Multiannual Financial Framework
Debate between David Gauke and Rebecca Long Bailey(7 years, 5 months ago)
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The Chair
We now move to questions, which we have until 10 am to consider. I remind Members that questions should be brief and that this time is for questions; there is an opportunity for debate when we have finished questions.
Rebecca Long Bailey (Salford and Eccles) (Lab)
It is a pleasure to serve under your chairmanship today, Mr Hanson, and indeed to serve opposite the Minister, in my first European Committee. I have a few brief questions. I will put the first three together, because they are all on a similar theme, and it will give the Minister adequate time to respond.
First, as the Minister has said, revised proposals were put forward at the European Council meeting of 15 November. However, as far as I am aware, full details of the revised proposals are not publicly available. Can he outline exactly what has been removed from or revised in the documents, other than that which he has referred to already? Indeed, does he have a date by which the revised proposals will be available?
Secondly, as far as I am aware, the proposals include a doubling of funds for the flexibility instrument and emergency aid reserve, and a new EU crisis reserve. However, the Minister has stated that there will be no new special instruments. Will the crisis reserve fund therefore not go ahead, and, if not, how does the Commission plan to deal with any unforeseen needs in the next four years?
Lastly in this suite of questions, the Minister’s letter to the European Scrutiny Committee said that the commitments proposals for special instruments have been reduced from €3.4 billion to €129 million per annum. Clearly, that is a colossal change of direction, not a minor tweak, so can he confirm exactly what funding will be allocated to which special instruments?
Mr Gauke
I thank the hon. Lady for her questions, and I welcome her to her first debate in a European Committee; I confess that this is not my first. It is good to see her in her place.
First, the hon. Lady asked how the proposals have changed since the initial Commission documents. I refer her back to the points I outlined in my opening remarks, but let me be clear: to begin with, top-ups or spending increases to lower priority budget headings have now been financed largely with reallocations, instead of using unallocated margins. We obviously welcome that. Secondly, the proposals for increasing special instruments capacity have been reduced from around €4 billion to €150 million per annum, with increases in just two special instruments. The new special instrument has been dropped, and I will come back to that in a moment. Caps on underspends that can be carried forward have only been raised marginally. Some ability to reshuffle funds between special instruments has been retained.
I will make two observations in respect of where we have got to following the work undertaken by the presidency on these proposals. First, from the perspective of a member state advocating budgetary restraint, this is clearly a move in the right direction. I have attended the negotiations on annual budgets for the past three years, and the dynamic is striking: the Parliament generally calls for a relaxation of controls; the Council of Ministers, although it contains a range of views, generally takes a more budgetary disciplinarian approach; and the Commission tries to broker a position. It is clear that the presidency proposals supported our view pretty strongly.
Secondly, as I said earlier, we believe that there should be greater scope for flexibility to respond to particular needs. In that context, it is better that that is funded by reallocations as much as possible; it should not come back to member states for more money. Again, we welcome the approach that has been set out. The crisis fund has been dropped because of a consensus that it is not required.
The hon. Lady’s third question was about special instruments. No changes have been made to the MFF ceilings. Proposals for placing special instrument repayments above ceilings were dropped early on. The emergency aid reserve increase was reduced from €220 million to €20 million per annum. The flex instrument increase was reduced from €530 million to €130 million per annum, and, as I say, the crisis reserve was dropped.
The hon. Lady asked when the full details would be released. I have outlined the main important areas, and it is now a question of reaching a conclusion on the mid-term review. I am not sure that I can update her about the date at this point.
Rebecca Long Bailey
In the written statement on 18 November, the Government confirmed that the UK had in fact abstained on the revised MFF proposals. Given that the documents before us would increase spending on great projects such as the youth employment initiative and Horizon 2020, can the Minister explain the rationale for abstaining and the reasons for the Council’s expediting this matter?
Finally, the documents state that the negotiations for the next MFF will begin next year. The remainder of the current MFF takes us up to 2020, by which time we may have been out of the EU for up to a year, according to the Government’s current timetable. Will the Minister confirm what role the UK will play in negotiating the next MFF? What will happen to our allocation of funding for the remainder of this framework if we have severed ties before 2020?
Mr Gauke
On the mid-term review, as I have explained, the current proposal ensures that the payment ceilings that we signed up to over this seven-year deal are preserved. Therefore, we would not be looking to oppose the proposed mid-term review. The proposals are essentially neutral, with respect to what we would expect to pay over the MFF period, but we recognise that some commitments and functioning are likely to outlast our membership. On that basis, we took the view that the most appropriate approach for us to take is to abstain. We think that is the most constructive approach in the circumstances.
The hon. Lady asked what our approach to the future MFF will be. She may be familiar with the answer. This will play into our negotiations for Brexit. In those circumstances, the point at which the negotiations will start for the next MFF will be in 2018. We can assume that we will be in the middle of Brexit negotiations at that point, and our role in the next MFF will also be discussed in those negotiations; I think that the two are linked.
On the hon. Lady’s point about why the mid-term review was expedited, the presidency was keen to make progress and show that the budget proposals could be delivered quickly. That is something we welcome. Sometimes these matters can drag on for some time, but where it is possible to make quicker progress, we should do so. I hope that that is helpful.
