s data-gathering powers to keep pace with those changes and futureproofs legislation by including emerging new data sources of a similar type. Those data will help HMRC to crack down on the hidden economy, which the Government are committed to addressing. The powers that enable HMRC to collect third-party data from a range of data holders is subject to appeal. When a data holder does not comply with a notice, HMRC may levy penalties.
Clause 165 corrects provision by which increased daily penalties can be approved and assessed. As drafted, the existing provisions are not sufficiently clear and may lead to confusion for data holders and obstacles to the administration of the penalties. Clause 165 gives clarity to the legislation regarding HMRC’s application to the first-tier tribunal and adds an appeal right for the data holder over the number of days the increased penalties can be assessed.
Rebecca Long Bailey
These clauses give HMRC the power to collect and publish data relating to claimants of certain tax reliefs listed in schedule 24; I will not detail them all. The aim is essentially to make it easier for the European Commission to assess whether any such reliefs constitute state aid, in accordance with relevant EU obligations that commence on 1 July 2016. Information will be published only for beneficiaries who are in receipt of aid above €500,000, and the specific amount of tax advantage will not be published.
State aid is defined by the European Commission as
“an advantage in any form whatsoever conferred on a selective basis to undertakings by national public authorities.”
We do not have any issue with the principle behind the clauses—despite the obvious question of whether they will all need to be repealed in a few years’ time—but I have a question about clause 170(3) to (5), which allows the Treasury to amend the list of reliefs in schedule 24 by statutory instrument made under the negative procedure, meaning that it will not be debated. That raises the issue of scrutiny. Under what circumstances will the list be updated? I hope the Minister can provide some clarity on that. However, overall there does not appear to have been much reaction to the measures in these clauses, and we will not oppose them today.
Mr Gauke
Clauses 168 to 170 and schedule 24 introduce new powers to allow HMRC to collect information on certain tax reliefs and exemptions. They will allow HMRC to improve its ability to monitor and evaluate the effectiveness and value of those reliefs, which constitute state aid. The powers will also allow some of that information to be shared with the European Commission through a legal gateway and published on a public website.
Improved the monitoring and evaluation of state aid provided to UK businesses via tax reliefs and advantages is a sensible step forward. It may help if I provide hon. Members with some background. State aid is an advantage granted to an undertaking by public authorities through state resources on a selective basis. The Government support improved monitoring and evaluation of aid, to ensure that tax reliefs or advantages are well targeted and of value to the UK.
The provisions will allow HMRC to determine what information should be included in any claim for tax relief, to collect information from relevant persons in receipt of state aid and to publish and disclose relevant information about state aid received by beneficiaries. The changes will only affect UK businesses in receipt of state aid in the form of certain tax reliefs, and we will engage with those affected to ensure that they are ready.
Rebecca Long Bailey
This clause provides a power, first, to define by regulations a qualifying transformer company, and secondly, to determine by regulations the tax treatments of QTCs, investors in QTCs and transactions involving QTCs. The Committee will be aware from my comments earlier in the week that transformer vehicles are used by insurance companies to transform receivables, such as the repayments for a bundle of mortgages from a group of mortgage borrowers, into a security. It is right to express extreme caution about that procedure, given that it was the process of securitisation in the US sub-prime mortgage market that led to the financial crisis in 2007-08.
The provision appears to be broadly unobjectionable, but it provides a power for the Treasury to create regulations. If memory serves me correctly, the issue was discussed recently during the passage of the Bank of England and Financial Services Act 2016. Securitisation structures operate by transferring assets, whether sub-prime mortgages, credit card receivables or similar cash flows, into off-balance-sheet special purpose vehicles. Ordinarily, the profits or cash flows received from those assets pass through the special purpose vehicle to the investors who have acquired bonds in it. Usually, the residual amounts—the focus of clause 61, which I spoke about at length earlier in the week—that are left in the special purpose vehicle are small amounts compared with the sums that are paid to the investors.
However, as with all such artificial financial structures, it is possible to manipulate those amounts. If the residual amounts held by special purpose vehicles are to be saved from withholding tax, as clause 61 provides, and treated in a different manner for tax purposes, that makes it possible for the payment flows through a special purpose vehicle to be artificially raised so that larger sums can benefit from that different tax treatment.
What concerns me is as follows. What is stopping an unscrupulous financial institution involved in the industry of off-the-peg tax avoiding derivatives from passing large sums that would otherwise be subject to withholding tax—for example as payments of interest—through special purpose vehicles? Have the Government considered in detail how such cash flows should be treated so as to prevent artificial or abusive tax avoidance? Are the Government satisfied that they have done enough work to identify contexts in which transformer vehicles might be used for tax avoidance purposes? For example, subsection (4)(c) acknowledges that the regulations must consider attempts to obtain a tax advantage using transformer vehicles.
I understand that from 1 March to 29 April, the Treasury ran a consultation on insurance-linked securities, to which there is not yet a Government response. The website still says:
“We are analysing your feedback”.
Will the Minister say why a response to the consultation was not published before this clause came before the Committee?
Mr Gauke
To address directly the points raised by the hon. Lady, the regime does not present significant avoidance opportunities. The tax approach will be contingent on regulatory rules being met, which will ensure that the tax rules are appropriately targeted. In addition, the clause allows for a tailored avoidance rule, specific to the regime. That will be in addition to other anti-avoidance rules that are in place, such as the general anti-abuse rule.
The hon. Lady raised the familiar issue of securitisation and the risks involved. It is worth pointing out that insurance-linked securities deals are not the kind of financial asset securitisations that were a contributory factor in the financial crisis. ILS deals are essentially specialist reinsurance deals that are fully funded to meet the risks that they take on. That full funding requirement will be a crucial safeguard in the new UK framework. Insurance-linked securities were an asset class that performed very well during the financial crisis, and they continue to do so. I hope that that provides some reassurance to her.
I should say a word about the consultation on this matter. A formal consultation was launched in March 2016. The Government consulted the London Market Group’s ILS taskforce and a range of market participants on the development of a framework that will allow vehicles that issue ILS deals to locate in the UK. Respondents were supportive of the general approach outlined in the consultation, and the comments received will inform the drafting of secondary legislation made under this power. As for why those comments are unpublished, detailed rules will be included within regulations, which will be subject to further consultation over the summer, in addition to ongoing discussion with the industry taskforce.
I hope that those points are helpful to the Committee and that the clause will stand part of the Bill.
Question put and agreed to.
Clause 171 accordingly ordered to stand part of the Bill.
Clause 172
Office of Tax Simplification
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Amendment 140, in schedule 25, page 569, line 2, at end insert
“, subject to subsection (4A).
(4A) The chair of the OTS will be appointed by the Chancellor of the Exchequer with the consent of the Treasury Committee of the House of Commons.”
Amendment 141, in schedule 25, page 570, line 21, leave out from “considers” to end of line 22 and insert
“sufficient for the OTS to fulfil its duties.”
That schedule 25 be the Twenty-fifth schedule to the Bill.
Amendment 142, in clause 173, page 254, line 32, after “contributions” insert “and tax reliefs”.
Clause 173 stand part.
Amendment 137, in clause 174, page 255, line 5, after “Exchequer” insert
“or as the OTS considers appropriate”.
Amendment 138, in clause 174, page 255, line 13, leave out “Chancellor of the Exchequer” and insert “OTS”.
Clause 174 stand part.
Amendment 139, in clause 175, page 255, line 26, leave out “Chancellor of the Exchequer” and insert “OTS”.
Clauses 175 to 177 stand part.
Mr Gauke
Clause 172 and schedule 25 place the Office of Tax Simplification and its governance arrangements on a permanent statutory footing. I will also cover the other clauses in this group. The Government are making these changes to reinforce the OTS’s independence, ensure that it can play a greater role in public debate, and expand its role and capacity to advise the Government on tackling complexity in the tax system.
I would like to provide hon. Members with some background to the changes. The Government established the OTS as a temporary, non-statutory office of the Treasury in July 2010 to provide the Chancellor with independent advice on options for addressing existing complexity in the tax system. Since then, the OTS has made more than 400 recommendations to simplify the tax system, almost half of which have been implemented by the Government. To ensure that the OTS continues that important work, the Chancellor announced at summer Budget 2015 that the Government intended to put the OTS on a permanent statutory footing in this Bill.
The changes made by clause 172 and schedule 25 put the OTS on a statutory footing and strengthen its governance and operations. The OTS board must include the OTS chair and tax director and representatives from the Treasury and HMRC. In addition, the chair may nominate up to four further non-executive members to be approved by the Chancellor to provide the board with additional challenge and guidance.
Clauses 173 to 175 specify the enhanced functions and operations of the OTS. As part of the OTS’s expanded role, it will be able to provide advice on the simplification of the tax system as it considers appropriate, which is something that it has never been able to do before, as well as undertake reviews on areas of the tax system at the request of the Chancellor of the Exchequer. Where the OTS has conducted a review at the Chancellor’s request, he must publish a response.
The new OTS will also be more accountable and transparent. Clause 175 requires the OTS to publish an annual report on the performance of its functions. To ensure the OTS’s long-term effectiveness, clause 176 requires the Treasury to review its work every five years and stipulates that such reviews must be published. Clause 177 gives the Treasury power to appoint the day when the legislation establishing the OTS will take effect. That will be done by the end of 2016.
If I may, I would like to respond briefly to amendments 137 to 142, which would amend clauses 174 and 175 and schedule 25. Amendment 137 would allow the OTS to conduct reviews on aspects of the tax system as it considers appropriate. Clause 173 makes a provision for the OTS to provide advice to the Chancellor on aspects of the tax system as it considers appropriate, which is a power that the OTS has never had before. That is appropriate to its advisory role.
Amendments 138 and 139 would provide for the OTS to lay reports before Parliament. The OTS’s role is to advise the Chancellor on aspects of the tax system. It does not have a scrutiny function. It is therefore right that the Chancellor, who is accountable for the Treasury and its independent offices, should publish and lay the OTS reports in Parliament. The Chancellor also has the ability to make statements regarding OTS reports when laying them in Parliament. The OTS does not have that ability.
Amendment 140 would require the Chancellor to seek the approval of the Treasury Committee before appointing a new OTS chair. The role of the OTS is to advise on the simplification of the tax system; it does not have an Executive function. It is for the Chancellor to make the final decisions on tax policy while balancing the competing objectives of simplification, fairness and growth. The Government are nevertheless clear that the independence of the OTS is critical to its success and that is why we have strengthened the OTS’s board and introduced legislation that will put it on a statutory footing. The Bill will allow the OTS to advise the Chancellor on the simplification of the tax system as it considers appropriate, which it has not been able to do before. The Government believe that these measures, as well as the Treasury Committee’s right to hold a post-appointment hearing for the OTS’s chairman and tax director, are sufficient to achieve the independence proportionate to the function of the OTS.
Amendment 141 seeks to ensure that the OTS has the funding it needs to carry out its functions. The amendment is not necessary. The Treasury has increased the OTS’s budget by nearly 50%, expanding its capacity with up to 10 full-time employees—an increase from six in the previous Parliament. Finally, amendment 142 looks to include tax reliefs in the OTS’s remit. That is not needed as tax reliefs are already in the scope of the OTS’s remit. Clause 173 provides for the OTS to give advice on the simplification of the tax system, which encompasses tax reliefs. I therefore urge Members to reject the amendments.
May I take this opportunity to thank John Whiting for his services to the OTS as tax director and congratulate him on his recent appointment as a CBE? He has served the OTS with much distinction and he will be greatly missed when he moves on. He has put a huge amount of effort into getting the OTS not only up and running but functioning well over a number of years.
The Government are committed to a tax system that is simple to understand and easy to comply with. The OTS has a key role to play in that. By tackling the big complexities in the system, the OTS can make a genuine difference to taxpayers. Establishing the OTS on a permanent, statutory footing will reinforce its independence and ensure that it can continue to provide robust and independent recommendations to the Government on simplifying the tax system. I hope that the clauses and schedule will stand part of the Bill.
Rebecca Long Bailey
We will not press our amendments to a vote, but I want the Minister to understand our rationale for tabling them. As he has already explained, these clauses and schedule 25 make provisions for the OTS’s governance, operation and functions. We support the measures, as we believe that the OTS made some valuable contributions during the previous Parliament to informing debate about taxation and challenging the Government, but we believe strongly that it should be clearly independent. As such, we have tabled amendments to try to beef up the Bill in that regard.
Amendment 140 would amend schedule 25 to specify that the chair of the OTS should be appointed by the Chancellor of the Exchequer with the Treasury Committee’s consent, as is the case with the Office for Budget Responsibility. We think that that is a sensible approach to ensure the impartiality of the OTS. I am sure that the Minister is aware that Labour has placed on record its concerns about the OTS being used for political purposes. We therefore think that the consent of the Treasury Committee to the appointment of the OTS’s chair would be beneficial, and it would be helpful to hear the Minister’s thoughts about that idea in principle.
Amendment 141 would ensure that the Chancellor was not able to refuse to provide funding for OTS inquiries that he did not deem to be within its remit, as I understand could be the case as the Bill currently stands. The amendment would make it harder for the Chancellor to refuse to fund inquiries.
Amendment 142 would insert tax reliefs specifically into the OTS’s functions, allowing it to review the best way to simplify the ever-growing number of tax breaks and reliefs. The Opposition are concerned that there does not seem to be an effective process to review the efficacy of those tax breaks and reliefs in achieving their desired aims, and it would therefore be sensible to insert tax reliefs directly into the functions of the OTS.
