Draft Investment Allowance and Cluster Area Allowance (Relevant Income: Tariff Receipts) Regulations 2018
Jonathan Reynolds Excerpts(5 years, 4 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It is a privilege to serve under your chairmanship this morning, Mr Davies. It is, indeed, always good to start the day with a Treasury statutory instrument; the Minister and I could go even further and say that it is a treat to consider one that is not related to Britain’s exit from the European Union, for a change.
As the Minister outlined, the draft regulations relate to a change originally announced in the 2016 Budget: allowing tariff receipts to be included as a relevant income for investment allowances in the oil and gas sector. My only technical question for him is whether that change will be retrospective and, if so, whether there is an estimate of the overall cost to the Exchequer in that regard. It is marked blank in the impact section of the tax information and impact note that the Government published on 23 July 2018. If the figure is zero, perhaps there is a question about why the change is needed at all.
Understandably, the Opposition are supportive of the economic contribution of the oil and gas sector and the jobs and tax revenue that it provides; as the Minister said, it is a major national asset. However, our constituents will be interested to know the Government’s rationale for offering a further tax break to the oil and gas sector at the time of transition to a low-carbon economy and when concerns about climate change are so acute. The Minister will be more than aware that the UN Intergovernmental Panel on Climate Change report published in October 2018 showed that we have just 12 years left to make unprecedented changes to prevent global warming from increasing above 1.5°.
The impact note published by the Government states:
“While the UKCS is a mature basin compared to other prospects, there is still an estimated 20 billion barrels of recoverable oil remaining.
In recent years, the government has taken significant steps to create the right environment for oil and gas producers to maximise economic recovery of the remaining hydrocarbons in the basin. Encouraging investment in key infrastructure is an important aspect of this objective as it can delay decommissioning and support further development in the UKCS.”
Is it really the Government’s intention that those 20 billion barrels would be recovered? If so, what environmental consequences would that entail? How, for instance, does it fit with the emissions reduction pledge 2020, to which the Government have publicly committed? To give the Committee some sort of guide, I point out that 20 billion barrels of oil, if combusted, would release more than 20 times the UK’s entire CO2 emissions in 2017, and that is before any emissions generated in extracting the oil were taken into account, so clearly that is quite a significant part of Government policy.
People want to know what tax incentives are being promised to the renewable energy sector to encourage further infrastructure development in cleaner technologies. Fiscal policy is intrinsic to driving the transition to a greener, low-carbon economy. This change appears to be a move in the other direction, and I think that people would benefit from hearing from the Minister some of the rationale that lies behind it.
Finance (No. 3) Bill
Jonathan Reynolds ExcerptsTuesday 8th January 2019
(5 years, 4 months ago)
Commons ChamberRead Full debate Finance Act 2019 View all Finance Act 2019 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Consideration of Bill Amendments as at 8 January 2019 - (8 Jan 2019)
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I beg to move, That the clause be read a Second time.
Mr Deputy Speaker (Sir Lindsay Hoyle)
With this it will be convenient to discuss the following:
New clause 7—Review of effect of carbon emissions tax on climate targets—
“The Chancellor of the Exchequer must review the expected effect of the carbon emissions tax on the United Kingdom’s ability to meet its internationally agreed climate targets and lay a report of that review before the House within six months of the passing of this Act.”
New clause 12—Review of expenditure implications of Part 3—
“(1) The Chancellor of the Exchequer must review the expenditure implications of commencing Part 3 of this Act and lay a report of that review before the House of Commons within six months of the passing of this Act.
(2) No regulations may be made by the Commissioners under section 78(1) unless the review under subsection (1) has been laid before the House of Commons.”
This new clause would require a review within 6 months of the expenditure implications of introducing a carbon emissions tax. It would prevent part 3 (carbon emissions tax) coming into effect until such a review had been laid before the House of Commons.
New clause 13—Report on consultation on certain provisions of this Act (No. 2)—
“(1) No later than two months after the passing of this Act, the Chancellor of the Exchequer must lay before the House of Commons a report on the consultation undertaken on the provisions in subsection (2).
(2) Those provisions are—
(a) sections 68 to 78,
(b) section 89, and
(c) section 90.
(3) A report under this section must specify in respect of each provision listed in subsection (2)—
(a) whether a version of the provision was published in draft,
(b) if so, whether changes were made as a result of consultation on the draft,
(c) if not, the reasons why the provision was not published in draft and any consultation which took place on the proposed provision in the absence of such a draft.”
This new clause would require a report on the consultation undertaken on certain provisions of the Bill – alongside New Clause 11, New Clause 14 and New Clause 15.