Oral Answers to Questions
Debate between David Gauke and Rebecca Long Bailey(7 years, 6 months ago)
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Rebecca Long Bailey (Salford and Eccles) (Lab)
Last month, the Chancellor proudly dismissed his predecessor’s plans to cut corporation tax to 15%. This week, however, we hear of plans hatched by senior Government figures to cut corporation tax as low as 10% as part of a so-called Brexit nuclear option, despite the fact that both the British Chambers of Commerce and the Institute of Directors have stated that cutting corporation tax would not be at the top of their wishlist. Will the Minister put an end to his Government’s reign of chaos and confirm his long-term position on corporation tax, so that businesses have the stability they deserve?
Mr Gauke
I am not sure whether I would use the phrase “reign of chaos” if I was a Labour Front Bencher. Let me be very clear. The UK Government have rightly reduced corporation tax from 28% to 20%. We have legislated for it to go down to 17%. If there are any further announcements they will be at a fiscal event, whether an autumn statement or a Budget.
Rebecca Long Bailey
I am afraid that the Government chaos we have seen on corporation tax is sadly replicated on investment. The Chancellor promised to tear up his predecessor’s Budget and develop an industrial strategy, before denying he was planning a spending splurge. A recent Ipsos MORI poll showed that almost two thirds of Britons agree that the country is not doing enough to meet its infrastructure needs, and the Opposition agree. Will the Minister end his Government’s chaotic record on investment and confirm how much he plans to invest in infrastructure, on what, and where he will get the money from?
Mr Gauke
On the subject of corporation tax, I point out that it was not that many months ago that on one day the shadow Chancellor condemned the reduction to 17% while in Committee the Labour party voted for it. I will be clear that it is no good coming forward with incredible plans to spend £500 billion on infrastructure without any idea of how those plans will be paid for. The Chancellor will make a statement on 23 November on our policy on this issue. The Labour party really needs to change track if it is to have some credibility.
Finance Bill (Sixth sitting)
Debate between David Gauke and Rebecca Long Bailey(7 years, 10 months ago)
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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.
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.
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.
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.
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.
Finance Bill (Fifth sitting)
Debate between David Gauke and Rebecca Long Bailey(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
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
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.
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 (Fourth sitting)
Debate between David Gauke and Rebecca Long Bailey(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 covered most of the points relating to this clause when discussing previous clauses. I am concerned that it is another example of complex arrangements being created for the purpose of, among other things, avoiding liability to pay corporation tax. Will the Minister confirm what specific activity has prompted these proposals?
The Financial Secretary to the Treasury (Mr David Gauke)
It is a pleasure to welcome you back to the Chair, Mr Howarth. Let me say a word or two about the clause in response to the hon. Lady’s question.
Clause 64 makes changes to prevent tax avoidance by ensuring that tax is chargeable upon any consideration received in return for agreeing to take over tax-deductible lease payments. Leasing of plant and machinery plays an important role in UK business by providing a means of access to assets for use in commercial activities. There may be a number of different reasons for choosing to lease plant and machinery—for example, where the assets are required for only a relatively short period, where a lease meets the requirements of the business’s cash flows, where the business does not have the funds to buy the asset outright or where the asset is of a type typically leased rather than bought.
The person who leases plant and machinery—the lessee—for use in their business is entitled to tax deductions for the rents payable under the lease. Her Majesty’s Revenue and Customs has become aware of arrangements relating to the transfer of a lessee position in an existing lease. In those arrangements, the existing lessee transfers its right to use the leased plant or machinery, together with the obligation to make the lease payments, to another person. The new lessee will use the plant or machinery in its business and claim tax deductions for the lease rental payments.
However, the arrangements for transfer also involve the new lessee or a connected person receiving a consideration in return for the new lessee agreeing to take over from the existing lessee. That is done in such a way that there is no charge for tax on that consideration. The new lessee is able to get tax deductions for rental payments, some or all of which are funded by the non-taxable consideration received. That is an unfair outcome, and in a number of examples seen by HMRC it is clearly part of a tax avoidance scheme.
It is right that where a person meets tax-deductible payments not from their own resources but out of an otherwise non-taxable consideration received for agreeing to take over those payments, that consideration should be taxed in full. The changes made by the clause will ensure that where a person takes over a lessee under an existing lease, obtains tax deductions for payments under that lease and, in return, receives a consideration, such consideration is chargeable for tax as income.
The changes proposed will ensure a fair outcome for tax purposes for such arrangements. No longer will it be possible for tax-deductible lease payments to be funded by untaxed considerations received for the transfer of responsibility to make those payments. The expected yield to the Exchequer over the scorecard period from the changes is £120 million. I therefore hope the clause will stand part of the Bill as a way of preventing businesses from gaining an unwarranted tax advantage.
Question put and agreed to.
Clause 64 accordingly ordered to stand part of the Bill.
Clause 82
Inheritance tax: increased nil-rate band
Question proposed, That the clause stand part of the Bill.
Mr Gauke
Clause 82 and schedule 15 ensure that the residence nil-rate band for inheritance tax will continue to be available when an individual downsizes or ceases to own a home. The clause builds on the provisions in the Finance Act 2015, which introduced a new residence nil-rate band, by creating an effective inheritance tax threshold of up to £1 million for many married couples and civil partners by the end of the Parliament, making it easier for most families to pass on the family home to their children and grandchildren without the burden of inheritance tax.