Amendments 137 and 138 relate to the reports and reviews that the OTS will produce. Amendment 137 would clarify that the OTS could produce reports as it considered appropriate, not just at the request of the Chancellor, and amendment 138 would allow the OTS directly to lay reports before Parliament. As the Bill currently stands, the OTS will report to the Chancellor, who can then lay those reports before Parliament. The amendments would give the OTS greater independence and accountability to Parliament, not just to the Chancellor.
We will not press the amendments to a vote, but I hope that the Minister will take time to consider and address the Opposition’s concerns about the Bill as drafted and that the Government will be willing to move on those issues in due course.
Mr Gauke
I am grateful for the hon. Lady’s remarks in support of the OTS. I addressed many of her points in my earlier remarks, but let me briefly come back to the point about independence. The role of the OTS is fundamentally different from that of the OBR. The OBR is a scrutinising body. Rather than the OTS having an Executive function, its role is to provide advice to the Chancellor on simplification of the tax system. Ministers then make the final decisions on tax policy and are held accountable for those decisions.
The hon. Lady expressed concern that the OTS’s independence is at risk because the Chancellor could withhold funding because the Treasury do not like what the OTS is doing. I do not think that is a real risk. It is worth making the point that the OTS budget has been expanded, providing it with the funding that it needs. It is also worth highlighting the OTS’s expanded role in providing advice on the simplification of the tax system as it considers appropriate, as opposed to where it has been given a specific remit.
I touched on many of those points in my earlier remarks, but I wanted to take this opportunity to reiterate them. I am pleased that there is cross-party support for the existence and role of the OTS and welcome that this afternoon.
Question put and agreed to.
Clause 172 accordingly ordered to stand part of the Bill.
Schedule 25 agreed to.
Clauses 173 to 179 ordered to stand part of the Bill.
The Chair
We now come to new clauses. Before I start with Government new clause 7, it might be helpful to point out to the hon. Member for Aberdeen North that we will take the free-standing new clauses in the name of her hon. Friend the Member for Kirkcaldy and Cowdenbeath at the end of the Government new clauses. She has been very patient and if she hangs on a bit longer, her moment will come.
New Clause 7
Receipts from intellectual property: diverted profits tax
‘(1) Part 3 of FA 2015 (diverted profits tax) is amended as follows.
(2) In section 79 (charge to tax), at the end insert—
“(6) But banking surcharge profits and notional banking surcharge profits, to the extent that they are determined by reference to notional PE profits (or what would have been notional PE profits) for an accounting period, do not include any amount which is (or would have been) included in notional PE profits for that period by virtue of section 88(5)(b).”
(3) In section 88 (which relates to the calculation of taxable diverted profits), for subsection (5) substitute—
“(5) “Notional PE profits”, in relation to an accounting period, means an amount equal to the sum of—
(a) the amount of profits (if any) which would have been the chargeable profits of the foreign company for that period, attributable (in accordance with sections 20 to 32 of CTA 2009) to the avoided PE, had the avoided PE been a permanent establishment in the United Kingdom through which the foreign company carried on the trade mentioned in section 86(1)(b), and
(b) an amount equal to the total of royalties or other sums which are paid by the foreign company during that period in connection with that trade in circumstances where the payment avoids the application of section 906 of ITA 2007 (duty to deduct tax).
(5A) For the purposes of subsection (5)(b) a payment of a royalty or other sum avoids the application of section 906 of ITA 2007 if—
(a) that section does not apply in relation to the payment, but
(b) that section would have applied in relation to the payment had the avoided PE been a permanent establishment in the United Kingdom through which the foreign company carried on the trade mentioned in section 86(1)(b).”
(4) In section 100 (credit for UK or foreign tax on same profits), for the heading substitute “Credits for tax on the same profits”.
(5) In section 100, after subsection (2) insert—
“(2A) Subsection (2)(b) does not allow a credit against a liability to diverted profits tax if or to the extent that the liability arises by virtue of section 88(5)(b) (payments of royalties etc).”
(6) In section 100, after subsection (4) insert—
“(4A) Subsection (4B) applies where—
(a) a company’s notional PE profits for an accounting period include an amount under section 88(5)(b) determined by reference to a royalty or other sum,
(b) the company’s liability to diverted profits tax for the accounting period is determined by reference to taxable diverted profits calculated under section 91(4) or (5), and
(c) those taxable diverted profits include an amount of relevant taxable income referred to in section 91(4)(b) or (5)(b) determined by reference to the same royalty or other sum.
(4B) A credit equal to the company’s liability to diverted profits tax for that accounting period which arises by virtue of section 88(5)(b) in respect of the royalty or other sum, to the extent that it is included in relevant taxable income for the purposes of section 91(4)(b) or (5)(b), is allowed against the company’s total liability to diverted profits tax for that period.
(4C) Subsection (4D) applies where—
(a) by reason of the payment of a royalty or other sum a company’s liability to diverted profits tax for an accounting period includes liability arising by virtue of section 88(5)(b),
(b) the royalty or other sum is paid to a person who is resident in a country or territory outside the United Kingdom, and
(c) under any relevant provision relief would have been due to that person had the avoided PE been a permanent establishment in the United Kingdom through which the company carried on the trade mentioned in section 86(1)(b).
(4D) Such credit as is just and reasonable having regard to the amount of the relief referred to in subsection (4C)(c) is allowed against the company’s liability to diverted profits tax.
(4E) In subsection (4C)(c) “relevant provision” means—
(a) the provision of a double taxation arrangement (as defined by section 2(4) of TIOPA 2010), or
(b) section 758 of ITTOIA 2005 (exemption for certain interest and royalty payments).”
(7) The amendments made by this section have effect in relation to accounting periods ending on or after 28 June 2016.
(8) For the purposes of section 88(5)(b) of FA 2015 as inserted by this section, a royalty or other sum which would not otherwise be regarded as paid during an accounting period ending on or after 28 June 2016 is to be regarded as so paid if—
(a) for the purposes of section 906 of ITA 2007 it is regarded as paid on a date during that period by virtue of section (deduction of income tax at source: intellectual property)(6), or
(b) for the purposes of section 577A(1) of ITTOIA 2005 it is regarded as paid on a date during that period by virtue of section (receipts from intellectual property: territorial scope)(5).”’—(Mr Gauke.)
Brought up, read the First and Second time, and added to the Bill.
New Clause 8
Deduction of income tax at source: intellectual property
‘(1) Part 15 of ITA 2007 (deduction from other payments connected with intellectual property) is amended as specified in subsections (2) and (3).
(2) In section 906 (certain royalties etc where usual place of abode of owner is abroad), for subsections (1) to (3) substitute—
“(1) This section applies to any payment made in a tax year where condition A or condition B is met.
(2) Condition A is that—
(a) the payment is a royalty, or a payment of any other kind, for the use of, or the right to use, intellectual property (see section 907),
(b) the usual place of abode of the owner of the intellectual property is outside the United Kingdom, and
(c) the payment is charged to income tax or corporation tax.
(3) Condition B is that—
(a) the payment is a payment of sums payable periodically in respect of intellectual property,
(b) the person entitled to those sums (“the assignor”) assigned the intellectual property to another person,
(c) the usual place of abode of the assignor is outside the United Kingdom, and
(d) the payment is charged to income tax or corporation tax.”
(3) For section 907 substitute—
‘907 Meaning of “intellectual property”
(1) In section 906 “intellectual property” means—
(a) copyright of literary, artistic or scientific work,
(b) any patent, trade mark, design, model, plan, or secret formula or process,
(c) any information concerning industrial, commercial or scientific experience, or
(d) public lending right in respect of a book.
(2) In this section “copyright of literary, artistic or scientific work” does not include copyright in—
(a) a cinematographic film or video recording, or
(b) the sound-track of a cinematographic film or video recording, except so far as it is separately exploited.”’
(4) The amendments made by subsections (2) and (3) have effect in respect of payments made on or after 28 June 2016.
(5) In determining whether section 906 of ITA 2007 applies to a payment, no regard is to be had to any arrangements the main purpose of which, or one of the main purposes of which, is to avoid the effect of the amendments made by this section.
(6) Where arrangements are disregarded under subsection (5) in relation to a payment which—
(a) is made before 28 June 2016, and
(b) is due on or after that day,
the payment is to be regarded for the purposes of section 906 of ITA 2007 as made on the date on which it is due.
(7) In determining the date on which a payment is due for the purposes of subsection (6), disregard the arrangements referred to in that subsection.
(8) In this section “arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable and whether entered into before, or on or after, 28 June 2016).”’—(Mr Gauke.)
Brought up, read the First and Second time, and added to the Bill.
New Clause 9
Receipts from intellectual property: territorial scope
‘(1) In section 577 of ITTOIA 2005 (territorial scope of Part 5 charges), at the end insert—
“(5) See also section 577A (territorial scope of Part 5 charges: receipts from intellectual property).”
(2) After that section insert—
‘577A Territorial scope of Part 5 charges: receipts from intellectual property
(1) References in section 577 to income which is from a source in the United Kingdom include income arising where—
(a) a royalty or other sum is paid in respect of intellectual property by a person who is non-UK resident, and
(b) the payment is made in connection with a trade carried on by that person through a permanent establishment in the United Kingdom.
(2) Subsection (3) applies where a royalty or other sum is paid in respect of intellectual property by a person who is non-UK resident in connection with a trade carried on by that person only in part through a permanent establishment in the United Kingdom.
(3) The payment referred to in subsection (2) is to be regarded for the purposes of subsection (1)(b) as made in connection with a trade carried on through a permanent establishment in the United Kingdom to such extent as is just and reasonable, having regard to all the circumstances.
(4) In determining for the purposes of section 577 whether income arising is from a source in the United Kingdom, no regard is to be had to arrangements the main purpose of which, or one of the main purposes of which, is to avoid the effect of the rule in subsection (1).
(5) In this section—
“arrangements” includes any agreement, understanding, scheme, transaction or series of transactions (whether or not legally enforceable);
“intellectual property” has the same meaning as in section 579;
“permanent establishment”—
(a) in relation to a company, is to be read (by virtue of section 1007A of ITA 2007) in accordance with Chapter 2 of Part 24 of CTA 2010, and
(b) in relation to any other person, is to be read in accordance with that Chapter but as if references in that Chapter to a company were references to that person.”’
(3) The amendments made by subsections (1) and (2) have effect in relation to royalties or other sums paid in respect of intellectual property on or after 28 June 2016.
(4) It does not matter for the purposes of subsection (4) of section 577A of ITTOIA 2005 (as inserted by this section) whether the arrangements referred to in that subsection are entered into before, or on or after, 28 June 2016.
(5) Where arrangements are disregarded under subsection (4) of section 577A of ITTOIA 2005 (as inserted by this section) in relation to a payment of a royalty or other sum which—
(a) is made before 28 June 2016, but
(b) is due on or after that day,
the payment is to be regarded for the purposes of subsection (1) of that section as made on the date on which it is due.
(6) In determining the date on which a payment is due for the purposes of subsection (5), disregard the arrangements referred to in that subsection.
(7) Where—
(a) an intellectual property royalty payment within the meaning of section 917A of ITA 2007 is made on or after 28 June 2016,
(b) the payment is made under arrangements (within the meaning of that section) entered into before that day,
(c) the arrangements are not DTA tax avoidance arrangements for the purposes of that section,
(d) it is reasonable to conclude that the main purpose, or one of the main purposes, of the arrangements was to obtain a tax advantage by virtue of any provisions of a foreign double taxation arrangement, and
(e) obtaining that tax advantage is contrary to the object and purpose of those provisions,
the arrangements are to be regarded as DTA tax avoidance arrangements for the purposes of section 917A of ITA 2007 in relation to the payment.
(8) In subsection (7)—
“foreign double taxation arrangement” means an arrangement made by two or more territories outside the United Kingdom with a view to affording relief from double taxation in relation to tax chargeable on income (with or without other tax relief);
“tax advantage” is to be construed in accordance with section 208 of FA 2013 but as if references in that section to “tax” were references to tax chargeable on income under the law of a territory outside the United Kingdom.
(9) Where—
(a) a royalty is paid on or after 28 June 2016,
(b) the right in respect of which the royalty is paid was created or assigned before that day,
(c) section 765(2) of ITTOIA 2005 does not apply in relation to the payment, and
(d) it is reasonable to conclude that the main purpose, or one of the main purposes, of any person connected with the creation or assignment of the right was to take advantage, by means of that creation or assignment, of the law of any territory giving effect to Council Directive 2003/49/EC of 3rd June 2003 on a common system of taxation applicable to interest and royalty payments made between associated companies of different member States,
section 758 of ITTOIA 2005 does not apply in relation to the payment.”’—(Mr Gauke.)
Brought up, read the First and Second time, and added to the Bill.
New Clause 10
Stamp duty: acquisition of target company’s share capital
‘(1) Section 77 of FA 1986 (acquisition of target company’s share capital) is amended as follows.
(2) In subsection (3), omit the “and” at the end of paragraph (g) and after paragraph (h) insert “, and
(i) at the time the instrument mentioned in subsection (1) is executed there are no disqualifying arrangements, within the meaning given by section 77A, in existence.”