New clause 19—Review of powers in consequence of EU withdrawal (No. 2)—
“(1) The Chancellor of the Exchequer must, no later than a week after the passing of this Act and before exercising the power in section 89(1), lay before the House of Commons a review of the following matters—
(a) the fiscal and economic effects of the exercise of the powers in section 89(1) and of the outcome of negotiations for the United Kingdom’s withdrawal from the European Union giving rise to their exercise;
(b) a comparison of those fiscal and economic effects with the effects if a negotiated withdrawal agreement and a framework for a future relationship with the EU had been agreed to;
(c) any differences in the exercise of those powers in respect of—
(i) England,
(ii) Scotland,
(iii) Wales, and
(iv) Northern Ireland;
(d) any differential effects in relation to the matters specified in paragraphs (a) and (b) in relation between—
(i) England,
(ii) Scotland,
(iii) Wales, and
(iv) Northern Ireland.”
This new clause would require a review of the economic and fiscal impact of the use of the powers in section 89 in the event of no deal and in event of a withdrawal agreement passing.
Amendment 16, in clause 78, page 51, line 32, after “may” insert
“(subject to section (Review of expenditure implications of Part 3))”.
See New Clause 12.
Amendment 1, in clause 89, page 66, line 38, at end insert—
“(1A) The Chancellor of the Exchequer must, no later than a week after the passing of this Act and before exercising the power in subsection (1), lay before the House of Commons a review of the following matters—
(a) the fiscal and economic effects of the exercise of those powers and of the outcome of negotiations for the United Kingdom’s withdrawal from the European Union giving rise to their exercise;
(b) a comparison of those fiscal and economic effects with the effects if a negotiated withdrawal agreement and a framework for a future relationship with the EU had been agreed to;
(c) any differences in the exercise of those powers in respect of—
(i) Great Britain, and
(ii) Northern Ireland;
(d) any differential effects in relation to the matters specified in paragraphs (a) and (b) in relation between
(i) Great Britain, and
(ii) Northern Ireland.”
This amendment would require the Chancellor of the Exchequer to review the fiscal and economic effects of the exercise of the powers in subsection (1) before exercising those powers.
Amendment 13, page 67, line 7, leave out subsection (5) and insert—
“(5) No statutory instrument containing regulations under this section may be made unless a draft has been laid before and approved by a resolution of the House of Commons.”
This amendment would make Clause 89 (Minor amendments in consequence of EU withdrawal) subject to the affirmative procedure.
Amendment 7, page 67, line 19, at end insert—
“(7) The provisions of this section only come into force if—
(a) a negotiated withdrawal agreement and a framework for the future relationship have been approved by a resolution of the House of Commons on a motion moved by a Minister of the Crown for the purposes of section 13(1)(b) of the European Union (Withdrawal) Act 2018, or
(b) the Prime Minister has notified the President of the European Council, in accordance with Article 50(3) of the Treaty on European Union, of the United Kingdom’s request to extend the period in which the Treaties shall still apply to the United Kingdom, or
(c) leaving the European Union without a withdrawal agreement and a framework for the future relationship has been approved by a resolution of the House of Commons on a motion moved by a Minister of the Crown.”
This amendment would prevent the Government implementing the “no deal” provisions of Clause 89 without the explicit consent of Parliament for such an outcome. It would provide three options for the provisions of Clause 89 to come into force: if the House of Commons has approved a negotiated withdrawal agreement and a framework for the future relationship; if the Government has sought an extension of the Article 50 period; or the House of Commons has approved leaving the European Union without a withdrawal agreement and framework for the future relationship.
Amendment 8, page 67, line 19, at end insert—
“(7) The provisions of this section shall not come into force until the House of Commons has come to a resolution on a motion made by a Minister of the Crown agreeing its commencement.”
Amendment 14, in clause 90, page 67, line 22, after “may” insert
“(subject to subsections (1A) and (1B))”.
See Amendment 15
Amendment 15, page 67, line 24, at end insert—
“(1A) Before proposing to incur expenditure under subsection (1), the Secretary of State must lay before the House of Commons—
(a) a statement of the circumstances (in relation to negotiations relating to the United Kingdom’s withdrawal from the European Union) that give rise to the need for such preparatory expenditure, and
(b) an estimate of the expenditure to be incurred.
(1B) No expenditure may be incurred under subsection (1) unless the House of Commons comes to a resolution that it has considered the statement and estimate under subsection (1A) and approves the proposed expenditure.”
This amendment would require a statement on the circumstances (in relation to negotiations) giving rise to the need for, as well as an estimate of the cost of, preparatory expenditure to introduce a charging scheme for greenhouse gas allowances. The amendment would require a Commons resolution before expenditure could be incurred.