The combined effect of this package will almost halve the number of estates expected to face an inheritance tax bill in future. The Office for Budget Responsibility now forecasts that 33,000 estates will be liable for inheritance tax in 2020-21. As a result of this package, 26,000 estates will be taken out of inheritance tax altogether and 18,000 will pay less.
We recognise that people’s circumstances change as they get older and that they may want to downsize or may have to sell their property. We do not want the residence nil-rate band to act as a disincentive for people thinking about making such changes. That is why we announced in the summer Budget that anyone who downsizes or ceases to own a home on or after 8 July 2015 will still be able to benefit from the new residence allowance. Clause 82 and schedule 15 allow an estate to qualify for all or part of the residence nil-rate band that would otherwise be lost as a result of the downsizing move or disposal of the residence.
The extra residence nil-rate band or downsizing edition will only be available for one former residence that the deceased lived in. Where more than one property might qualify, executors of an estate will be able to nominate which former residence should qualify. The approach reduces complexity and ensures flexibility in the system.
The Government have tabled seven amendments to schedule 15 to ensure that the legislation works as intended in certain situations that are not currently covered by the downsizing provisions. Amendment 15 caters for situations in which an individual had more than one interest in a former residence, to ensure that they are not disadvantaged compared with those who owned the entire former residence outright. Amendment 16 clarifies the meaning of disposal in situations where an individual gave away a former residence but continued to live in it. Amendment 19 ensures that where an estate is held in a trust for the benefit of a person during their lifetime, a disposal of that former residence by the trustees would also qualify for the residence nil-rate band.
Amendments 13, 14, 17 and 18 make minor consequential changes to take into account the other amendments. Clause 82 and schedule 15 will help to deliver the Government’s commitment to take the ordinary family home out of inheritance tax by ensuring that people are not disadvantaged if they move into smaller homes or into care. That commitment was made in our manifesto and I am pleased to deliver it fully with this clause.
Rebecca Long Bailey
As we have heard from the Minister, clause 82 and schedule 15 provide that the inheritance tax transferrable main residence nil-rate band will apply to an estate even when somebody downsizes. As the Tax Journal’s commentary on the Bill concisely explains, schedule 15 in particular contains provisions to ensure that
“estates will continue to benefit from the new residence nil rate band even where individuals have downsized or sold their property, subject to certain conditions. The residence nil-rate band is an additional transferable nil rate band which is available for transfers of residential property to direct descendants on death. The additional relief will be available from 6 April 2017 and the relief for downsizing or disposals will apply for deaths after that date where the disposal occurred on or after 8 July 2015.”
My hon. Friend the Member for Hayes and Harlington and I tabled amendments to leave out clause 82 and schedule 15 today—we will therefore oppose the clause—although they were not selected for debate.
The Government’s objective seems to be that
“individuals may wish to downsize to a smaller and often less valuable property later in life. Others may have to sell their home for a variety of reasons, for example, because they need to go into residential care. This may mean that they would lose some, or all, of the benefit of the available RNRB. However, the government intends that the new RNRB should not be introduced in such a way as to disincentivise an individual from downsizing or selling their property.”
If we go back a couple of steps, at summer Budget 2015 the Government announced that there would be an additional nil-rate band for transfers on death of the main resident to a direct descendant set at £100,000 and subject to a taper for an estate with a net value of more than £2 million. The band will be withdrawn by £1 for every £2 over the threshold. During the passage of the Finance Act 2015, which introduced the additional nil-rate band, the Opposition spokesperson, my hon. Friend the Member for Worsley and Eccles South (Barbara Keeley), stated:
“We have been clear that we believe that the focus of tax cuts should be on helping working people on middle and low incomes and on tackling tax avoidance…the Treasury has admitted that 90% of households will not benefit from the Government’s inheritance tax policy, so we should be clear about the part of society we are talking about.”
She went on:
“The priority for the Government, we believe, should be helping the majority of families and first-time buyers struggling to get a home of their own. That is why Labour voted against the Government’s inheritance tax proposals in the July Budget debate. The Treasury estimates that the changes to inheritance tax will cost the Exchequer £940 million by 2020-21—nearly £1 billion.”––[Official Report, Finance Public Bill Committee, 17 September 2015; c. 56.]
I echo those comments in the light of the measure today. We simply do not believe that expanding the conditions in which inheritance tax is not payable should be a priority for the Government. As my hon. Friend said at that time, this measure will cost nearly £1 billion by 2020-21. That is a vast amount of money that could be better spent supporting those on middle and low incomes who are struggling to get by.
As with so many measures in the Bill, the Government are prioritising the wrong people, with tax giveaways for the wealthy, such as this measure, and cuts to capital gains tax, at a time when they were considering taking billions away from working people through cuts to tax credits and disability payments. Not only do we disagree with the principle of this tax giveaway; we are also concerned that the legislation is badly drafted. A similar outcome could be achieved through a simpler mechanism. The Chartered Institute of Taxation has said:
“It appears to us that the legislation in Schedule 15 as currently drafted is deficient in one particular respect in that no provision has been made for downsizing when the home is held as a trust interest (for example, and especially, an Immediate Post-Death Interest (“IPDI”)). The typical scenario would be that the home (solely owned by husband) was left on a life interest basis to his widow, with remainder over to his children. The widow goes into care and the trustees wish to sell the property. An IPDI is becoming increasingly common to safeguard the interests of children from a first marriage when their parent enters into a second.”