(3) In subsection (3A) for “(3)” substitute “(3)(b) to (h)”.
(4) In subsection (4) after “this section” insert “and section 77A”.
(5) After section 77 of FA 1986 insert—
“77A Disqualifying arrangements
(1) This section applies for the purposes of section 77(3)(i).
(2) Arrangements are “disqualifying arrangements” if it is reasonable to assume that the purpose, or one of the purposes, of the arrangements is to secure that—
(a) a particular person obtains control of the acquiring company, or
(b) particular persons together obtain control of that company.
(3) But neither of the following are disqualifying arrangements—
(a) the arrangements for the issue of shares in the acquiring company which is the consideration for the acquisition mentioned in section 77(3);
(b) any relevant merger arrangements.
(4) In subsection (3) “relevant merger arrangements” means arrangements for the issue of shares in the acquiring company to the shareholders of a company (“company B”) other than the target company (“company A”) in a case where—
(a) that issue of shares to the shareholders of company B would be the only consideration for the acquisition by the acquiring company of the whole of the issued share capital of company B,
(b) the conditions in section 77(3)(c) and (e) would be met in relation to that acquisition (if that acquisition were made in accordance with the arrangements), and
(c) the conditions in paragraphs (f) to (h) of section 77(3) would be met in relation to that acquisition if—
(i) that acquisition were made in accordance with the arrangements, and
(ii) the shares in the acquiring company issued as consideration for the acquisition of the share capital of company A were ignored for the purposes of those paragraphs;
and in section 77(3)(e) to (h) and (3A) as they apply by virtue of this subsection, references to the target company are to be read as references to company B.
(5) Where—
(a) arrangements within any paragraph of subsection (3) are part of a wider scheme or arrangement, and
(b) that scheme or arrangement includes other arrangements which—
(i) fall within subsection (2), and
(ii) do not fall within any paragraph of subsection (3),
those other arrangements are disqualifying arrangements despite anything in subsection (3).
(6) In this section—
“the acquiring company” has the meaning given by section 77(1);
“arrangements” includes any agreement, understanding or scheme (whether or not legally enforceable);
“control” is to be read in accordance with section 1124 of the Corporation Tax Act 2010;
“the target company” has the meaning given by section 77(1).”
(6) The amendments made by this section have effect in relation to any instrument executed on or after 29 June 2016 (and references to arrangements in any provision inserted by this section include arrangements entered into before that date).’—(Mr Gauke.)
Brought up, and read the First time.
Mr Gauke
I beg to move, That the clause be read a Second time.
I will speak briefly about new clause 10, unless there are questions. The new clause stops an unfair stamp duty advantage where takeovers are brought about through share-for-share exchanges with no stamp duty becoming due. It will ensure that the tax system operates fairly by preventing share-for-share relief from being claimed in situations for which it was not intended. The change made by the clause will catch the insertion of a new company above another by way of a share-for-share exchange as part of a wider transaction involving transfer of a controlling stake in the new company. The change will mean that no share-for-share relief will be available where arrangements are in place, at the time of the share-for-share exchange, for a change of control of the new company. The measure will apply to any instrument exercised on or after 29 June 2016.
New clause 10 will stop share-for-share relief being claimed inappropriately on takeovers. The Government have acted quickly to prevent an unfair tax advantage and to protect significant tax revenue.
Question put and agreed to.
New clause 10 accordingly read a Second time, and added to the Bill.
New Clause 11
Corporation tax: territorial scope etc
“(1) Section 5 of CTA 2009 (territorial scope of charge) is amended in accordance with subsections (2) to (4).
(2) For subsection (2) substitute—
‘(2) A non-UK resident company is within the charge to corporation tax only if—
(a) it carries on a trade of dealing in or developing UK land (see section 5B), or
(b) it carries on a trade in the United Kingdom (other than a trade of dealing in or developing UK land) through a permanent establishment in the United Kingdom.’
(3) After subsection (2) insert—
‘(2A) A non-UK resident company which carries on a trade of dealing in or developing UK land is chargeable to corporation tax on all its profits wherever arising that are profits of that trade.’
(4) In subsection (4), after ‘(1)’ insert ‘, (2A)’.
(5) After section 5 of CTA 2009 insert—
“5A Arrangements for avoiding tax
(1) Subsection (3) applies if a company has entered into an arrangement the main purpose or one of the main purposes of which is to obtain a relevant tax advantage for the company.
(2) In subsection (1) the reference to obtaining a relevant tax advantage includes obtaining a relevant tax advantage by virtue of any provisions of double taxation arrangements, but only in a case where the relevant tax advantage is contrary to the object and purpose of the provisions of the double taxation arrangements (and subsection (3) has effect accordingly, regardless of section 6(1) of TIOPA 2010).
(3) The relevant tax advantage is to be counteracted by means of adjustments.
(4) For this purpose adjustments may be made (whether by an officer of Revenue and Customs or by the company) by way of an assessment, the modification of an assessment, amendment or disallowance of a claim, or otherwise.
(5) In this section “relevant tax advantage” means a tax advantage in relation to corporation tax to which the company is chargeable (or would without the tax advantage be chargeable) by virtue of section 5(2A).
(6) In this section—
“arrangement” (except in the phrase “double taxation arrangements”) includes any agreement, understanding, scheme, transaction or series of transactions, whether or not legally enforceable;
“double taxation arrangements” means arrangements which have effect under section 2(1) of TIOPA 2010 (double taxation relief by agreement with territories outside the United Kingdom);
“tax advantage” has the meaning given by section 1139 of CTA 2010.
5B Trade of dealing in or developing UK land
‘(1) A non-UK resident company’s “trade of dealing in or developing UK land” consists of —
(a) any activities falling within subsection (2) which it carries on, and
(b) any activities from which profits, gains or losses arise which are treated under Part 8ZB of CTA 2010 as profits or losses of the company’s trade of dealing in or developing UK land.
(2) The activities within this subsection are—
(a) dealing in UK land;
(b) developing UK land for the purpose of disposing of it.
(3) In this section “land” includes—
(a) buildings and structures,
(b) any estate, interest or right in or over land, and
(c) land under the sea or otherwise covered by water.
(4) In this section—
“disposal” is to be interpreted in accordance with section 356OQ of CTA 2010;
“UK land” means land in the United Kingdom.”
(6) In section 3 of CTA 2009 (exclusion of charge to income tax), in subsection (1), for paragraph (b) substitute—
“(b) the company is not UK resident and—
(i) the income is profits of a trade of dealing in or developing UK land, or
(ii) the income is within its chargeable profits as defined by section 19.”
(7) In section 18A of CTA 2009 (exemption for profits or losses of foreign permanent establishments), after subsection (2) insert—
“(2A) But profits and losses are not to be left out of account as mentioned in subsection (2) so far as they are, or would if the company were non-UK resident be, profits of the company’s trade of dealing in or developing UK land (as defined in section 5B).”
(8) In section 19 of CTA 2009 (chargeable profits)—
(a) in subsection (2) for “company’s chargeable profits” substitute “company’s “chargeable profits””;
(b) after subsection (2) insert—
“(2A) But the company’s “chargeable profits” do not include profits of a trade of dealing in or developing UK land (and accordingly such profits are not attributable to any permanent establishment of the company).”
(9) In section 189 of CTA 2009 (post-cessation receipts: extent of charge to tax), in subsection (4), at the end insert “other than a company’s trade of dealing in or developing UK land”.
(10) In section 107 of CTA 2010 (restrictions on losses etc surrenderable by non-UK resident), in subsection (1), for the words from “non-UK resident” to the end substitute “non-UK resident company—
(a) carrying on a trade of dealing in or developing UK land, or
(b) carrying on a trade in the United Kingdom through a permanent establishment.”
(11) In section 1119 of CTA 2010 (definitions for purposes of Corporation Tax Acts), at the appropriate place insert—
““trade of dealing in or developing UK land”, in relation to a non-UK resident company, has the meaning given by section 5B of CTA 2009,”.”—(Mr Gauke.)
Brought up, and read the First time.
The Chair
With this it will be convenient to discuss the following:
Government new clause 12—Corporation tax: transactions in UK land.
Government new clause 13—Income tax: territorial scope etc.
Government new clause 14—Income tax: transactions in UK land.
Government new clause 15—Pre-trading expenses.
Government new clause 16—Commencement and transitional provision: sections (Corporation tax: territorial scope etc), (Corporation tax: transactions in UK land) and (Pre-trading expenses).
Government new clause 17—Commencement and transitional provision: sections (Income tax: transactions in UK land) and (Income tax: territorial scope etc).
Mr Gauke
New clauses 11 to 17 will introduce the legislation announced in the 2016 Budget for a specific charge to income tax or corporation tax on profits from the disposal of land in the UK. The new clauses will ensure that offshore structures cannot be used to avoid UK tax on profits generated from dealing in or developing land in the UK.
New clauses 11, 12 and 15 will introduce new rules to ensure that profits generated by a company from dealing in or developing land in the UK will be chargeable to UK corporation tax. Those rules will apply regardless of the residence of the person carrying on the trade and regardless of whether the developer has a permanent establishment in the UK.
New clauses 13 and 14 will ensure that the profits generated by an individual from dealing in or developing land will always be chargeable to UK income tax. To prevent avoidance, the new charge will also apply where, instead of dealing in land, a developer sells shares in a company that carries on such developments. It will also apply where arrangements are put in place to split profits from development activity between the developer and related entities that could otherwise reduce chargeable allowance. In addition, the Government have strengthened long-standing rules on transactions in land to ensure that they can effectively counter abuse of the new rules.
To support those new rules, the Government are introducing an anti-avoidance rule to prevent manipulation between the policy announcement on Budget day 2016 and the introduction of the new clauses. The anti-avoidance rule is in new clause 16 for corporation tax and new clause 17 for income tax, along with other commencement and transitional rules. We have taken steps to amend our double taxation treaties; I am grateful to our partners in Guernsey, the Isle of Man and Jersey for agreeing to make changes to those treaties, taking effect from Budget day 2016. These measures will raise £2.2 billion over the scorecard period and take effect from 5 July 2016; they will affect developers of UK property who choose to operate from somewhere other than the UK to reduce their tax bills. There will be no effect on companies, based in the UK or elsewhere, whose profits are already fully taxed in the UK.
The changes made by new clauses 11 to 17 will continue the Government’s fight against aggressive tax planning and profit shifting. They will bring the UK in line with other major economies and ensure fair treatment between UK and overseas developers.
Rebecca Long Bailey
The measures appear to be closing a tax loophole. On that basis, we do not oppose them, especially as they are estimated to bring in £130 million in this financial year, rising to a peak of £640 million in 2019-20. I must say, however, that this important addition to the Bill was tabled rather late in the day, even if the outline of the measure itself was announced for consultation at the Budget. It could be argued that the Opposition and stakeholders have been given insufficient time to go through the detail of the legislation.
None the less, the Chartered Institute of Taxation has identified two areas of concern on which it would like some clarification. First, will the Minister confirm that the Government do not intend pure investment structures to be affected by the new measures? Secondly, will he confirm that new clause 16 is simply a timing rule dealing with the opposition of pre-trading expenditure that would not be deductible under normal principles and where reliance needs to be placed on section 61 of the Corporation Tax Act 2009? The concern is that the clause seeks to restrict normal trading expenses incurred prior to the company’s falling within the new charge. Some clarification from the Minister on those points would be appreciated.
Kirsty Blackman
I beg to move, That the clause be read a Second time.
My apologies for causing confusion earlier. If I am ever lucky enough to be on a Finance Bill again, I promise to try hard not to cause so much confusion.
The Government will not be surprised that we have tabled this new clause, because it concerns an ongoing issue between the Scottish and UK Governments. We feel that it still requires attention. To give a little background, before the incorporation of the police and fire authorities, regional authorities were gifted VAT exemption for the fire and rescue and police services. In 2013, when the single Scottish police force and the fire service were brought in, the VAT exemption failed to be carried over to the new services.
The Government argue that the exemption should not apply because national non-departmental public bodies are outside the exemptions under the Value Added Tax Act 1994. Since the issue has arisen, however, HMRC and HM Treasury have decided that tax breaks should be given to the new transport agency Highways England, which is a national non-departmental public body, and that the exemption should be given to the UK-wide Olympic legacy organisation, London Legacy Development Corporation. Those are comparable organisations in terms of territorial extent and they are national bodies, but they have been given the exemption. The Conservative Government can no longer say that the issue is one of fairness, when it is clearly one of unfairness.
The VAT charge, which is being levied unfairly, is costing Scotland’s emergency services tens of millions every year. We would appreciate the opportunity to spend the money on front-line services instead. We have tabled the new clause in the hope that the Government will look at the issue, particularly in the light of the fact that they have permitted exemptions for Highways England and London Legacy. The Government should consider fairness and parity.
Mr Gauke
This is a familiar debate. The new clause requests that the Treasury reviews the VAT treatment of the Scottish police and fire and rescue services, reporting the cost of VAT and what the change would be if they were eligible for a refund. I am tempted to refer the Committee to the speech I have given on numerous occasions previously, as well as to the history of this. Furthermore, the Scottish Government made the decision to reform their public services knowing full well about the VAT implications.