New clause 18—Review of effects on measures in Act of certain changes in migration levels—
“(1) The Chancellor of the Exchequer must review the effects on the provisions of this Act of migration in the scenarios in subsection (2) and lay a report of that review before the House of Commons within one month of the passing of this Act.
(2) Those scenarios are that—
(a) the United Kingdom does not leave the European Union,
(b) the United Kingdom leaves the European Union without a negotiated withdrawal agreement,
(c) the United Kingdom leaves the European Union following a negotiated withdrawal agreement, and remains in the single market and customs union,
(d) the United Kingdom leaves the United Kingdom on the terms of the draft withdrawal agreement of 14 November 2018.
(3) In respect of each of those scenarios the review must consider separately the effects of—
(a) migration by EU nationals, and
(b) migration by non-EU nationals.
(4) In respect of each of those scenarios the review must consider separately the effects on the measures in each part of the United Kingdom and each region of England.
(5) In this section—
“parts of the United Kingdom” means—
(a) England,
(b) Scotland,
(c) Wales, and
(d) Northern Ireland;
“regions of England” has the same meaning as that used by the Office for National Statistics.”
This new clause would require a review of effects on measures in the Bill of certain changes in migration levels.
Jonathan Reynolds
This group of amendments relates to the tax and fiscal implications of the UK’s withdrawal from the EU.
Throughout the last year Parliament has been asked to approve a series of Bills giving the Government the power to deliver every type of Brexit deal conceivable, and this Finance Bill is no different. I said when closing the Second Reading debate on the Bill for the Opposition that this approach was one of “give us the powers now and we will make the decisions later,” and as it currently stands Brexit represents the biggest transfer of power to the Executive in modern constitutional history. That is disappointing for anyone who thought Brexit would see greater powers for this Parliament, but it is also a recipe for very bad decisions, and there is a classic culprit in this Finance Bill in the form of clause 89. Innocently named “Minor amendments in consequence of EU withdrawal”, it gives the Government power to amend tax legislation without any of the usual due process in the event that the UK leaves the EU without a deal.
The Government always tell us—I am sure they will do so again—that this is simply a safeguarding provision that we will never have to use, but all of us here today know that as it stands the Government have absolutely no chance of getting their deal through, because that deal does not deliver the basics of what this country needs. It does not deliver smooth, low-friction borders for manufacturing and supply chains, nor does it deliver market access for financial services. It also fails to resolve the big question: after we leave the EU, will we prioritise market access or trade autonomy? Because of that, we will almost certainly end up in the backstop arrangements, a halfway house without any say for the UK—the very worst of all worlds.
The new clauses and amendments are therefore of seminal importance, and I am extremely grateful to the Chair of the Home Affairs Committee, my right hon. Friend the Member for Normanton, Pontefract and Castleford (Yvette Cooper), for laying amendment 7 before the House today. It is clearly a cross-party amendment, supported by the Chairs of the Treasury, Exiting the European Union and Business, Energy and Industrial Strategy Committees, but it has the Opposition’s support because it offers Parliament a chance to make a clear statement rejecting a no-deal outcome—a statement that cannot come soon enough.
Anyone pretending that crashing out without a deal is simply about resorting to World Trade Organisation schedules is dangerously misinformed. As The Economist magazine said last month:
“A no-deal Brexit is about a lot more than trade—it would see many legal obligations and definitions lapse immediately, potentially putting at risk air travel, electricity interconnections and a raft of financial services”.
It would mean tariffs on trade with the EU, but it would also affect trade beyond the EU as all our current trade agreements negotiated as an EU member would immediately cease to apply. Agriculture, aerospace, the automotive sector—all these major sectors of our economy—would face potentially irreparable damage, and while tariffs may be reduced over time, excise duties and health checks on food, plants and livestock cannot be reduced so easily. Researchers at Imperial College London have calculated that just two minutes more transit time per lorry at Dover and the Channel tunnel translates into a 47 km traffic jam, and for perishable items like food, delays of that magnitude simply could not be sustained. When we add to that higher prices through tariffs and further inflationary pressure from another inevitable fall in the value of the pound, it is a recipe for significant pressure on living standards. That is why the Opposition say that no deal is not a real option.
There has been some suggestion that the Government might accept amendment 7.
Mr John Baron (Basildon and Billericay) (Con)
Does the hon. Gentleman not acknowledge that by ruling out preparations for no deal one is in effect tying the hands of one’s negotiating team, which in effect makes a trade deal—which we all, I think, would prefer to leaving on WTO terms—more difficult to achieve and therefore makes leaving on WTO terms more likely?