Will the Minister clarify what will happen in that instance?
I will touch briefly on Government amendments 13 to 19, which according to the Minister’s helpful letter of 30 June make a number of technical amendments to ensure that the legislation operates as intended in a limited number of specific circumstances that are not currently covered by the downsizing provisions. I am glad that the Government are taking steps to improve the legislation, but I cannot see how the amendments address the concerns outlined by the Chartered Institute of Taxation.
The Opposition do not feel that these measures, which expand the number of situations in which inheritance tax is not due, are a priority, given the apparent funding constraints we often hear about from the Government. We will therefore oppose clause 82 and schedule 15.
Rebecca Long Bailey
The Minister will be pleased to hear that I do not have many comments on this clause, which provides that inheritance tax will not be charged if a person leaves unused funds in a pension drawdown fund when they die. In April 2015, the Government introduced changes to pension tax rules allowing people to access their pension funds flexibly from the age of 55. That flexibility, and an increase in drawdown arrangements, means that the inheritance tax charge will potentially apply to more people. The changes, which the Opposition supported at the time, meant that pensioners could access as much of their pension pots as they wanted, without having to buy an annuity. That meant, however, that if people became entitled to the funds but did not actually draw on them before death, the money would be subject to inheritance tax at the usual rate. According to the explanatory notes, that was not the original policy intention, so the clause has been introduced to correct things. The Opposition supported the changes to pension tax rules so will not be opposing the clause.
Mr Gauke
As we have heard, clause 83 makes changes to ensure that when an individual dies, unused funds in a drawdown pension are not treated as part of their estate for inheritance tax purposes. Without the clause, a small number of pensions would be liable for inheritance tax in some circumstances, which was not our intention.
As the Committee will be aware, funds that remain in a pension scheme do not traditionally form part of a deceased’s estate and are generally exempt from inheritance tax. Nevertheless, under the current tax rules, in a small number of circumstances undrawn pension funds are unintentionally caught. For example, if an individual has designated funds for pension drawdown and then passes away without having drawn down all those funds, an inheritance tax charge may arise.
The Government introduced changes to the pensions tax rules from April 2015 that allowed more people to flexibly access their pension funds from age 55. That flexibility means that the inheritance tax charge might apply to more people who pass away leaving undrawn funds in their pension scheme. It was not intended that an IHT charge should arise in such circumstances; the clause ensures that it will not do so. It changes the existing rules so that an inheritance tax charge will not arise when a person has unused funds remaining in their drawdown pension when they die.
The changes will be backdated and will apply for deaths on or after 6 April 2011, so that they include any charges that could arise from the time when the general rule ceased to apply. The minor changes made by the clause will help to maintain the integrity and consistency of the pensions system while supporting those who have worked hard and saved responsibly throughout their lives. I commend the clause to the Committee.
Question put and agreed to.
Clause 83 accordingly ordered to stand part of the Bill.
Clause 84
Inheritance tax: victims of persecution during Second World War era
Question proposed, That the clause stand part of the Bill.
Rebecca Long Bailey
As we have heard, this substantial group of clauses introduces the apprenticeship levy that was announced in the summer Budget and autumn statement in 2015. I shall address my remarks to clauses 87 to 110 as a group, touching on new clause 2, tabled by the hon. Member for Kirkcaldy and Cowdenbeath, and Government amendments 22 to 28.
The apprenticeship levy was announced in 2015 and will come into force in April 2017 as part of the Government’s commitment to reaching 3 million apprenticeships by 2020. The levy will be charged on large employers with annual pay bills in excess of £3 million. According to the HMRC policy paper, that means that less than 2% of employers will pay the levy. It will be charged at 0.5% of an employer’s pay bill through PAYE. Each employer will receive one annual allowance of £15,000 to offset against its levy payment. Employers operating multiple payrolls will be able to claim only one allowance. As we have heard, levy funds will be retained as electronic vouchers in a digital apprenticeship service account. The employer can spend these vouchers on training and end-point assessment from accredited apprenticeship providers, but not on associated costs such as administration of apprenticeships, pay or allowances.
According to the Government’s costings, the levy is expected to raise £2.7 billion in its first financial year, rising to just over £3 billion by 2020-21. HMRC’s policy paper states specifically:
“It is expected that the levy will support productivity growth through the increase in training. It may have a near-term impact in reducing earnings growth, although by supporting increased productivity, it is expected that the levy will lead to increased profitability for businesses, and increased wages over the long-term.”
The paper also assesses the impact on business, stating:
“For employers paying the levy, the measure is expected to have some impact on administration costs and the impact will vary by employer, depending on the size of their pay bill. The policy intention is that they will calculate and pay the levy on a monthly basis. HM Revenue and Customs (HMRC) will engage with employers to discuss and assess the impacts on them.”
Opposition Members are certainly happy to support the introduction of the apprenticeship levy, but we have some concerns that we would like the Minister to provide some reassurances on.