As was explained last year, any use of Treasury resource to review and produce a report into the financial position of Police Scotland and the Scottish Fire and Rescue Service would be unjustified. Neither is eligible to receive VAT refunds under existing legislation, and the Treasury has no intention of amending principles of the VAT refund scheme to change that. I recognise that the SNP has raised the issue before, and I dare say that it will again. However, we cannot support the new clause and, if pressed to a vote, I recommend that the Committee rejects it.
Kirsty Blackman
We wish to return to the matter on Report, so I beg to ask leave to withdraw the motion.
Clause, by leave, withdrawn.
New Clause 4
Fuel duty regulator regime
‘The Chancellor of the Exchequer shall undertake a review of fuel duty to establish the form of fuel duty regulator regime which would best ensure stability of pricing, and report to Parliament within six months of the passing of this Act.’—(Philip Boswell.)
Brought up, and read the First time.
Philip Boswell
I apologise for any confusion, Mr Howarth. It is a pleasure to serve under your chairmanship.
I rise to ask the Minister to review the need for a fuel duty regulation regime that could mitigate the worst excesses of fuel price fluctuations and best ensure the stability of pricing. It should be obvious to even the most casual observer that fuel prices fluctuate, but it is perhaps not so obvious that the oil price typically runs through a cycle of approximately seven or eight years. As sure as oil prices go down, they inevitably go up. The fluctuation of the price between $125 per barrel in 2012 to under $30 per barrel earlier this year has had a massive impact on producers and users alike. It is good news for some that oil prices appear to be on the rise again, with oil sitting at around $50 per barrel today.
The fluctuations seriously affect road haulage companies, private road users and other transport services, as well as domestic fuel users across the country. Some of the most severely affected are those who are subject to fuel poverty. As a responsible fuel-duty regulator should, the Government could protect the most vulnerable people from the worst vagaries of the markets. In Scotland, 35% of households are affected by fuel poverty, which I am sure the Minister will agree is unacceptable. I urge him to consider a review with the objective of regulating fuel prices via a fuel duty regulator. I advise the Committee that we will press new clause 4 to a vote.
Mr Gauke
The Government oppose the inclusion of the new clause in the Bill. We recognise that, even with the recent fall in fuel prices, fuel costs remain a significant part of business and household costs, which is why it was announced at Budget 2016 that fuel duty would remain frozen for the sixth year in a row, thereby saving the average driver £75 a year and the average haulier £2,400 a year, relative to the pre-2010 fuel duty escalator. Our policy has provided greater certainty for consumers and businesses and has left pump prices much lower than they would have been.
The hon. Member for Coatbridge, Chryston and Bellshill is asking the Chancellor to undertake a review of fuel duty to establish a form of fuel duty regulatory regime that would ensure the stability of pricing. Members will remember that at Budget 2011 the Chancellor put forward a proposal for a fair fuel stabiliser that would have linked fuel duty rates more closely with oil prices. That policy would have meant that if oil prices were high, fuel duty rates would increase by RPI only, as the Government would have more revenues from the supplementary charge levied on oil and gas production. If oil prices were below the trigger price, fuel duty would have been increased by RPI plus 1p per litre, and the supplementary charge cut back to 20%. The fair fuel stabiliser was abolished in 2014 so that the Government could support the oil and gas industry without raising the tax burden on motorists. Had it been maintained, we would have had to raise fuel duty at the Budget.
A fuel duty regulator that links fuel duty to changes in oil prices would destabilise public finances by making receipts collected from the Government’s fifth-largest tax more volatile. Since 2010, oil prices have shown significant volatility, with the price per barrel ranging from between $30 to $130. By contrast, pump prices have not shown the same level of volatility.
Kirsty Blackman
I beg to move, That the clause be read a Second time.
The new clause would allow the taxation of allowances payable to Members of the House of Lords to be reviewed. Members of the House of Lords receive a tax-free allowance of £300 for every day that they pitch up and sign in. They do not all claim it, but many of them do. In 2014-15, the House of Lords sat for 126 days. That was a low number of days—normally they sit for more—but I have done some calculations on the basis of that. If one peer was there for all 126 days, they would receive £37,800 tax-free for that year. If we imagine that a lot of peers are on the 40% tax rate—many will be in the 45% bracket; not many will be on a lower tax rate—we are looking at a tax loss to the Treasury of £15,120 per peer. If 798 peers pitched up on all those days, that is a tax loss to the Treasury of £12 million.
Most peers do not turn up every day. The average attendance last year was 483 peers on any given day, which means that the loss to the Treasury is more like £7 million every year. That is quite a lot of money, and considering that the majority of those who sit in the House of Lords probably do not have a huge need for that money, I believe, as a member of a progressive party, that it would be better for some of that wealth to be redistributed. Will the Government seriously consider examining whether those people sitting in the House of Lords should, in times of austerity, receive a tax-free payment? The Treasury could easily do something on this issue; it could decide to tax the £300-a-day allowance at the appropriate level, depending on what the Member earns in other income. This is not a good use of taxpayers’ money. The money could come to the Treasury, but we are using it instead for a tax-free allowance for peers.
Mr Gauke
The Government oppose new clause 5. We are committed to ensuring a fair and more sustainable tax system for everyone, but the Finance Bill is not the appropriate vehicle to review the system of financial support for Members of the House of Lords. The new clause says that the Chancellor of the Exchequer
“shall undertake a review of the tax-free status of allowances payable to members of the House of Lords”.
The Government recognise the importance of keeping the general system of tax reliefs and allowances under review. That is done routinely by the Treasury and HMRC, who consult on changes to the tax system as part of the policy-making process, but the House of Lords introduced the present system of financial support in 2010. That system and its basis have not changed, and therefore we do not consider that the tax treatment needs to be re-examined at this time. In addition, such a review could not be carried out in isolation; the system would need to be considered as a whole, and the Finance Bill is not the vehicle to consider such constitutional reform.
Finally, this cannot be a matter solely for the Commons; we must respect the constitutional position. For the Commons to intervene on House of Lords reform without any involvement of the other House would not be the right process. It is simply not the place of the Finance Bill to legislate for such a review.
Kirsty Blackman
Given that we are asking for a review, it is quite possible that peers and the House of Lords could be consulted and have input into that review. I think the very place to discuss taxation and allowances in taxation is the Finance Bill. That is what we did with respect to workers who work through intermediaries. This is a totally sensible place to discuss this issue.
Mr Gauke
As I said, this has to be looked at in the context of the system of financial support for Members of the House of Lords in the round; we cannot look at the tax system in isolation, which is what a review under the Finance Bill would have to do. This is not the right way in which to consider the system of financial support for Members of the House of Lords. Any review of that system would need to be done in the round, and the new clause is not appropriate for the Finance Bill. I therefore urge hon. Members to oppose new clause 5, if it is pressed to a Division.
Rebecca Long Bailey
I understand that the Review Body on Senior Salaries published a review of financial support for Members of the other place in November 2009. Our position is that there needs to be a broader review of House of Lords salaries and allowances. We are happy to support the Scottish National party if the new clause is pressed to a vote; it certainly deserves consideration.
Mr Gauke
Before we conclude, I would like to make one or two remarks and thank a number of people. I am pleased that Finance Bills continue to receive excellent scrutiny, even if we have had dramatic changes in the Committee’s composition over the course of the past few days. The hon. Member for Salford and Eccles has continued the diligence and common sense of her predecessor. In the circumstances—I speak from experience, having held the Opposition Front Bencher role on Finance Bills—she has acted with great thoroughness and determination, and I congratulate her on providing scrutiny in slightly difficult circumstances, particularly as I understand she did not inherit any notes.
I should also thank the hon. Member for Wolverhampton South West (Rob Marris) for his work in the earlier stages of the Committee. I thank the SNP Members; rather remarkably, they had a larger Front-Bench team working on this Bill than the Labour party. I thank you, Mr Howarth, and Sir Roger for your guidance and wisdom in steering all Members through what can be a complex process. I owe you a particular debt for your chairing, with regard to chairs and your generosity in allowing me to stand and sit in accordance with the needs of my back, rather than the usual standards of procedure. Without that, this Committee might have been my last. As it is, I can highly recommend the curative effects of debating deep-in-the-money options.
I thank all Members on the Committee for their contributions and, indeed, non-contributions. I thank Members on the Government Benches for their patience and, above all, attendance. The Finance Bill has been considered against the backdrop of significant and dramatic events elsewhere in the Palace of Westminster. I would hesitate to suggest that the Finance Bill Committee is ever anything other than the very centre of the country’s public and political life, but I am not even sure it has been the centre of public life on this corridor. However, excitement and substance can be very different things.
I pay tribute to the Committee’s diligence and expertise in considering the wide range of issues before it. The hon. Member for Salford and Eccles shot straight to the first rank of Finance Bill humourists by observing that a clause does what it says on the tin. I will not attempt to compete with that, beyond observing that fellow Members of the Commons owe a debt to Committee members—the people who love the jobs you hate.
I thank the usual channels, my hon. Friend the Member for Central Devon and the hon. Member for St Helens North. I am particularly grateful for the assistance I received from the Exchequer Secretary to the Treasury, my hon. Friend the Member for East Hampshire. Finally, I thank the interested parties who submitted evidence to the Committee, as well as our Clerks, the Hansard Reporters and the Doorkeepers, who have ensured the smooth running of the Committee. I thank the HMRC and Treasury officials without whose inspiration this job would be much harder, and the Office of the Parliamentary Counsel, without which none of this would be possible. I look forward to us all meeting again at some point on Report.
The Chair
On behalf of the co-Chair, Sir Roger, and myself, I thank the Minister for his kind words. I particularly thank him for promoting me at one point in our proceedings to the lofty position of Speaker. I mentioned this to Mr Speaker, and he gave me a very frosty look.
I thank all Committee members, including those from the Scottish National party and the official Opposition, for the cordial way in which they conducted themselves, making it a pleasure for Sir Roger and me to chair the Finance Bill Committee. On behalf of both of us, I particularly thank the Clerks, Hansard and the Doorkeepers for ensuring that we conducted our proceedings efficiently, while still ensuring ample opportunity for the democracy of the Committee to function. In all those thank-yous, I am sorry if I missed anybody out.
Question put and agreed to.
Bill, as amended, accordingly to be reported.
UK-Turkmenistan Double Taxation Conventions
David Gauke Excerpts(7 years, 10 months ago)
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The Financial Secretary to the Treasury (Mr David Gauke)
A Double Taxation Convention with Turkmenistan was signed on 10 June 2016. The text of the Convention has been deposited in the Libraries of both Houses and made available on HM Revenue and Customs’ pages of the gov.uk website. The texts will be scheduled to draft Orders in Council and laid before the House of Commons in due course.
[HCWS70]
Finance Bill (Third sitting)
David Gauke Excerpts(7 years, 10 months ago)
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Rebecca Long Bailey (Salford and Eccles) (Lab)
Who knows what adventures the Finance Bill will take us on today? Hopefully the sittings will be a little more sedate than last week’s.
I will first address clause 50 and schedule 8, and then move on to clause 51 relating to television and video games tax relief. Clause 50 brings in schedule 8, which introduces a new relief for orchestral concerts, provides for consequential amendments to other parts of taxes Acts as a result, and arranges for the commencement of the relief. First announced in the autumn of 2014, the new tax relief for orchestral production will allow qualifying companies engaged in the production of concerts to claim an additional deduction in computing their taxable profits and, where that additional deduction results in a loss, to surrender the losses for a payable tax credit. The additional deduction and the payable credit are calculated on the basis of European Economic Area core expenditure, up to a maximum of 80% of the total core expenditure by the qualifying company. The additional deduction is 100% of qualifying core expenditure, and the payable tax credit is 25% of losses surrendered.
The credit is based on the company’s qualifying expenditure on the production of a qualifying orchestral concert. The expenditure must be on activities directly involved in producing a concert, such as rehearsal costs. Qualifying expenditure will not include indirect costs, such as financing, marketing and accountancy and legal fees, and at least 25% of the qualifying expenditure must be on goods or services that are provided from within the EEA. Concerts that have among their main purposes the advertising of goods and services or the making of a recording, or that include a competition, will not qualify for relief.
The stated objective of the measure is to support the creative sector and sustainably promote British culture. I certainly back that approach, not least because the BBC Philharmonic orchestra is based in my constituency and continues to attract many like-minded orchestral organisations to my city. On the machinery of the calculations, however, as the deduction of credit is calculated on the basis of EEA core expenditure, what assessment has the Minister made of amendments that might need to be made to the clause as a result of Britain’s exit from the EU?
I am pleased that the Government took the time to consult on the measure, and I note that the summary of responses published in March 2015 indicates that the industry welcomed the introduction of the relief. I am also pleased that the Government took heed of the Opposition’s concerns about the initial proposal exempting brass bands from the relief, effectively introducing a brass band tax, and that the Government subsequently included brass bands in the relevant definition in March 2015. The draft Bill and a policy paper were published in December 2015, and the Government did not make any substantive changes after the technical consultation exercise, so I am confident that the legislation will do what it says on the tin.
The measure is expected to cost the Exchequer £5 million in the financial year 2016-17 and £10 million every financial year thereafter until 2019-20. The Opposition agree with the principle of supporting the UK’s creative industries and therefore support clause 50 and schedule 8, but we are concerned that we keep creating relief after relief. Why does this targeted measure take the form of a tax relief, rather than a grant? Also, the industry is concerned that the relief does not support commercial music production, which is supported in other countries. Will the Minister clarify today, or indeed in a written response after today, what support is in place for this important industry?