Jonathan Reynolds
The facts are as they are. It is far too late for that. Everyone knows the position that this country is in. The Government have run down the clock. They lost their majority through a general election that they did not need to call, and it is far too late to start applying the logic that might have applied several years ago. Because of that, our vulnerability is evident for everyone to see. No one should underestimate the likelihood of a no-deal outcome at this stage. No one should be pretending, through semantics or parliamentary chicanery, that we might be able to present no deal as a way of giving us greater leverage in negotiations. I am afraid that the Government have got us to the point of ruin if that is the strategy that Conservative Members wish to pursue.
Kevin Brennan (Cardiff West) (Lab)
Given that the Business Secretary said in the House earlier that no deal should not be contemplated, and that my hon. Friend is outlining the possibility of the Government accepting amendment 7, would it not be right for the Government to say clearly at the end of business today that they are ruling out no deal because it would be so damaging to this country?
Jonathan Reynolds
I absolutely agree with my hon. Friend. We all know that several members of the Government take that view, even though they may not be able to say it on the record. They are quite clear as to what no deal would mean, and they would not contemplate going down that route. It would be far simpler and far better to get to a position where ruling out no deal was clearly the Government’s intent.
New clause 3 would oblige the Government to publish a review of the fiscal and economic effects of the exercise of the powers in clause 89, as well as the differences between exercising those powers in Great Britain and in Northern Ireland. As we edge closer to the reality of crashing out without a deal, clause 89 is not simply hypothetical. We are now just two and a half months away from the UK’s exit without an agreement. It is therefore of critical importance that we have a full and transparent view of the implications of a clause of this kind.
Crispin Blunt (Reigate) (Con)
I am afraid that the hon. Gentleman is going to have to do a bit better than this. He talks about crashing out without a deal, but he needs to get into the detail of the implications. Perhaps he is going to start talking about planes, but amazingly, the planes are going to keep flying. Amazingly, we are still going to have drugs supplied into the United Kingdom. He needs to get down into the detail of exactly what the implications will be, because if we are faced with the reality of no overall agreement, there will be a barrow-load of minor agreements to ensure that the common interests of the United Kingdom and the European Union survive the transfer to WTO terms on 29 March with minimum impact on the citizens of the EU and the UK. It is time he got real and stopped this nonsense—
Jonathan Reynolds
Thank you, Mr Deputy Speaker.
I have just talked about some of the consequences of crashing out without a deal. I have talked about relationships, about tariffs on products and about the legal definitions under the common agreements that this country has undertaken with other European countries. We all know this—the information is readily available—so I am not quite sure what point the hon. Gentleman is making. I think he is aware of the dangers of taking this course of action.
Mr Kenneth Clarke (Rushcliffe) (Con)
With respect, it is quite right to concede that some of the fears being raised about no deal are grossly exaggerated, but the problems are quite real enough. If we leave with no deal, we will be the only developed country in the world that has no trade agreement at all with anybody and that is having to fall back on WTO rules, which are made to sound marvellous by the Brexiteers but which do not actually amount to very much. We will also be erecting new barriers to trade and investment around the borders of the United Kingdom, including along the Irish border, and that is bound to disadvantage our economy very seriously indeed.
Jonathan Reynolds
The Father of the House is as accurate as ever. Some colleagues are pursuing a dangerous argument that all our trading relationships with countries that are not in the EU are somehow currently under WTO terms, which is an absurd misconception. We have entered into trade agreements as a member of the EU that account for something like 16% of our goods exports.
Regardless of the significant impacts of a no-deal outcome, we could go further and say that to leave the EU having not secured a deal—an acrimonious departure —would damage our relationship with our most important trading partner for years to come and fundamentally undermine our credibility on the world stage. I cannot see how any serious-minded Member of this House could understand that that would not be of severe consequence for the United Kingdom, which is why it is so important that this House makes a clear statement today about the dangers of no deal.
John Redwood (Wokingham) (Con)
Can the hon. Gentleman name a single country that has a free trade agreement with the EU that will not transfer it to the UK under the novation procedures?
Jonathan Reynolds
We simply do not know the answer to that question. I always listen to what the right hon. Gentleman has to say in Treasury and Finance Bill debates, but he is one of the archetypal Members who come to the House and pursues what I call the BMW argument: “Everything will be fine because we buy BMWs and everyone will give us what we want.” That argument is still being pursued in these debates, but it has been proved completely untrue by the stage of the negotiations that we are at. It is simply not good enough to say, “It will all be alright on the night. Everyone will transfer over the benefits we currently have. It will be as straightforward as that.” If that were case, the Government would not be in this morass and the country would be in a far better position.