Business representatives have broadly welcomed the levy as a commitment to delivering increased apprenticeship places. However, they have widely expressed concern at the short timeframe for implementation, the lack of guidance to date ahead of the introduction and the limitations that the proposals place on expenditure. Indeed, the Confederation of British Industry has called for a “realistic lead-in time” and for
“taking the time to get this right”,
while EEF, the Manufacturers Organisation, has specifically called for a delay to the levy’s introduction full stop.
In addition, the high target of 3 million apprenticeship starters by 2020 has caused concern that there could be a race to the bottom in terms of the quality of apprenticeships. Mark Beatson, chief economist at the Chartered Institute of Personnel and Development, has said:
“We’d argue that the three million target should not be sacrosanct, and that quantity should not trump quality.”
Can the Minister therefore outline what regulatory framework or safeguards are in place to ensure that the quality of apprenticeships is up to scratch?
The Charity Finance Group is particularly concerned that the charitable sector does not have highly developed human resources departments or accredited apprenticeship training schemes. The sector remains reliant on volunteers whose expenses cannot be remunerated via the apprenticeship levy. The CFG is also concerned that significant charity resources are tied up in public sector contracts or that charitable donors will seek confirmation that their donations will fund a charity’s specific cause.
Indeed, public sector employers themselves have expressed concern that, first, the levy is being introduced at a time of severe funding cuts and, secondly, that it is accompanied by a new requirement in the sector to ensure that 2.3% of workers are apprentices. The Local Government Association has urged that local authorities be exempted from payment but given authority to oversee administration of levy funds locally. Can the Minister confirm that the Government have considered that approach?
There may be scope for local authorities to co-ordinate. For instance, councils could take up a commissioning role in the Digital Apprenticeship Service, or unallocated levy funding could be reallocated to contributing areas and commissioned locally rather than being retained centrally.
Another issue that I would like the Minister to shine some light on today is agency workers and large recruitment agencies. In particular, the largest recruitment agencies have expressed concern to me that they will be liable to make large levy payments for placing employees in other companies, including for periods that would not qualify for a quality apprenticeship—over 12 months.
The Recruitment and Employment Confederation has raised concerns that large recruitment agencies will have to pay the levy on their pay bill when they place employees in temporary employment in different workplaces, so that those employees are paid by the agency but not working for it. Indeed, the TUC has expressed concern that agency contracts may be used by employers to lower their PAYE bill and reduce their levy requirement. Opposition Members are really concerned about that, so can the Minister say what steps are in place to ensure that it does not happen?
Finally, I have some concerns about how the levy will work under a devolved Administration, and I think that the hon. Member for Kirkcaldy and Cowdenbeath shares those concerns, as do his colleagues. That is reflected in new clause 2, where they have requested a review addressing how equitable treatment of the different parts of the UK will be assured in its implementation. Throughout their submissions they have asked some very pertinent questions, and I look forward to hearing the Minister’s responses to them.
The levy will be UK-wide, so employers operating across the devolved nations will pay their contribution based on all their UK employees, irrespective of where they live or work. However, the vouchers that levy-paying employers will be allocated—they can spend them on apprenticeship training—will be based only on the portion of the levy that they pay on the pay bill for their English employees. Funds available for training in devolved Administrations are provided through the block grant, and allocation will be decided upon by the Administration.
There appears to be very little guidance on how the apprenticeship levy will work in the devolved Administrations, so I would be grateful if the Minister could provide more detail today. For example, will the funds levied from a company’s UK operations based in devolved nations be identifiable in the grants made to devolved Administrations? We will support new clause 2 if it is pushed to a vote today.
I turn now to Government amendments 22 to 28, which relate to clauses 88, 90, 91 and 109. Clause 90, as drafted, states that where there is an aggregate pay bill of a group of connected companies that will qualify to pay the apprenticeship levy and each would be entitled to a levy allowance, only one will in fact be entitled to the allowance. The connected companies must nominate which company will qualify. Similarly, clause 91 sets out that at the beginning of the tax year, where two or more qualified charities are connected with one another, only one will be entitled to the levy allowance to be offset against the apprenticeship levy.
Government amendments to those two clauses allow companies and charities that are connected for the purposes of the apprenticeship levy to share their annual levy allowance of £15,000 between them, instead of only one company or charity being entitled to the allowance. There is also a consequential amendment to clause 88, which, according to the Minister’s letter,
“allows for the levy allowance not being the full £15,000, if a group of connected employers choose to split it under sections 90 or 91.”
The Government have stated that these changes are in response to representations they have received, and the Opposition are also aware of concerns from stakeholders about the legislation as currently drafted. We therefore fully support these amendments.
Amendments 26 and 28 are technical amendments that clarify that the definition of a company in clause 90 applies to the whole of part 6 of the Bill relating to the apprenticeship levy. Again, we are happy to support these Government amendments.
In conclusion, the Opposition have long called for Government action to drive growth in productivity. That is the underlying problem that the Chancellor has failed to deal with time and again. Supporting apprenticeships is certainly an important factor in doing so, and we are therefore supportive of these measures in the Bill. However, we have some serious concerns about the machinery of the specific clauses, as I have outlined, and I hope that the Minister can address them in his response.
Mr Gauke
Let me see if I can address the points that have been raised in the debate. It has been argued that business organisations are calling for a delay in implementation. We recognise that employers have concerns about the development and planned implementation of the levy, but we urgently need to address the skills shortage in our economy and improve the quality of vocational training, which employers are calling for. We are holding regular working groups with various employers and employer groups in order to keep them updated on progress and the timing of announcements, and we will shortly be publishing draft funding rates and rules to provide further information to help them plan for the introduction of the levy. The hon. Member for Aberdeen North is not wrong: there is still further information that needs to be published. That information will be published shortly.