Finally, what modelling have the Government done to ensure that the legislation is rigorous enough to prevent use of the relief for avoidance purposes? I understand that there were some issues about film tax relief and avoidance, and I am also concerned that the wording in proposed new section 1217RL to the Corporation Tax Act 2009 may not be very robust, especially with reference to those tax avoidance arrangements that fall within the ambiguous term, “understanding”; I am sure that the Minister will agree that by their very nature those will not be contractual. Will he confirm whether he has given thought to additional resources that Her Majesty’s Revenue and Customs might need if it is adequately to investigate such scenarios?
Clause 51 simply makes minor, consequential amendments to the Taxation of Chargeable Gains Act 1992 and the Corporation Tax Act 2010, substituting the words “section 1218B” for “section 1218”. The Opposition support television and video games tax relief, as we introduced it. We see no issue with this technical clause.
The Financial Secretary to the Treasury (Mr David Gauke)
It is a great pleasure to serve under your chairmanship again this morning, Mr Howarth. I welcome the hon. Member for Salford and Eccles to the Committee. She has taken on a substantial workload in the past few days. Having had experience of performing her role of holding the Government to account in the Finance Bill, I recognise how challenging it can be. I wish her luck in that; if I may say so, she has made an excellent start, raising important points about this group of clauses.
I will start with a few words about clauses 50 and 51 and schedule 8, and then I will respond to the hon. Lady’s questions. The Government have supported our world-leading creative and cultural sectors, which have entertained millions worldwide while attracting significant investment into the United Kingdom. Clause 50 and schedule 8 provide further support by introducing a new corporation tax relief for the production of orchestral concerts. The Government recognise the cultural value and artistic importance of Britain’s orchestras. The relief is intended to support them in continuing to perform for a range of audiences, and in contributing to British culture.
Clause 51 makes minor consequential amendments to the Taxation of Chargeable Gains Act 1992 and the Corporation Tax Act 2010 as a result of the introduction of video games tax relief in the Finance Bill 2013. The change is not expected to have an impact on businesses that claim the relief.
The UK is home to some exciting, world-famous orchestras. The relief introduced by clause 50 recognises their artistic importance and cultural value. Its objective is to support orchestras so that they can continue to perform for a wide range of audiences. To deliver that support, the Government are building on the success of existing creative sector tax reliefs available for the production of film, high-end television and children’s television, video games, animation and theatre. Those reliefs have shown how targeted support can make a real difference, not only by promoting economic activity, but by promoting British culture and the way that the UK is viewed internationally.
Clause 50 will introduce a new corporation tax relief and payable tax credit for the qualifying costs of producing an orchestral performance. It will support a wide variety of ensembles and performances, from chamber orchestras to large brass bands playing music ranging from jazz to blues. It will allow production companies to claim a payable tax credit worth up to 25% of the cost of developing an orchestral concert, with effect from 1 April this year.
In 2013, minor consequential amendments were made to the Corporation Tax Act 2010, as some sections were renumbered following the introduction of video games tax relief in the Finance Bill 2013. Clause 51 makes a further consequential amendment to the Act and the Taxation of Chargeable Gains Act 1992; it is not expected to have an impact on any business claiming that relief.
The Government are grateful for the constructive and positive engagement with the industry since the policy was announced, and during consultation in 2015. That has enabled us to understand better how the orchestra industry operates, and to design a relief that will work across the sector. The director of the Association of British Orchestras, Mark Pemberton, has commented that the relief
“will make a big difference to our members’ resilience in these challenging times, helping them to continue to offer the very best in British music-making to audiences both here in the UK and abroad.”
The hon. Lady asked whether there was a risk of the relief being abused. Effective anti-avoidance rules are critical to the long-term success and stability of orchestra tax relief. Rules similar to those applied to the creative industry reliefs aim to prevent artificial inflation of claims. In addition, there will be a general anti-avoidance rule based on the GAAR denying relief where there are any tax-avoidance arrangements relating to the production—and, of course, HMRC will monitor for abuse once the regime has been introduced. On HMRC resourcing, I point the Committee in the direction of the £800 million announced in last year’s summer Budget, which provided further investment in HMRC to deal with avoidance and evasion measures more generally.
I come back to the point the hon. Lady raised about film tax relief and how that was abused. It is true that an earlier design of film tax relief was brought in by the previous Labour Government and was abused. That relief was abandoned by that Government, and the replacement model has been much more successful. It has provided the support that the film industry needs and benefits from, and that has helped to ensure that we have a thriving film industry without anything like the risks of abuse we saw formerly. In the measures that we have taken, we have learned from the previous approach.
The hon. Lady referred to making use of an EEA definition, and understandably asked what the implications are of the vote to leave the European Union. It is too early to say exactly how that will work. We are not sure what relationship we will have with the European Union, other than that we will be leaving it. It is quite possible that EEA definitions and so on will remain relevant, but we currently remain members of the EU and are considering legislation that takes effect in April, so it is necessary to comply with the rules as they stand. If it is necessary to review definitions, that is something we will have to look at, but that will depend on the future renegotiation.
The hon. Lady expressed the concern that perhaps we have too many tax reliefs. As the Chancellor made clear in the House of Commons yesterday, there is a place for reliefs, but our general and main focus has been on lowering corporation tax rates, and that continues to be the case. There is scope for using tax reliefs to support investment in growth through the tax system, and that is why we provide a range of tax reliefs and allowances. The Government have restricted a number of tax reliefs and allowances; for example, we have introduced a cap on income tax reliefs, restricted relief for buy-to-let landlords and capped the amount of losses through which banks can reduce their tax, so we have taken action on reliefs where we feel that their use is disproportionate to the benefits for the wider economy.
On orchestras, the Government are committed to supporting the arts through both spending programmes and tax reliefs. The orchestra tax relief is intended to complement current funding. It is specifically aimed at supporting orchestras in continuing to produce high-quality music that is enjoyed by a range of audiences. In those circumstances, we think it is justifiable. I hope that the clause has the support of Members in all parts of the Committee.
Question put and agreed to.
Clause 50 accordingly ordered to stand part of the Bill.
Schedule 8 agreed to.
Clause 51 ordered to stand part of the Bill.
Clause 52
Banking companies: excluded entities
Question proposed, That the clause stand part of the Bill.
Mr Gauke
I am grateful to the hon. Lady for her support for clauses 52 and 53, which will ensure that the exceptional tax treatment of banks’ crisis-related losses is maintained in the light of the wider changes to the UK loss relief regime announced in the Budget. They will also amend the definition of a bank used in tax legislation to ensure that bank-specific tax measures are targeted as intended.
Clause 52 will change the definition of an investment bank to ensure that legislation is appropriately targeted. We have been clear that banks should make a fair contribution to reflect the risks they pose to the UK economy, and we have taken several steps to ensure that they do make that contribution. The Chancellor introduced the bank levy—a tax on banks’ balance sheets—in 2011 and removed tax relief for banks’ compensation in relation to misconduct and mis-selling from July 2015. We restricted the amount of profit that banks can offset with historical corporation tax losses, and we introduced a new supplementary tax of 8% on banking sector profit from 1 January 2016.
Those policies, which are forecast to raise more than £28 billion between 2015 and 2021, rely on there being an appropriate definition in tax legislation of a bank. That definition is based broadly on the extent to which a company is regulated and the nature of the activities that it undertakes. Concerns have been raised that the existing definition has the potential to go further than intended and bring into scope companies that are not undertaking retail or investment banking activities. We seek to address that through clause 52, which will make a minor technical change that is expected to have a negligible cost to the Exchequer and will ensure that legislation is fair and appropriately targeted. The clause will ensure that banking taxes are targeted appropriately at banks and that legislation remains simple, certain and effective.
Clause 53 will reduce from 50% to 25% the amount of profit that banks can offset with historical losses for corporation tax purposes from 1 April 2016. When a company makes a loss for corporation tax purposes, it is able to offset that loss against the profit of a group member in the same year. If that is not possible, companies are able to carry forward their losses and offset them against future profits. Companies’ ability to carry forward losses is an important feature of the corporation tax system. It means that companies with volatile income streams are not subject to higher effective rates of tax on their long-term profits. In the 2014 autumn statement, the Chancellor announced that the proportion of taxable profit that could be offset by banks’ pre-April 2015 losses would be limited to 50% from 1 April 2015. That exceptional treatment recognised the significant losses that banks had carried forward from the financial crisis and the subsequent misconduct scandals, and the impact that those losses were having on banks’ corporation tax payments. It was forecast to increase corporation tax receipts by £2 billion between 2015 and 2020.
In the March 2016 Budget, fundamental reforms were announced to the treatment of carried-forward losses across all industry groups, to take effect from April 2017. First, there will be greater flexibility regarding the profits against which carried-forward losses can be offset. Secondly, the amount of profit that can be offset by carried-forward losses will be restricted to 50% from April 2017, subject to a £5 million allowance. Those reforms will create a more modern loss relief regime in the UK that is competitive with those in other G7 countries and better aligned with how businesses operate.
The changes made by clause 53 will maintain the exceptional treatment of banks’ historical losses by reducing from 50% to 25% the amount of profit that banks can offset with historical carried-forward losses from 1 April 2016. That will increase banks’ corporation tax payments by around £2 billion over the next five years. The existing reliefs for losses incurred by new entrant banks and building societies will be maintained; those will continue to be treated in the same way as losses in other industry groups.
On the hon. Lady’s question about timing, these measures, taken together, will raise about £5 billion in 2016-17 alone. It is important that the banking sector’s tax contribution is made when it is most needed during this period of fiscal consolidation. I take the point about the changed circumstances in the light of the vote to leave the European Union. It is also important that we make progress in reducing the deficit, and that we demonstrate that the Government are fiscally responsible. That is what we are doing. This measure is part of a plan to make progress to reduce our deficit further. Having given the Committee those points of information, I hope that these clauses can stand part of the Bill.
Question put and agreed to.
Clause 52 accordingly ordered to stand part of the Bill.
Clause 53 ordered to stand part of the Bill.
Clause 54
Reduction in rate of supplementary charge
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss the following:
Clauses 55 to 59 stand part.
Clause 128 stand part.
New clause 3—Corporation tax treatment of the oil and gas industry—
‘The Chancellor of the Exchequer shall, within six months of the passing of this Act, commission a comprehensive review of the corporation tax rates and investment allowances applicable to companies producing oil and gas in the UK or on the UK continental shelf, and publish the report of the review.’
New clause 6—Oil and gas: decommissioning contracts—
‘(1) The Chancellor of the Exchequer shall commission a review of the ways in which the tax regime could be changed to increase the competitiveness of UK-registered companies in bidding for supply chain contracts associated with the decommissioning of oil and gas infrastructure.
(2) In undertaking the review, the Chancellor shall consult the Department for Business, Innovation and Skills, the Oil and Gas Authority; Scottish Ministers; and any other stakeholders that the Chancellor thinks appropriate.
(3) The Chancellor shall report to Parliament on the results of his review within six months of the passing of this Act.’
The Chair
I remind the Committee that I will put the question on clause 128—and new clauses 3 and 6, if required—without further debate when we reach them.
Clause 60
Profits from the exploitation of patents etc
The Chair
With this it will be convenient to discuss the following:
Government amendments 51 to 115 and 136.
Clause stand part.
Government amendments 116 to 121.
That schedule 9 be the Ninth schedule to the Bill.
Mr Gauke
Clause 60 and schedule 9 make changes to ensure that the UK’s patent box operates in line with a newly agreed international framework resulting from the base erosion and profit shifting action plan. The Forum on Harmful Tax Practices—the international group leading work on action 5—focused on harmonising the level of substantive activity required for access to preferential intellectual property regimes such as the patent box. This was linked to the BEPS action plan’s overall aim of aligning taxation with economic substance. The framework applies to all patent and innovation box-type regimes that apply preferential tax treatment to IP income in OECD, G20 and EU countries. It ensures that preferential tax treatment cannot be offered for as little as simply registering ownership of IP in a jurisdiction offering such a regime. While the UK’s patent box includes adequate safeguards to address these concerns, this framework will ensure that robust standards apply internationally.
The new framework also takes a slightly different approach from the UK patent box, so amendments to the current regime are required. In particular, the international framework links the availability of a lower tax rate offered by a preferential IP regime to the proportion of the development expenditure on the IP that the claimant taxpayer incurred, directly or through a third-party subcontractor. This means that if, for example, a claimant taxpayer directly incurred only half of the expenditure on a patent, with the other half of the expenditure being on acquisition, IP, or outsourcing to a related party, only half the profit derived from that patent will benefit from a lower tax rate.
Mr Gauke
I thank the hon. Lady for her broad support for the patent box. What we sought to do with the patent box—both when it was introduced and now—is ensure that we have incentives in our tax system to encourage internationally mobile activity. This is about bringing jobs and investment to the United Kingdom. It is not about artificial profit shifting. On the Government’s wider approach to the international tax system, we believe that there should be close alignment between economic activity, the profits that relate to that, and where those profits are taxed. That is why the UK has taken a leading role in the OECD’s base erosion and profit shifting process. Of course, any process like BEPS requires compromise, but the direction in which we believe the international tax system should go—towards closer alignment—is the one that BEPS has pursued, and we are pleased with the outcomes.