Chris Philp (Croydon South) (Con)
First, is it not the case that the UK and, indeed, the entire EU currently trade with major economies, such as the USA and China, under WTO terms? Therefore, while not desirable, they can be made to work. Secondly, if we adopt the shadow Minister’s approach and rule out no deal, we have no choice but to remain in the EU or to accept whatever the EU sees fit to give us, which is not a great negotiating position.
Jonathan Reynolds
I thoroughly agree that what the Government have got us into is not a great negotiating position, but that is because the negotiations have been driven by the best interests of the internal politics of the Conservative party. If the national interest had been considered, we would be in a completely different place.
Trade can exist on WTO terms. It is not that the UK would somehow no longer be a trading nation, but that is not the test of good Government policy. The test is to consider the ramifications of that decision and to decide whether it is in the UK’s best interests, but I cannot believe that anyone would look rationally at what a no-deal outcome means and say, “I would find that acceptable for this country.”
Kate Hoey (Vauxhall) (Lab)
Does not my hon. Friend think that it would be irresponsible for any Government not to be making contingency plans for WTO rules in these circumstances? Does he also agree that the Irish Taoiseach has in the past few days looked for the first time at making some changes to his intransigent approach to the backstop, precisely because the Republic of Ireland would suffer so much more from WTO terms than the United Kingdom?
Jonathan Reynolds
The merits of the Government undertaking contingency measures are different from the political case that we must consider, which is whether we would find it desirable to undertake a course of action that would mean that we had to use those contingency measures. The focus of the debate in this Finance Bill should be a seriously hard-headed look at the consequences of no deal, and there should be a statement from Members on both sides of the House that that is not what we seek for the UK and that we do not believe that it is possible.
Jonathan Reynolds
I will take an intervention from the hon. Member for Dover (Charlie Elphicke), and I may come to the hon. Member for Shrewsbury and Atcham (Daniel Kawczynski) if the intervention is good enough.
Charlie Elphicke
The hon. Gentleman is making an interesting speech. My concern is with how he can support undermining the making of contingency preparations that are in the national interest, which is the effect of amendment 7. It is just the wrong thing to do, and the Labour party ought to be more responsible than that.
Jonathan Reynolds
I completely disagree with the hon. Gentleman, and a little humility from Conservative Members on the point about responsibility for the Brexit negotiations would be appreciated. For my entire lifetime, this country’s European policy has been dictated by the internal politics of the Conservative party. Every Conservative Prime Minister in my lifetime has been brought down by the issue of Europe. To suggest that any other political party or actor in this country needs to have more regard for the national interest, when it is the Conservative party that has never been able to do so, is not something I will take.
Daniel Kawczynski
Bearing in mind that 95% of the world’s growth over the coming decades will come from outside the European Union, what assessment has he made of the opportunities that will be afforded to the United Kingdom by our being able to tailor-make bilateral trading agreements?
Jonathan Reynolds
I am extremely glad that that issue has come up, because the opportunities created by growth outside the EU have no relationship to our membership of the EU, and could possibly be undermined by our leaving the EU. If we want to compete in competitive emerging markets around the world, what better way is there to do so than from within the single market? I would wager with the hon. Gentleman that a country like Germany will do far better from that growth around the world through its continued membership of the European Union than we will. I am afraid that it is because of such statistics, which have no bearing on serious Government policy or reality, that this debate has got to where it is, but I will move away from a wider debate on Brexit and return to the Finance Bill before you tell me to do so, Mr Deputy Speaker.
I will now come to clause 89 and the relationship between Great Britain and Northern Ireland. Under the draft withdrawal agreement it is widely accepted that, under the backstop arrangements, Northern Ireland will remain in regulatory alignment with the European Union, which would be particularly the case for EU customs law but it would also apply to compliance with elements of EU single market regulation in the technical regulation of goods, state aid and other areas of north-south co-operation between Northern Ireland and the Republic. Of course, Northern Ireland would be included in parts of the EU VAT and excise regimes and in the single electricity market.
With that in mind, it is clear that the powers handed to the Treasury by this Bill may not be applicable in Northern Ireland in the legal and regulatory areas under which EU authority would remain. We are therefore seeking a review that clearly sets out any difference in application of these powers in respect of Great Britain and Northern Ireland, and I urge Members on both sides of the House to support new clause 3.