Our focus is on ensuring that the levy works for businesses of all sizes as they adapt and seize opportunities in the coming months. In April we set out how the operational model for the apprenticeship levy and the new digital apprenticeship service will work, and how the funding of apprenticeship training will change. We continue to work with employers to design the apprenticeship levy around their needs, and we will publish further details of the draft rates and rules shortly.
Picking up on the point raised by the hon. Member for Brentford and Isleworth about Brompton Bikes and the particular concern about niche areas such as braziers, a key part of reform to apprenticeships is the trailblazer programme, which invites employers to create their own standards. It needs 10 employers, but in exceptional cases the Department for Business, Innovation and Skills is happy to accept smaller, more niche specialisms, such as braziers. I encourage all employers in such circumstances to enter into dialogue with BIS.
Finance Bill (Third sitting)
Debate between David Gauke and Rebecca Long Bailey(7 years, 10 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
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 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
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.)
National Insurance Contributions (Rate Ceilings) Bill (Second sitting)
Debate between David Gauke and Rebecca Long Bailey(8 years, 6 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mr Gauke
Like clause 1, clause 2 is a simple provision and I do not intend to detain the Committee for long in explaining it. The rate of secondary class 1 contributions payable by employers for employees who are not under the age of 21 is 13.8%. It is payable on earnings above £156 per week. The clause simply provides that the rate shall not exceed 13.8%.
Rebecca Long Bailey (Salford and Eccles) (Lab)
Again, as this is part of the Government’s policy to cap national insurance contributions for this Parliament, we do not oppose it in principle, but I hope that the Minister will address a few issues.
The national insurance fund is used almost exclusively to pay for contributory benefits. However, one portion, as we discussed this morning in the evidence session, is used for the NHS. Will the Minister assure us that the Government are not tying their own hands should there be another economic crisis? There could be a danger in such circumstances that the Chancellor may decide to reduce public spending further, just at the point when a stimulus is needed.
Economists the world over warn that the global economic situation is becoming increasingly precarious, and the Minister will no doubt be acutely aware that the Opposition have concerns that the Government are not taking sufficient measures to increase our financial resilience. I ask the Minister, in the words of Keynes: if the facts change, will the Chancellor change his mind? Alternatively, if the Government are committed to keeping this framework in place regardless, what contingency plans exist to protect the fund if unemployment starts to rise and receipts from national insurance consequently fall?
On Second Reading, the point was made that the Chancellor’s spending plans are predicated on,
“a forecast rise in revenue yield from NICs”.—[Official Report, 15 September 2015; Vol. 599, c. 941.]
However, should this yield be less than forecast, whether due to unforeseen circumstances, simple miscalculation or, indeed, economic policy failures, what will the Government do? Will further cuts be imposed on public expenditure, or will borrowing rise and the Chancellor simply change his targets once again?
I was grateful for the Minister’s response this morning when he confirmed that NHS funding would not be cut directly as a result of any impact that the Bill has. However, in the same way as the Bill provides an assurance to the market that the Government will keep their promise on national insurance, it would be prudent to legislate for the promise on the NHS. I trust that the Minister has listened diligently to my concerns and I look forward to his response.
Mr Gauke
I am grateful to the hon. Lady for her questions. She asked whether we are tying our hands in these circumstances. To the extent that we are not putting up the employers’ rate of national insurance contributions, for which the clause provides, or the employees’ rate, for which clause 1 provides, we are making it clear that we do not believe that that would be the right thing to do.
The hon. Lady draws me on to hypothetical ground when she asks what would happen if there were a crash, but even on a Keynesian analysis, I do not think anyone would particularly advocate, as an immediate response to an economic downturn, increasing employers’ or employees’ national insurance contributions. I do not claim to be an expert on Keynesian orthodoxy, but I do not think that that would constitute an orthodox Keynesian response to a downturn.
On the hon. Lady’s points about the impact on the national insurance fund, let me repeat the assurances that I gave this morning. There is no question of the fund not being able to fund pensions or the NHS. The Government will introduce the new state pension from 2016, which will make pensions affordable and improve the sustainability of the national insurance fund in the long term and provide the right support for private saving.
The Government Actuary recommends a working balance of one sixth of benefit expenditure for the national insurance fund, as we heard this morning. There is provision to top up the national insurance fund from the Consolidated Fund to maintain the balance at that level. For the 2015-16 tax year, a top-up of £9.6 billion has been provided for in legislation. The future funding of contributory benefits, should NICs receipts prove insufficient, is a matter for the Chancellor and that decision would need to be made at the relevant fiscal event, based on the latest projections available at the time, and taking account of this Bill. I hope that that provides some reassurance that there is flexibility.
It is not the case—nor is this an argument that a future Government would make—that, if the national insurance fund were lower than we expected, we would not honour our commitments on the NHS and on the state pension. I have to make the point that, when it comes to ensuring that we can have a properly funded NHS and properly funded pensions, we need to make sure that the economy is on a sound footing, and that the public finances are strong. That means that we have to make choices, and, in some cases, difficult choices about public finances. That includes, for example, identifying savings in the welfare budget, but, Mr Bailey, that would be taking me away from clause 2.