The changes to the patent box reflect a degree of compromise, but in essence, thanks to the patent box, the UK continues to offer an attractive place in which intellectual property may be developed. That is something that we wish to continue. I have to pick up on three of the points made by the hon. Member for Salford and Eccles. In the context of the EU, I will make a similar point to one I made earlier: we are still in the EU and a negotiation has yet to be undertaken to know where we stand exactly. There is also a wider point: when addressing the challenges of the international tax system, much of the legislation would apply whether we were in the EU or not, because the OECD BEPS process applies to all OECD countries. I do not think that anyone is proposing a referendum on whether we should leave the OECD—it is not one that I would welcome. In these circumstances, we expect to comply with the OECD standard, and that is very much our approach.
The hon. Lady also made a couple of technical points, the first of which was about what constitutes exceptional circumstances. For example, IP might have been purchased but turned out to be worth less, so that its contribution to the fraction is out of line with the cost. Obviously I cannot be exhaustive, but I hope that example is helpful in illustrating the types of things we are talking about. She also asked about tracking and tracing at an individual product level, and why that is not the approach we have taken. Companies will be able to track and trace at IP product level, so I hope that she is reassured, but I will write to her with further information.
Amendment 50 agreed to.
Amendments made: 51, in clause 60, page 94, line 38, leave out “either”.
Amendment 52, in clause 60, page 94, line 43, leave out “multi-IP” and insert “IP”.
Amendment 53, in clause 60, page 94, line 43, at end insert
“, or
(c) a sub-stream consisting of income properly attributable to a particular kind of IP process (a “process sub-stream”)”.
Amendment 54, in clause 60, page 95, line 1, leave out from “See” to second “and” and insert
“subsection (5) for the meaning of “IP item” and “IP process””.
Amendment 55, in clause 60, page 95, line 2, before “further” insert
“see subsections (5A) and (6) for”.
Amendment 56, in clause 60, page 95, line 2, at end insert “and process sub-streams”.
Amendment 57, in clause 60, page 95, line 12, at end insert—
“But see section 357BIA (which provides that certain amounts allocated to a relevant IP income sub-stream at Step 3 are not to be deducted from the sub-stream at this Step).”
Amendment 58, in clause 60, page 95, leave out lines 13 to 17.
Amendment 59, in clause 60, page 95, line 19, leave out from beginning to “deduct” in line 20.
Amendment 60, in clause 60, page 95, leave out lines 40 to 47 and insert—
“(5) In this section—
“IP item” means—
(a) an item in respect of which a qualifying IP right held by the company has been granted, or
(b) an item which incorporates one or more items within paragraph (a);
“IP process” means—
(a) a process in respect of which a qualifying IP right held by the company has been granted, or
(b) a process which incorporates one or more processes within paragraph (a).
(5A) For the purposes of this section two or more IP items, or two or more IP processes, may be treated as being of a particular kind if they are intended to be, or are capable of being, used for the same or substantially the same purposes.”
Amendment 61, in clause 60, page 95, line 48, leave out
“which is properly attributable to a multi-IP item”.
Amendment 62, in clause 60, page 95, line 49, after “sub-stream” insert “or process sub-stream”.
Amendment 63, in clause 60, page 96, line 5, at end insert—
‘( ) Any reference in this section to a qualifying IP right held by the company includes a reference to a qualifying IP right in respect of which the company holds an exclusive licence.”
Amendment 64, in clause 60, page 98, line 2, leave out “357A” and insert “357A(1)”.
Amendment 65, in clause 60, page 98, line 21, after first “income” insert “, finance income”.
Amendment 66, in clause 60, page 100, line 41, at end insert—
“357BIA Certain amounts not to be deducted from sub-streams at Step 4 of section 357BF
(1) This section applies where a company enters into an arrangement with a person under which—
(a) the person assigns to the company a qualifying IP right or grants or transfers to the company an exclusive licence in respect of a qualifying IP right, and
(b) the company makes to the person an income-related payment.
(2) A payment is an “income-related payment” for the purposes of subsection (1) if—
(a) the obligation to make the payment arises under the arrangement by reason of the amount of income the company has accrued which is properly attributable to the right or licence, or
(b) the amount of the payment is determined under the arrangement by reference to the amount of income the company has accrued which is so attributable.
(3) If the amount of the income-related payment is allocated to a relevant IP income sub-stream at Step 3 of section 357BF(2), the amount is not to be deducted from the sub-stream at Step 4 of section 357BF(2) unless the payment will not affect the R&D fraction for the sub-stream.”
Amendment 67, in clause 60, page 104, line 6, leave out from beginning to end of line 31 on page 105.
Amendment 68, in clause 60, page 108, line 13, at end insert—
“(3A) If an election made by the company under section 18A of CTA 2009 (election for exemption for profits or losses of company’s foreign permanent establishments) applies to the relevant period, expenditure incurred by the company during the period which meets conditions A and B—
(a) is not “qualifying expenditure on relevant R&D undertaken in-house”, but
(b) is “qualifying expenditure on relevant R&D sub-contracted to connected persons”,
so far as it is expenditure brought into account in calculating a relevant profits amount, or a relevant losses amount, aggregated at section 18A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign permanent establishments amount for the period.”
Amendment 69, in clause 60, page 108, line 22, leave out
“incorporated in a multi-IP item”
and insert
“—
(i) to which income in the sub-stream is attributable, or
(ii) which is incorporated in an item”.
Amendment 70, in clause 60, page 108, line 23, at end insert
“, or
(c) in a case where the sub-stream is a process sub-stream, relates to a qualifying IP right granted in respect of any process—
(i) to which income in the sub-stream is attributable, or
(ii) which is incorporated in a process to which income in the sub-stream is attributable.”
Amendment 71, in clause 60, page 109, line 8, leave out “65% of any” and insert “the”.
Amendment 72, in clause 60, page 109, leave out lines 10 to 15 and insert
“in making payments within subsection (2).
(2) A payment is within this subsection if—
(a) it is made to a person in respect of relevant research and development contracted out by the company to the person, and
(b) the company and the person are not connected (within the meaning given by section 1122).”
Amendment 73, in clause 60, page 109, line 15, at end insert—
“(3) If an election made by the company under section 18A of CTA 2009 (election for exemption for profits or losses of company’s foreign permanent establishments) applies to the relevant period, expenditure incurred by the company during the period in making payments within subsection (2)—
(a) is not “qualifying expenditure on relevant R&D sub-contracted to unconnected persons”, but
(b) is “qualifying expenditure on relevant R&D sub-contracted to connected persons”,
so far as it is expenditure brought into account in calculating a relevant profits amount, or a relevant losses amount, aggregated at section 18A(4)(a) or (b) of CTA 2009 in calculating the company’s foreign permanent establishments amount for the period.”
Amendment 74, in clause 60, page 109, line 23, after “means” insert “the total of—
(a) any expenditure which is “qualifying expenditure on relevant R&D sub-contracted to connected persons” as a result of section 357BMB(3A) or 357BMC(3) (certain expenditure attributed to company’s foreign permanent establishments), and
(b) ”.
Amendment 75, in clause 60, page 109, line 23, leave out “65% of any” and insert “the”.
Amendment 76, in clause 60, page 109, leave out lines 25 to 30 and insert
“in making payments within subsection (2).
‘(2) A payment is within this subsection if—
(a) it is made to a person in respect of relevant research and development contracted out by the company to the person, and
(b) the company and the person are connected (within the meaning given by section 1122).”
Amendment 77, in clause 60, page 109, line 39, leave out from “company” to end of line 41 and insert
“in making during the relevant period payments within any of subsections (1A), (1B) and (1C).
(1A) A payment is within this subsection if it is made to a person in respect of the assignment by that person to the company of a relevant qualifying IP right.
(1B) A payment is within this subsection if it is made to a person in respect of the grant or transfer by that person to the company of an exclusive licence in respect of a relevant qualifying IP right.
(1C) A payment is within this subsection if—
(a) it is made to a person in respect of the disclosure by that person to the company of any item or process, and
(b) the company applies for and is granted a relevant qualifying IP right in respect of that item or process (or any item or process derived from it).
(1D) Where the company has incurred expenditure in making a series of payments to a person in respect of a single assignment, grant, transfer or disclosure, each of the payments in the series is to be treated for the purposes of this section as having been made on the date on which the first payment in the series was made.”
Amendment 78, in clause 60, page 110, line 2, leave out
“incorporated in a multi-IP item” and insert “—
(i) to which income in the sub-stream is attributable, or
(ii) which is incorporated in an item”.
Amendment 79, in clause 60, page 110, line 4, at end insert
“, or
(c) in a case where the sub-stream is a process sub-stream, a qualifying IP right granted in respect of a process—
(i) to which income in the sub-stream is attributable, or
(ii) which is incorporated in a process to which income in the sub-stream is attributable.”
Amendment 80, in clause 60, page 110, line 22, leave out “357BME” and insert “357BMD”.
Amendment 81, in clause 60, page 111, leave out from beginning of line 8 to “, and” in line 11 and insert
“in each of subsections (1A), (1B) and (1C) the word “relevant” were omitted”.
Amendment 82, in clause 60, page 112, line 25, leave out “357A” and insert “357A(1)”.
Amendment 83, in clause 60, page 112, line 46, at end insert—
“Small claims treatment
357BNA Small claims treatment
(1) This section applies where—
(a) a company carries on only one trade during an accounting period,
(b) section 357BF applies for the purposes of determining the relevant IP profits of the trade for the accounting period, and
(c) the qualifying residual profit of the trade for the accounting period does not exceed whichever is the greater of—
(i) £1,000,000, and
(ii) the relevant maximum for the accounting period.
(2) The company may make any of the following elections for the accounting period—
(a) a notional royalty election (see section 357BNB),
(b) a small claims figure election (see section 357BNC), and
(c) a global streaming election (see section 357BND).
This is subject to subsections (3) and (4).
(3) The company may not make a notional royalty election, a small claims figure election or a global streaming election for the accounting period if—
(a) the qualifying residual profit of the trade for the accounting period exceeds £1,000,000,
(b) section 357BF applied for the purposes of determining the relevant IP profits of the trade for any previous accounting period beginning within the relevant 4-year period, and
(c) the company did not make a notional royalty election, a small claims figure election or (as the case may be) a global streaming election for that previous accounting period.
(4) The company may not make a small claims figure election for the accounting period if—
(a) the qualifying residual profit of the trade for the accounting period exceeds £1,000,000,
(b) section 357C or 357DA applied for the purposes of determining the relevant IP profits of the trade for any previous accounting period beginning within the relevant 4-year period, and
(c) the company did not make an election under section 357CL for small claims treatment for that previous accounting period.
(5) In subsections (3) and (4) “the relevant 4-year period” means the period of 4 years ending with the beginning of the accounting period mentioned in subsection (1)(a).
(6) For the purposes of this section, the “qualifying residual profit” of a trade of a company for an accounting period is the amount which (assuming the company did not make an election under this section) would be equal to the aggregate of the relevant IP income sub-streams established at Step 2 in section 357BF(2) in determining the relevant IP profits of the trade for the accounting period, following the deductions from those sub-streams required by Step 4 in section 357BF(2) (ignoring the amount of any sub-stream which is not greater than nil following those deductions).
(7) For the purposes of this section, the “relevant maximum” for an accounting period of a company is—
(a) in a case where no company is a related 51% group company of the company in the accounting period, £3,000,000;
(b) in a case where one or more companies are related 51% group companies of the company in the accounting period, the amount given by the formula—
where N is the number of those related 51% group companies in relation to which an election under section 357A(1) has effect for the accounting period.
(8) For an accounting period of less than 12 months, the relevant maximum is proportionally reduced.
357BNB Notional royalty election
(1) Subsection (2) applies where a company has made a notional royalty election for an accounting period under section 357BNA(2)(a).
(2) In its application for the purposes of determining the relevant IP profits of the trade of the company for the accounting period, section 357BHA (notional royalty) has effect as if—
(a) in subsection (2) for “the appropriate percentage” there were substituted “75%”, and
(b) subsections (3) to (6) were omitted.”
357BNC Small claims figure election
(1) Subsection (2) applies where a company has made a small claims figure election for an accounting period under section 357BNA(2)(b).
(2) In its application for the purposes of determining the relevant IP profits of the trade of the company for the accounting period, section 357BF(2) (steps for calculating relevant IP profits) has effect as if in Step 6—
(a) for “marketing assets return figure” there was substituted “small claims figure”, and
(b) for “(see section 357BL)” there was substituted “(see section 357BNC(3))”.
(3) Subsections (4) to (9) apply for the purpose of calculating the small claims figure for a relevant IP income sub-stream established at Step 2 in section 357BF(2) in determining the relevant IP profits of a trade of a company for an accounting period.
(4) If 75% of the qualifying residual profit of the trade for the accounting period is lower than the small claims threshold, the small claims figure for the sub-stream is 25% of the amount of the sub-stream following Step 4 in section 357BF(2).
(5) If 75% of the qualifying residual profit of the trade for the accounting period is higher than the small claims threshold, the small claims figure for the sub-stream is the amount given by—
where—
A is the amount of the sub-stream following the deductions required by Step 4 in section 357BF(2),
QRP is the qualifying residual profit of the trade of the company for the accounting period, and
SCT is the small claims threshold.
(6) If no company is a related 51% group company of the company in the accounting period, the small claims threshold is £1,000,000.