New clause 7 relates to clause 90 on establishing an emissions reduction trading regime. It would require the Government to review the expected effect of the carbon emissions tax on the UK’s capacity to meet internationally agreed climate targets. There has never been a more critical time to take urgent action on climate change to avoid environmental catastrophe. The report from the UN Intergovernmental Panel on Climate Change, published in October 2018, shows that we have just 12 years left to make unprecedented changes to prevent global warming increases above 1.5° C. Our exit from the European Union must not be used as an excuse to step back from action on climate change. Worryingly, clause 90 contains one of the Bill’s very few passing references to environmental issues, and our review, proposed in new clause 7, would ensure that the Government are held accountable for making progress on reducing emissions without using Brexit as an excuse for stalling.
This is evidently a Government in chaos, seemingly without any plan or strategy at all. The new clauses and amendments in this group would improve both the Finance Bill and the process by which we leave the European Union. They are sensible, proportionate and timely, and I commend them to the House.
Sir Vince Cable
Thank you for your indulgence, Mr Speaker. I just want to say a few words in support of amendments 7 and 8. They are Brexit-neutral, in the sense that they require the House to approve any change, but of course they relate primarily to no deal. The fiscal issues, as the right hon. Member for West Dorset (Sir Oliver Letwin) explained them, were arcane and rather gentle. I tabled a more brutal amendment that was not called.
In the 30 seconds left, I want to relate an incident from this morning, when I went to the ferry port at Portsmouth. It is very clear that the Government are totally and utterly unprepared for the chaotic impact that there will be on the road system, including access to the naval base, if a no-deal Brexit occurs. Despite repeated requests from the council and others, the Department for Transport and the Ministry of Defence are refusing to co-operate, and the police now say that the M3 motorway will have to be closed from Winchester to Basingstoke in order to provide a lorry park. Repeated efforts to get Ministers to respond have not been heeded. A meeting was held for 19 regional MPs last week, but only one attended, so I am taking on the job of representing a no-deal Brexit. It is a task I undertake with all the enthusiasm of an arsonist trying to put out a bushfire, but I will do it.
Jonathan Reynolds
This has been a significant and important debate. In fact, it is clear that the House desires a longer and broader debate—that point was well made by the Chair of the Treasury Committee. No deal is some people’s preferred outcome, and they are the same people who told us that doing a deal would be the easiest thing in history. They were wrong then and they are wrong now. I feel that the case against the unilateral use of these no-deal powers has been comprehensively made, and I urge all Members to vote for our amendments, because that is best for jobs, prosperity and the national interest.
HBOS Reading: Independent Review
Jonathan Reynolds Excerpts(5 years, 4 months ago)
Westminster HallRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Westminster Hall is an alternative Chamber for MPs to hold debates, named after the adjoining Westminster Hall.
Each debate is chaired by an MP from the Panel of Chairs, rather than the Speaker or Deputy Speaker. A Government Minister will give the final speech, and no votes may be called on the debate topic.
This information is provided by Parallel Parliament and does not comprise part of the offical record
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
Thank you, Sir Christopher, for calling me to respond to this debate for the Opposition.
I also thank the hon. Member for Thirsk and Malton (Kevin Hollinrake) for securing the debate and for his work in chairing the all-party parliamentary group on fair business banking and finance, as well as for all the APPG’s continued efforts on this matter; its commitment to securing justice for victims of banking fraud is commendable and important.
The hon. Gentleman, along with some other Members—especially my hon. Friend the Member for East Lothian (Martin Whitfield) and the hon. Member for Strangford (Jim Shannon)—outlined clearly the challenges that people face in making sure that the victims of this scandal receive the redress they deserve through the current compensation scheme.
The actions of HBOS Reading and the then head of the impaired assets division and its corrupt partners were absolutely disgusting. I have read the accounts several times, but each time I reread the testimonies of the victims in advance of a debate such as this one it gives me a sense of rage. I find the injustices and the cynical destruction of other people’s lives unconscionable.
At a minimum, we must offer proper redress to those affected. It should not have been down to those victims to force action to be taken, but unfortunately that is not what we have heard today. Instead, we have heard about the difficulty in appealing against compensation decisions; about the lack of clarity and transparency over decisions; about documents that underpin judgments being hidden from victims; and about a fundamental lack of accountability and independence. Lloyds must explain how it plans to address those ongoing and legitimate concerns. I would like that response to be sent to the hon. Member for Thirsk and Malton and for Members present today to be copied in.
The number of contributions today, as well as their depth and detail, shows how pertinent and urgent the matter continues to be. It is important that it does not fall off the agenda, given the political situation, but I do not think it will, looking at the Members present today. We all have a responsibility to keep up the pressure to ensure that victims’ voices are heard. We are talking about much more than financial losses. Victims lost entire livelihoods, their health and, in some cases, their relationships on the basis of what happened to them.