Mr Gauke
I am sorry if we are detaining the hon. Lady. I am sure she has many useful things to do this afternoon, so I will not detain her longer than I have to. I come back to the point that we debated this morning. It was a manifesto commitment that we would legislate for this and it is similar to the argument on rates that we have just had on clauses 1 and 2. It underlines our commitment.
I suspect that, had the Bill contained just clauses 1 and 2, and not dealt with the upper earnings limit alignment, the hon. Lady would have been one of the first to identify an apparent lacuna in the legislation and would say that there was nothing to stop us increasing the 12% band of national insurance contributions above the point at which the higher rate threshold came into place. Indeed, I think that that was Labour party policy in 1992, so it is not an immaterial issue or one that has never been considered in public debate.
To be consistent with the capping of the employees’ NICs rate, it is right to set out the threshold and the fact that that is tied in with the higher rate threshold. That has been the practice for some years now and we wish to maintain it.
Rebecca Long Bailey
On highlighting a lacuna, several need to be highlighted and we will take the same approach as the Government to the Bill. If they are going to legislate for every single pre-election promise, surely they should apply the same sort of legislation to every manifesto pledge. They are certainly not doing that.
As my hon. Friend the Member for Wolverhampton South West rightly said this morning, while the Government might be providing assurances to the market on this issue, they are certainly not providing any assurances on all their other pre-election promises because they are not legislating for them in the same way.
Mr Gauke
On a point of order, Mr Bailey. I am not sure whether it is appropriate or necessary to make a point of order at this point, but I think I should. I thank you for your guidance over the last 21 minutes. You have demonstrated all the skills we needed this afternoon, and I am grateful for that. I also thank Mr Rosindell for his assistance this morning.
I thank all hon. Members for their participation in our proceedings. They can report back to the Whips that they have served on yet another Bill Committee, and I hope they feel that this has been a day well spent.
I thank the Whips—the Lord Commissioner of Her Majesty’s Treasury, my hon. Friend the Member for Central Devon, and the hon. Member for St Helens North—for their assistance. I also thank Opposition Members, including the Front-Bench spokespeople, the hon. Members for Wolverhampton South West and for Salford and Eccles, for their constructive engagement with the Bill.
This is the second Bill that some of us have completed in recent days. It has taken considerably less time than the Finance Bill, for which I, for one, am very grateful.
May I conclude by thanking the Clerks, the Hansard reporters, the police and the attendants, as well as the officials from Her Majesty’s Revenue and Customs and the Treasury, for their assistance with this short but important Bill? I look forward to discussing these issues again—no doubt at some length—on Third Reading.
Rebecca Long Bailey
Further to that point of order, Mr Bailey. I reiterate the thanks the Minister has expressed. I also thank him for what has, as always, been a lively and engaging debate. It has been a pleasure.
Finance Bill
Debate between David Gauke and Rebecca Long Bailey(8 years, 6 months ago)
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Mr Gauke
I can assure the hon. Gentleman that the Government are talking to the devolved Administrations about exactly how we are going to do that. We are conscious that these are devolved matters, and we are actively engaged with the devolved Administrations.
I hope that the new clauses and amendments to which I referred earlier in the context of the enterprise investment scheme, venture capital trusts, corporation tax instalment payments and restitution interest payments will be able to stand part of the Bill and have the support of the whole House.
Rebecca Long Bailey (Salford and Eccles) (Lab)
It is an honour for me to speak from the Dispatch Box for the first time under your chairmanship, Madam Deputy Speaker, and I hope that this will be the first of many debates in the Chamber with the Financial Secretary to the Treasury.
I shall first speak to the Government’s amendments and new clauses, before speaking to our amendments on vehicle excise duty. On the whole, the Government’s amendments are technical in nature, designed to preserve the integrity of the Bill, to comply with EU law and to close loopholes. On that basis, we broadly support them, but I will make a few comments.
The explanatory notes and impact assessments relating to the measures were only provided by the Government at 11.50 this morning. Given the detailed nature of the proposed changes, that simply does not allow sufficient time for scrutiny. The hon. Member for Hereford and South Herefordshire (Jesse Norman) has already made that point, and KPMG has also voiced its concern, stating:
“It is important…that the Government is seen to follow the process consistently, and provide suitable time for consultation and Parliamentary scrutiny wherever possible: the addition of entirely new measures to the Summer Finance Bill so late in its passage through the Commons…is likely to foster only uncertainty.”
I hope that the Minister will take these concerns into account and ensure that this does not happen again.
New clause 4 will exclude certain contractual activities relating to reserve electricity generating capacity from the scope of venture capital trusts. These proposals are required to comply with EU state aid rules, along with amendments 31 to 45 and 46 to 70. New clause 5 relates to corporation tax instalment payments and corrects a legislative defect that has previously caused uncertainty over how the legislation will apply to accounting periods that run over 1 April 2015.
New clause 6 relates to carried interest and disguised investment management fees. These are technical corrections to clause 40 that are meant to ensure that where carried interest is charged to tax under the capital gains tax code, the full economic gain is brought into charge to tax. This new clause is intended to prevent sums arising to a fund manager as investment management fees or carried interest from being sheltered from tax through arrangements that have the effect that the amounts arise to other persons.