(7) If one or more companies are related 51% group companies of the company in the accounting period, the small claims threshold is—
where N is the number of those related 51% group companies in relation to which an election under section 357A(1) has effect for the accounting period.
(8) For an accounting period of less than 12 months, the small claims threshold is proportionately reduced.
(9) Subsection (6) of section 357BNA (meaning of “qualifying residual profit”) applies for the purposes of subsection (4) and (5) of this section.
357BND Global streaming election
(1) Subsection (2) applies where a company has made a global streaming election for an accounting period under section 357BNA(2)(c).
(2) In its application for the purpose of determining the relevant IP profits of the trade of the company for the accounting period, this Chapter has effect with the following modifications.
(3) In subsection (2) of section 357BF (relevant IP profits)—
(a) omit Step 2,
(b) in Step 3 for “each of the relevant IP income sub-streams” substitute “the relevant IP income stream”,
(c) in Step 4—
(i) in the words before paragraph (a), for “each” substitute “the”,
(ii) for “sub-stream”, in each place it occurs, substitute “stream”,
(d) in Step 6—
(i) at the beginning insert “If the relevant IP income stream is greater than nil following Step 4,”,
(ii) for the words from “each” to “Step 4” substitute “the stream”,
(iii) for “sub-stream”, in the second place it occurs, substitute “stream”,
(e) in Step 7—
(i) for “each relevant IP income sub-stream” substitute “the relevant IP income stream”,
(ii) for “sub-stream”, in the second place it occurs, substitute “stream”,
(f) omit Step 8, and
(g) in Step 9 for “given by Step 8” substitute “of the relevant IP income stream following Step 7”.
(4) In subsection (3) of that section for “given by” substitute “of the relevant IP income stream following the Steps in”.
(5) In subsection (4) of that section for “given by” substitute “of the relevant IP income stream following the Steps in”.
(6) Omit subsections (5), (5A) and (6) of that section.
(7) In section 357BIA(3) (certain amounts not to be deducted from sub-streams at Step 4 of section 357BF)—
(a) for “a relevant IP income sub-stream” substitute “the relevant IP income stream”;
(b) for “sub-stream”, in the second and third places it occurs, substitute “stream”.
(8) In section 357BJ (routine return figure)—
(a) for “sub-stream”, in each place it occurs, substitute “stream”, and
(b) in subsection (1) for “Step 2” substitute “Step 1”.
(9) In section 357BL (marketing asset return figure) for “sub-stream”, in each place it occurs, substitute “stream”.
(10) In section 357BLA (notional marketing royalty)—
(a) for “sub-stream”, in each place it occurs, substitute “stream”, and
(b) in subsection (1) for “Step 2” substitute “Step 1”.
(11) In section 357BLB (actual marketing royalty) for “sub-stream”, in each place it occurs, substitute “stream”.
(12) In section 357BM (R&D fraction: introduction)—
(a) for “sub-stream” (in each place it occurs) substitute “stream”, and
(b) in subsection (1) for “Step 2” substitute “Step 1”.
(13) In section 357BMA(1) (R&D fraction) for “sub-stream” substitute “stream”.
(14) In section 357BMB(4) (qualifying expenditure on relevant R&D undertaken in-house) for the words after “1138)” substitute “which relates to a qualifying IP right to which income in the stream is attributable”.
(15) In section 357BME(2) (qualifying expenditure on acquisition of relevant qualifying IP rights) for the words from “means” to the end substitute “means a qualifying IP right to which income in the stream is attributable”.
(16) In section 357BMG (cases where the company is a new entrant with insufficient information about pre-enactment expenditure) for “sub-stream”, in each place it occurs, substitute “stream”.
(17) In section 357BMH (R&D fraction: increase for exceptional circumstances) for “sub-stream”, in each place it occurs, substitute “stream”.
(18) In section 357BNC (small claims figure election)—
(a) for “sub-stream”, in each place it occurs, substitute “stream”;
(b) in subsection (3) for “Step 2” substitute “Step 1”.”
Amendment 84, in clause 60, page 113, line 17, at end insert—
“( ) Where section 357BF applies by reason of this section for the purposes of determining the relevant IP profits of a trade of a company for an accounting period, the company may not make a global streaming election for the accounting period under section 357BNA(2)(c).”
Amendment 85, in clause 60, page 113, leave out lines 34 to 44 and insert—
“(a) the company and the person who assigned the right or granted the licence were connected at the time of the assignment or grant,
(b) the main purpose, or one of the main purposes, of the assignment of the right or the grant of the licence was the avoidance of a foreign tax,
(c) the person who assigned the right or granted the licence was not within the charge to corporation tax at the time of the assignment or grant, and
(d) the person who assigned the right or granted the licence was not liable at the time of the assignment or grant to a foreign tax which is designated for the purposes of this section by regulations made by the Treasury.”
Amendment 86, in clause 60, page 114, line 1, leave out “(9)(b)” and insert “(8)(d)”.
Amendment 87, in clause 60, page 114, line 4, at end insert—
“( ) Regulations may not be made under subsection (8)(d) after 31 December 2016.”
Amendment 88, in clause 60, page 114, line 21, leave out “(b)” and insert “(c)”.
Amendment 89, in clause 60, page 114, line 24, leave out
“and each product sub-stream”
and insert
“, each product sub-stream and each process sub-stream”.
Amendment 90, in clause 60, page 114, line 32, leave out
“and product sub-streams”
and insert
“, each of the product sub-streams and each of the process sub-streams”.
Amendment 91, in clause 60, page 114, line 42, leave out “a multi-IP item” and insert
“an IP item or IP process”.
Amendment 92, in clause 60, page 114, line 44, after “sub-stream” insert “or process sub-stream”.
Amendment 93, in clause 60, page 114, line 45, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 94, in clause 60, page 115, line 1, after “item” insert “or process”.
Amendment 95, in clause 60, page 115, line 4, after “item” insert “or process”.
Amendment 96, in clause 60, page 115, line 8, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 97, in clause 60, page 115, line 9, leave out “item or items” and insert “items or processes”.
Amendment 98, in clause 60, page 115, line 11, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 99, in clause 60, page 115, line 13, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 100, in clause 60, page 115, line 17, after “sub-stream” insert “or process sub-stream”.
Amendment 101, in clause 60, page 115, line 18, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 102, in clause 60, page 115, line 20, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 103, in clause 60, page 115, line 24, after “sub-stream” insert “or process sub-stream”.
Amendment 104, in clause 60, page 115, line 26, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 105, in clause 60, page 115, line 27, after “sub-stream” insert “or process sub-stream”.
Amendment 106, in clause 60, page 115, line 27, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 107, in clause 60, page 115, line 29, after “items” insert “or processes”.
Amendment 108, in clause 60, page 115, line 31, leave out “a multi-IP” and insert
“an IP item or IP process”.
Amendment 109, in clause 60, page 115, line 35, after “items” insert “or processes”
Amendment 110, in clause 60, page 115, line 35, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 111, in clause 60, page 115, line 38, after “items” insert “or processes”.
Amendment 112, in clause 60, page 115, line 38, leave out “multi-IP item” and insert
“IP item or IP process”.
Amendment 113, in clause 60, page 115, line 40, at end insert—
“( ) In section 357FB (tax advantage schemes)—
(a) in subsection (2)(b) (list of ways by which deductions can be inflated)—
(i) omit “or” at the end of sub-paragraph (ii), and
(ii) after sub-paragraph (iii) insert “, or
(iv) an R&D fraction (see subsection (4A)) being greater than it would be but for the scheme.”, and
(b) after subsection (4) insert—
“(4A) The reference in subsection (2)(b)(iv) to an R&D fraction is a reference to such a fraction as is mentioned at Step 7 of section 357BF(2).””
Amendment 114, in clause 60, page 115, line 40, at end insert—
“( ) After section 357GC insert—
“Transferred trades
357GCA Application of this Part in relation to transferred trades
(1) Where—
(a) a company (“the transferor”) ceases to carry on a trade which involves the exploitation of a qualifying IP right (“the relevant qualifying IP right”),
(b) the transferor assigns the relevant qualifying IP right, or grants or transfers an exclusive licence in respect of it, to another company (“the transferee”), and
(c) the transferee begins to carry on the trade,
the following provisions apply in determining under this Part the relevant IP profits of the trade carried on by the transferee.
(2) The transferee is to be treated as not being a new entrant if—
(a) an election under section 357A(1) has effect in relation to the transferor on the date of the assignment, grant or transfer mentioned in subsection (1)(b) (“the transfer date”), and
(b) the first accounting period of the transferor for which that election had effect began before 1 July 2016.
(3) The relevant qualifying IP right is to be treated as being an old qualifying IP right in relation to the transferee if by reason of section 357BP it is an old qualifying IP right in relation to the transferor.
(4) Expenditure incurred prior to the transfer date by the transferor which is attributable to relevant research and development undertaken by the transferor is to be treated for the purposes of section 357BMB as if it is expenditure incurred by the transferee which is attributable to relevant research and development undertaken by the transferee.
(5) Expenditure incurred prior to the transfer date by the transferor in making a payment to a person in respect of relevant research and development contracted out by the transferor to that person is to be treated for the purposes of sections 357BMC and 357BMD as if it is expenditure incurred by the transferee in making a payment to that person in respect of relevant research and development contracted out by the transferee to that person.
(6) Expenditure incurred prior to the transfer date by the transferor in making a payment in connection with the relevant qualifying IP right which is within subsection (1A), (1B) or (1C) of section 357BME is to be treated for the purposes of that section as if it is expenditure incurred by the transferee in making a payment in connection with that right which is within one of those subsections.
(7) Expenditure incurred by the transferee in making a payment to the transferor in respect of the assignment, grant or transfer mentioned in subsection (1)(b) is to be ignored for the purposes of section 357BME.
(8) In this section—
“trade” includes part of a trade, and
“relevant research and development” means research and development which relates to the relevant qualifying IP right.
(9) For the purposes of this section research and development “relates” to the relevant qualifying IP right if—
(a) it creates, or contributes to the creation of the invention,
(b) it is undertaken for the purpose of developing the invention,
(c) it is undertaken for the purpose of developing ways in which the invention may be used or applied, or
(d) it is undertaken for the purpose of developing any item or process incorporating the invention.””
Amendment 115, in clause 60, page 116, line 9, for “357A” substitute “357A(1)”.—(Mr Gauke.)
Clause 60, as amended, ordered to stand part of the Bill.
Schedule 9
Profits from the exploitation of patents etc: consequential
Amendments made: 116, in schedule 9, page 330, line 30, at end insert—
“1A In section 357B (meaning of “qualifying company”), in subsection (3)(b)(ii), for “section 357A” substitute “section 357A(1)”.”
Amendment 117, in schedule 9, page 331, line 20, at end insert—
“( ) In subsection (6), in paragraph (a)(ii) of the definition of “relevant accounting period”, for “section 357A” substitute “section 357A(1)”.”
Amendment 118, in schedule 9, page 331, line 24, leave out paragraph 9 and insert—
“9 (1) Section 357CL (companies eligible to elect for small claims treatment) is amended as follows.
(2) In subsection (1) for “elect” substitute “make an election under this section”.
(3) In subsection (6) for “section 357A” substitute “section 357A(1)”.”
Amendment 119, in schedule 9, page 332, line 16, at end insert—
“13A In section 357EB (allocation of set-off amount within a group) in subsection (3)(a) for “section 357A” substitute “section 357A(1)”.
13B In section 357ED (company ceasing to carry on trade etc) in subsection (2)(c) for “section 357A” substitute “section 357A(1)”.”
Amendment 120, in schedule 9, page 332, line 18, at end insert—
“14A In section 357FB (tax advantage schemes) in subsection (4)(b) for “section 357A” substitute “section 357A(1)”.
14B (1) Section 357G (making an election under section 357A) is amended as follows.
(2) In the heading, for “section 357A” substitute “section 357A(1) or (11)(b)”.
(3) In subsection (1) for “section 357A” substitute “section 357A(1) or (11)(b)”.
14C (1) Section 357GA (revocation of election made under section 357A) is amended as follows.
(2) In the heading, for “section 357A” substitute “section 357A(1)”.
(3) In subsection (1) for “section 357A” substitute “section 357A(1)”.
(4) In subsection (5) for “section 357A” substitute “section 357A(1)”.”
Amendment 121, in schedule 9, page 332, line 28, at end insert—
“16A In section 357GE (other interpretation), in subsection (1), at the appropriate place insert—
“payment” includes payment in money’s worth,”.”— (Mr Gauke.)
Schedule 9, as amended, agreed to.
Clause 61
Power to make regulations about the taxation of securitisation companies
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
I want to say a few words about the clause; although it might not seem exciting at first glance, it really is, so listen carefully to what I am about to say.
Three principal themes underpin the Labour party’s approach to the provisions in clauses 61 and 64, which we will come to later—in particular, those relating to the taxation of financial products. First, we need to ensure that, when the UK leaves the EU, its arrangements for regulating taxation and financial activity serve the country best and protect it from abusive practices such as tax avoidance and financial crime. Those arrangements must demonstrate the highest levels of transparency and probity.
Secondly, we need to ensure that the infrastructure supporting the UK economy accords with international standards on taxation and regulation, including the relevant OECD and International Accounting Standards Board models, which are applicable to this Bill. Finally, we need to secure Britain’s place in the world by ensuring that it maintains the highest international standards.