Ten years on from the financial crisis, it is widely agreed that too many people were able to walk away from the serious damage they caused without any form of personal censure. It is clearly a good thing that the perpetrators of the fraud were brought to justice, and Thames Valley police deserves quite a lot of credit for that, as do Paul and Nikki Turner. Without securing a fair outcome for the victims, however, we have no hope of properly rebuilding trust between businesses and their banks in the long term.
Research shows that frighteningly low numbers of small businesses trust their banks to do the right thing by them, and we have to look at how we can improve that trust. We need to restore confidence that there is a level playing field for businesses when they find themselves in conflict with their banks, especially if those working at the bank have committed fraud, as was true in this case. All that makes it even more important that we agree a comprehensive package to properly address the legacy banking scandals that this country faces.
We can rebuild trust in business banking. We need a full public inquiry into all the scandals. We need an independent tribunal system for SMEs. Lastly, we need a much better and more robust system to protect and enable whistleblowing. I will briefly reiterate the case for each of those.
The first step has to be securing proper redress for SMEs that have been mistreated by their banks. Scandals such as this and RBS GRG, which we have all been present to debate in the past, have seriously dented confidence in our banking sector. That is why we have always called for a full public inquiry so that victims can get proper redress. Many colleagues in this room have argued for the same. It is not just about getting to the bottom of who was responsible for such scandals; it is about examining the wider systemic issues that allowed these events to take place. I was struck by the right hon. Member for Wantage (Mr Vaizey) making the point that he raised these issues 10 years ago. It is simply too important for us to sweep them under the carpet without securing the ability to say to people, “This will never happen again.”
In terms of disputes, part of the problem is definitely that the gap is too big between the Financial Ombudsman Service for individuals and the full legal process for very big firms. We have all seen the recent report from Simon Walker, alongside the response from UK Finance, arguing that an expanded Financial Ombudsman Service would be sufficient to meet that need. As the Opposition, we believe that, given the severity of the damage done in such cases, we need to go further.
We support the proposals from the all-party group on fair business banking and finance to establish an independent tribunal to help create that level playing field between businesses and their banks. That is also supported by the Treasury Committee, as outlined in its report on SME finance published on 26 October. We share the Committee’s ultimate conclusion that an independent financial services tribunal is needed to handle more complex disputes, complementing the expansion of the ombudsman’s remit. In our experience so far with voluntary redress schemes, they have been beset by issues. We would not be here today if such schemes were sufficient to meet the need. Ultimately, I do not believe we can convince our constituents that the industry is in a position to self-regulate. That is why an independent tribunal system is necessary.
Lastly, a potential answer could lie in exploring our approach to whistleblowing in financial services in this country. We have to look at why the fraud took so long to uncover and how we can improve internal systems and processes to stop such things ever happening again. The hon. Member for Thirsk and Malton raised a specific example of how a whistleblower was treated in this case. In the US, the Dodd-Frank Act, introduced as a central piece of post-financial crisis legislation in 2010, is a demonstration of how much more robust the whistleblower protection framework could be. Whistleblowers are entitled to awards if their information leads to enforcement action. It is structured in such a way as to disincentivise false reports and to provide protection in the event of dismissal. The UK legislation, on the other hand, is much thinner. While the Financial Conduct Authority can assist whistleblowers under the Public Interest Disclosure Act 1998, that has not been enshrined in financial regulation in the way Dodd-Frank has been used in the US. There is a case for examining whether specific financial services whistleblower protection could be a starting point in seriously improving conduct in banking from the inside out.
In conclusion, if we are to restore trust in UK business banking, two outcomes must be achieved. First, we must ensure that the victims of the HBOS scandal get proper redress for the damage done to their businesses and livelihoods as a result of the appalling conduct by individuals who worked in the bank. The same is obviously true for victims of the RBS GRG scandal. The second responsibility we all share is to ensure that such a flagrant abuse of the bank and business relationship can never happen again on such a scale. The combination of a full, comprehensive public inquiry with a broad enough scope to capture the full breadth of victims, the establishment of an independent financial services tribunal and a radical rethink of how we treat whistleblowers could begin that process. The victims of this scandal were badly let down. I want to be able to stand here and say that they will all get justice and that this can never happen again.
Draft Markets in Financial Instruments (Amendment) (EU Exit) Regulations 2018
Jonathan Reynolds Excerpts(5 years, 4 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
Good afternoon, Mr Sharma. As ever, it is a pleasure to see you in the Chair.
Once again, the Minister and I are in Committee to discuss Treasury-related statutory instruments that make provision for the financial regulatory framework after Brexit in the event that we crash out without a deal. On each of those occasions, my Labour Front-Bench colleagues and I have spelled out our objections to the use of secondary legislation in this manner, as well as the challenges of ensuring proper scrutiny of the sheer volume of legislation passing through Committee.