New clause 8 relates to restitution interest payments and introduces a new rate of corporation tax on amounts of restitution interest that may be paid by HMRC under a claim relating to the payment of tax on a mistake of law or the unlawful collection of tax. The interest element of a restitution award will be chargeable to corporation tax at a special rate of 45% instead of the normal 20% rate. We broadly support this measure, but the Minister will be aware of the hostile views that have been expressed by some businesses. He might wish to take this opportunity to respond to some of those views today.
New clause 3 requires the Chancellor to lay a report setting out proposals for amending the law to ensure that no element of the remuneration aid to an investment fund manager may be treated as a capital gain and that such remuneration shall be treated as income for tax purposes. We agree with the general aims of the new clause but we will listen carefully to what the Minister has to say on this issue.
The proposal dealing with vehicle excise duty relates to rates for light passenger vehicles in the UK and considerably flattens them out by introducing a flat-rate excise charge for every vehicle, regardless of carbon dioxide emissions, from 1 April 2017. First-year rates will continue to be determined by a sliding scale, depending on CO2 emissions. For most greener cars, which emit below 120g of CO2 per kilometre, people will now pay VED of up to £160 in the first year, whereas previously they paid nothing—only zero-emission cars will be liable for zero VED. In subsequent years, there will be a flat-rate of VED of £140 a year. Hon. Members will note that this will result in a substantial VED increase for low-emission cars in the first and subsequent years, while there is a substantial reduction for cars that are less carbon-efficient. Previously, VED for subsequent years was banded, with the more polluting cars paying more—up to £505.
Clearly, over time, the approach being taken strongly benefits more polluting cars, which will pay hundreds of pounds a year less, while greener cars, aside from those with zero emissions, will pay about £100 a year more. To put this into perspective, approximately 445 cars are currently in the top least polluting bands and so pay no VED, as they emit less than 100g of CO2 per kilometre, whereas under the proposed changes only 13 will fall into the exempt category. That represents a significant drop. In addition to those proposals, moves are also being made to additionally penalise vehicles priced at over £40,000 and, over time, there will also be a supplementary rate of £310 for the first five years.
A tax on passenger vehicles has been a feature of Government policy since as far back as 1889, but it is important to note that it was the Labour Government in 1999 who introduced bands of VED linked to the levels of CO2 emissions. The measure was designed to encourage the purchase and use of more fuel-efficient and low-emission vehicles, with the aim of lessening the environmental impact of an ever-increasing number of cars on the road. There is broad consensus on both sides of the House that VED reform is needed. Greener, more carbon-efficient vehicles are slowly becoming more commonplace across the UK, and this will undoubtedly have clear implications for VED as a future source of Government revenue. VED bands were set up in 2008, when the average emission was 158g of CO2 per kilometre, whereas the average car now produces 125g of CO2 per kilometre. Many cars therefore pay no VED at all.
Labour Members agree with the Government that this is unsustainable, but we question whether the approach they have taken to address it is pragmatic. We do not agree that increasing the duty paid on low-emission cars while decreasing the duty paid on higher-emission cars is the logical solution. The fact that zero-emission vehicles will continue to be exempt from road tax is welcome, but we are concerned that a flat rate of VED, as outlined in this proposal, will mean that low-emission vehicles will pay £800 to £1,000 more over a seven-year period than they do now, while many high-emission vehicles are expected to pay up to £440 less.
Air Passenger Duty: Regional Airports
Debate between David Gauke and Rebecca Long Bailey(8 years, 6 months ago)
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Mr Gauke
My right hon. Friend anticipates the response that I would generally make, as Treasury Ministers are required to do fairly regularly, regarding requests for tax reductions or spending increases. I cannot add to what I have previously said about the review. We will respond in due course. This is a detailed and complex area. One thing that has emerged from the debate is the fact that there are complexities, and that unintended consequences can result from pursuing certain policies, so we wish to consider the evidence carefully. We are in the process of doing so, and we will respond in due course to the points raised in the consultation. A number of options have been set out this afternoon and, although the consultation is closed, we will want to look closely at the contributions to the debate to develop our thinking on the matter.
Rebecca Long Bailey
I refer the Minister back to his comment about my hon. Friend the Member for Wolverhampton South West (Rob Marris) mentioning in a previous debate that he would be in favour of increasing APD. As has been highlighted by many of the contributions today, we are now working in a different economic landscape in light of the fact that control over APD has been devolved to Scotland. We need to assess the economic impact of APD across the regions, because the playing field is not level. I hope that the Minister will heed my comments in that regard.
Mr Gauke
I certainly understand the point that the hon. Lady is making. To be fair, the hon. Member for Wolverhampton South West made his remarks in June, and I appreciate that that was before he was on the Front Bench. It is a bad habit of Government Front Benchers to point out remarks made by Opposition Front Benchers before they were appointed to the Front Bench, or even selected to be on the Front Bench.
We have recognised the potential impacts of APD devolution, and we are conducting a review to make sure that other cities and regions do not lose out. We are listening to interested parties and we will set out the Government’s next steps in due course. The Government have a long-term economic plan for the great nations and regions of this country, which clearly includes the west midlands. The Government are giving local people more control over the decisions that affect them and strengthening the UK economy as a whole.