The Bill’s proposals on the taxation of financial instruments may appear on the surface to be merely technical, but they raise a number of significant questions about the organisation of our economy and infrastructure in the near future. Clause 61 appears to be a simple extension of the corporation tax treatment of securitisation companies to the taxes Acts generally. However, in 2008 the non-existent regulation of securitisation structures amplified a medium-sized storm in the US real estate market, and it became a fully-fledged banking crisis. I would like to ask the Minister how closely HMRC and the Treasury have considered the risks that the provision will be used for tax avoidance purposes.
Experience suggests that, if we alter the basis on which tax is levied, financial institutions will attempt to create derivative products that generate losses for tax purposes on, before and after the transition between the two tax codes, as we saw in the case of Inland Revenue Commissioners v. Scottish Provident Institution 2003 and many other cases in Hudson’s “The Law on Financial Derivatives”.
Just in the reported cases, there are several examples of financial institutions using slippery derivative products, for want of a better phrase, to avoid tax liability, such as Prudential plc v. Revenue and Customs Commissioners 2008. In that case, Chancellor Morritt held that banks should not be entitled to dictate the tax consequences of their transactions by attributing particular descriptions to them. That sort of tax avoidance, using changes in the tax treatment of products, has been criticised by Professor Alastair Hudson as
“a veritable industry in off-the-peg tax avoidance schemes”
in his book “The Law on Financial Derivatives”. Has the Minister considered the misdescriptions that might be possible under this provision?
To return to the particulars of clause 61, securitisation structures operate by transferring assets—whether subprime mortgages, credit card receivables or similar cash flows—into off balance sheet special purpose vehicles. Ordinarily, the profits, or cash flows, received from those assets pass through the special purpose vehicle to the investors who have acquired bonds in the special purpose vehicle. Usually, the residual amounts—the focus of clause 61—that are left in the special purpose vehicle are small, compared with the sums paid to the investors. However, as with all such artificial financial structures, it is possible to manipulate those amounts.
If the residual amounts held by special purpose vehicles are to be saved from withholding tax, as clause 61 proposes, and are to be treated in a different manner for tax purposes—although the provision does not make plain exactly what the different tax treatment will be—that makes it possible for the payment flows through a special purpose vehicle to be raised artificially so that larger sums could benefit from this different tax treatment.
Will the Minister confirm what is stopping an unscrupulous financial institution involved in the off-the-peg industry of tax avoidance derivatives from passing large sums—otherwise subject to withholding tax as payments of interest, for example—through special purpose vehicles? Have the Government considered in detail how such cash flows should be treated to prevent artificial or abusive tax avoidance?
Furthermore, securitisation products, in the form of collateralised debt obligations, use complex derivatives as part of their structure—namely, credit default swaps. The purpose of credit default swaps has always been to permit two things: first, speculation on the creditworthiness of companies and Governments issuing bonds; and secondly, a form of artificial insurance. A feature of credit default swaps and all other credit derivatives is that they are flexible tools—so flexible, in fact, that they are ideal for manipulating tax statutes for tax avoidance purposes.
Professor Alastair Hudson has described the inherent flexibility of financial derivatives in his book “The Law on Financial Derivatives”, which I recommend to the Minister for his summer holidays. Professor Hudson states that
“different legal structures and different pricing structures can generate different commercial and structural results out of substantially similar subject matter”.
As he shows, it is possible for options contracts to be reorganised as swaps, and vice versa, so the possibilities for tax avoidance are endless. Consequently, it would be simple for financial institutions to repackage their payment obligations to achieve whatever characteristics are most helpful for tax purposes. I fear that clause 61 is really only the tip of the iceberg. There is a serious general point behind the specificity of my concerns about the clause.
The Chair
It may help all Committee members if I point out that if you want to take part in the debate—and everyone is encouraged to take part in the debate—it is usually a good idea to signify that by some means: a nod, a smile or even, more obviously, by rising to your feet. Otherwise, I am as much in the dark as everyone else.
Mr Gauke
Clause 61 will make a simple technical change to widen the scope of the power to make regulations about the taxation of securitisation companies included in the Corporation Tax Act 2010. It will enable the Government to make changes in regulations to remove uncertainty over the tax treatment of what are referred to as residual payments in the securitisation sector. That uncertainty generates a large number of requests to HMRC for clearances, which creates an administrative burden on both businesses and HMRC. Making the tax position clear will improve the customer experience. It has been welcomed by the securitisation sector and will improve the UK’s competitiveness as a financial centre.
Securitisation companies are a particular type of financial entity in which financial assets such as loans are transferred to a special purpose vehicle as security for debt issued to investors in the capital markets. Securitisation is an important way of getting more credit or liquidity flowing into the economy and of keeping down the costs of UK businesses’ borrowing and finance. The securitisation regime has worked well since its introduction, but the current rules have been in place since 2006. They need updating, to reflect recent changes to accounting standards and market developments.
One area of uncertainty that has grown as the securitisation sector has developed over recent years involves residual payments. Residual payments arise because securitisation companies typically contain more financial assets than are likely to be required in order to repay investors, meet transactions costs and retain a small profit. That excess protects against possible poor performance of the assets and allows the securitisation company to obtain an attractive credit rating. The uncertainty that arises is that residual payments may, in limited circumstances, be treated as annual payments for tax purposes and therefore be subject to withholding tax under the Income Tax Act 2007. Whether or not residual payments are treated as annual payments will depend on the facts of each case.
Uncertainty over the withholding tax rules affects the ability of law firms to issue a legal opinion on which ratings agencies can base the credit rating of the securitisation. That has a negative impact on the competitiveness of the UK securitisation sector. Currently, the uncertainty is addressed by companies writing to HMRC to seek clearance that residual payments will not be annual payments and so can be paid without withholding tax. That is an administrative burden for businesses. We would like to clarify the position by removing the potential withholding obligation in regulations, but the existing power is not wide enough to do so.
The changes made by the clause will amend the existing power to make regulations concerning the application of the Corporation Tax Acts to securitisation companies. The clause will extend the power to cover the wider taxes Acts, including the income tax Acts. That will permit changes to be made in regulations to ensure that the requirement to deduct income tax from annual payments will, as intended, not apply to residual payments made by securitisation companies. It will have a negligible cost to the Exchequer. Updated regulations under the amended power will be developed in consultation with interested parties.
The hon. Member for Salford and Eccles raised the role of securitisation in the financial crisis, which we could have spent plenty of time debating. However, while there were significant problems and faults in the US securitisation market, the UK and EU securitisation markets remained relatively robust. The global regulatory framework for securitisation has been completely overhauled since the crisis, including through increased capital requirements, reform of the oversight of credit ratings agencies and improved transparency rules.
The clause will not mean that securitisation companies pay less tax or face less scrutiny from HMRC. There is no statutory definition determining whether a payment is an annual payment. That must be decided based on characteristics established in case law. HMRC’s view is that the overwhelming majority of residual payments will never be annual payments. The change will clarify the position by placing the tax treatment on a statutory footing, removing uncertainty for taxpayers. There is no policy change here.
In terms of what is to stop large sums from being artificially passed through these vehicles, the notes have to be issued wholly or mainly to external investors. The SPVs are conduits and do not retain the profits. On how we treat such cash flows to prevent avoidance, under the payment rules an SPV is taxed on a small retained profit that has to be paid out to investors within 18 months.
This simple change to primary legislation has been welcomed by the industry. It will allow changes to be made in regulations to make the tax rules applying to securitisation companies work as intended. It will also make it easier for UK businesses to raise finance through securitisations, making those businesses and the UK securitisation sector more competitive. It will remove uncertainty over the appropriate tax treatment and need for businesses to consult HMRC on this issue before entering into securitisation transactions and it will ensure that the tax treatment of residual payments will be treated consistently. I therefore hope that the clause will stand part of the Bill.
Question put and agreed to.
Clause 61 accordingly ordered to stand part of the Bill.
Clause 62
Hybrid and other mismatches
Question proposed, That the clause stand part of the Bill.
The Chair
With this it will be convenient to discuss that schedule 10 be the Tenth schedule to the Bill.
Rebecca Long Bailey
The same general points that I made about clause 61 broadly apply to this clause. The United Kingdom finds itself occupying a new place in the world and the provisions in the clause relate to the difficult business of double tax treaties. Such treaties currently need to be negotiated on a bilateral basis with countries that are outside large trading blocs such as the EU. They are therefore a model for the sort of issues that will be vital for the UK outside the EU.
There are model double tax treaties created by the OECD, which will guide our work. A future Labour Government would be outward looking in forging alliances of the sort possible under the OECD umbrella to create viable tax regulation and financial regulation internationally. However, there are some contexts in which the provisions in schedule 10, which the clause introduces, appear to be a little vague. For example, proposed new section 259BD(8) prevents a company from being “under taxed”, by identifying the highest rate at which tax is charged and asking whether that is lower than the company’s full marginal rate of tax should have been.
That is to be done by taking into account, on a “just and reasonable basis”, any credit for underlying tax. The reference to just and reasonable appears somewhat vague when contrasted with, for example, provisions governing international accounting standards in earlier clauses. As a survivor of the legal world, will the Minister confirm what “just and reasonable” is intended to mean and how HMRC will use that broad measuring stick in practice? Does he think that is a sufficiently clear mechanism for identifying whether sufficient tax has been paid, or do the Government simply seek to grant HMRC as much slack as they can?
Mr Gauke
Clause 62 and schedule 10 make changes to tackle multinationals that avoid UK corporation tax through cross-border business structures known as hybrid mismatch arrangements. We are building on the new rules announced at autumn statement 2014 and extending them, not least so that they also cover overseas branches, leading the way on implementing international best practice in this area.
The changes will neutralise the tax effect of hybrid mismatch arrangements and effect the recommendations of action 2 of the G20-OECD base erosion and profit-shifting project. In addition, they will neutralise the tax effect of hybrid mismatch arrangements involving permanent establishments. That means that the measure will tackle aggressive tax planning where, within a multinational group, either one party gets a tax deduction for a payment while the other party does not have a taxable receipt or there is more than one tax deduction for the same expense. The aim is to eliminate the unfair tax advantages that arise from the use of hybrid entities, hybrid instruments, dual resident companies and permanent establishments. That will encourage businesses to adopt less complicated cross-border investment structures.
In 2013 the OECD and the G20 countries adopted a 15-point action plan to address base erosion and profit shifting. BEPS refers to tax-planning strategies that exploit gaps and mismatches in the tax rules of different countries to make profits disappear for tax purposes or to shift profits to locations where there is little or no real activity but where the tax rates are low, resulting in little or no overall corporate tax being paid. The BEPS action plan is aimed at ensuring that profits are taxed where the economic activities generating the profits are performed, and where value is created.
Rebecca Long Bailey
I will be brief. The provision raises some seemingly technical questions on the taxation of loan relationships and derivatives—concepts that are closely linked in tax law. As with the other clauses, it requires deeper thought as the UK prepares to leave the EU. What precise changes, which HMRC has presumably observed in the financial markets, have prompted the reforms proposed in clause 63?
The role of insurance companies, particularly naive participants such as AIG before 2008, in derivatives markets must give us all pause for thought when considering how to regulate and tax them in the future. Those enormous insurance companies are involved in vital financial services for our citizens as well as extraordinarily complex financial instruments, such as credit default swaps. We must therefore be concerned that the reforms to the treatment of insurance companies are considered necessary. Will the Minister confirm what work the Treasury has done on assessing the future treatment of derivatives and similar markets and their impact on the UK economy? It is important for the future health of the UK economy that careful analysis of those markets is conducted as we prepare to leave the EU.
Mr Gauke
Clause 63 makes changes to ensure that corporation tax rules applying to insurance companies carrying on long-term business produce the appropriate policy results. A new regime for the taxation of life insurance companies was introduced in the Finance Act 2012 and was widely welcomed. However, putting that into practice has uncovered some specific issues that must be resolved for the regime to operate smoothly and effectively. HMRC has worked with industry to identify those issues, which relate to three main areas: intangible fixed assets, deemed income and trading losses.
Clause 63 will make minor technical changes to that legislation to ensure that it operates as intended. The cost to the Exchequer is negligible. For intangible fixed assets, clause 63 will allow debits to be set against the income for the accounting period in which they are incurred. That will bring the rules into line with those for companies that are not life insurers. For deemed income, clause 63 will prevent unused interest expenses from being set against the minimum profits charge in any circumstances. That will mean that any such charge is always fully taxed. For trading losses, clause 63 will mean that their use is no longer restricted to a company’s net position on its derivative contracts in the same period, which will bring stability into that calculation. The changes are relatively minor in nature and will have a small impact on insurers’ profits. However, they are important as they will ensure that the legislation delivers the intended policy objectives.
As I said, the Finance Act 2012 introduced a fundamental rewrite of life insurance company taxation. Such major reforms are always likely to necessitate some minor adjustments when put into practice and HMRC has worked with the industry to identify a handful of issues where the legislation does not work as intended. The changes will simply ensure the legislation operates as initially intended, which is why we are making them. Of course, all these matters are kept under review. Again, the hon. Lady raises the point about EU membership and so on. I am not sure I have much to add to what I previously said on that matter. I hope that the clause stands part of the Bill.
Question put and agreed to.
Clause 63 accordingly ordered to stand part of the Bill.
Ordered, That further consideration be now adjourned. —(Mel Stride.)