The frustration that we will spend time and resources creating a framework that might never be used is a point that has already been made several times in Committee. All of us hope that the draft regulations will never have to be used; no deal would be so seriously detrimental to the UK that it is hard to believe that it is anything more than a threat from the Government to try to force their deal through. However, we must recognise that the instruments passing through the Committee might well not disappear on 29 March 2019. Given the chaotic events of the past few weeks, we simply cannot treat lightly the possibility of no deal.
What we are doing today could therefore end up in real and substantive changes to the statute book, so the measures need proper, in-depth scrutiny. If the Government end up without a deal, we have to bear in the mind the stress that the financial markets would be under. We believe that the draft regulations must be considered through that lens, because they would certainly have to be robust.
Members of the Committee might be aware that this draft statutory instrument was originally scheduled for discussion on 28 November, but that was postponed. That is because the Opposition requested that a full debate take place on the Floor of the House regarding this transposition. As has been mentioned previously in these Committees, we must agree to about 70 Treasury-related SIs to ensure that markets do not grind to a halt in the event of no deal. The secondary legislation process contains, as a democratic backstop—if I dare use the word—the option for a debate on the Floor of the House. In the case of this instrument, we believe that to be essential. I will explain why.
I very much appreciate the efforts that the Minister personally and the civil service have made to brief us on the process, and the information that they have provided to us. Earlier today, in the Treasury, we had a most helpful meeting with the civil service staff working on this, as well with representatives of the Financial Conduct Authority. I understand that they are working extremely hard to draft this legislation in a tight timeframe, and I appreciate them taking the time to engage with us, but my conversation in the Treasury reinforced the enormous magnitude of the issues with which we are dealing in this Committee. We simply must have this debate on the Floor of the House, where Members may contribute and the issues can be discussed in the depth they deserve.
The draft SI is different in size and scope from those that have preceded it. The markets in financial instruments directive, or MiFID, as it is more commonly known, is a sprawling piece of legislation that affects our financial markets, from investment banks to retail investors. Now in its second iteration, named MiFID II, the directive has transformed pre and post-trade efficiency in the UK. It has progressed us towards more transparent markets, enshrined critical investor protection, and taken a tough line on inducements.
For anyone not so familiar with the recent changes, there was significant debate about what constitutes an inducement from a financial adviser to encourage an investor to buy a product or service. That resulted in sweeping changes to historical market practices, such as the bundling of free investor research by sell-side operators into execution relationships. We cannot allow any room for the UK to dial back on those measures, or any other measure that helps to improves the transparency and fairness of financial markets in the UK.
The volume of potential legislative changes from transposing MiFID has necessitated the production of a Keeling schedule, which Her Majesty’s Treasury has stated it will not draw up for any other SI. If the Government are going to the expense and trouble of producing such a schedule, it should form part of a proper process of democratic review that goes beyond the Committee Room. The shadow Leader of the House, my hon. Friend the Member for Walsall South (Valerie Vaz), made that point during business questions last Thursday.
I wonder whether anyone in the room has come across a Keeling schedule before. We have some exceptionally distinguished Members here, but I would not be surprised if the answer were in single figures, because they are not used very often. A Keeling schedule is effectively a track changes on original legislation. It is necessitated by the significant scope of the alterations to the legislation. The last one needed was for the general data protection regulation. I think we can all attest to the sprawling reach of that item, given the effect on our inboxes. Just 18 Keeling schedules have been deposited in the Library since 2002. The Treasury has told us that it will not draw up such a schedule for any other SI, so how can the Government argue that an item demands a Keeling schedule but does not require a debate on the Floor of the House?
The Treasury’s impact assessment of the SI lists the familiarisation cost of it at £9.6 million. That far exceeds the next closest figure, which is for the capital requirements regulations, at £1.7 million. By comparison, the average equivalent cost for the remaining eight SIs for which the Treasury has conducted assessments is significantly lower at just £266,000. The Minister has reassured us on multiple occasions that policy decisions are not being made in the fabric of these instruments, but we must examine closely the implication of what we would be enabling.
The EU approach to drafting regulations, known as the Lamfalussy process, is being imported into UK law. The Treasury will enact the European Commission’s powers, and the FCA will take on the responsibilities of the European Securities and Markets Authority. That has wide-ranging implications for supervision. For example, it has been decided that the European Commission’s function of assessing equivalence would be transferred to the Treasury rather than the FCA, yet historically, equivalence decisions have been made by both parties in different circumstances. That should be properly examined and debated, rather than arbitrarily assigned.
In a letter to my colleague the noble Lord Tunnicliffe after the instrument was debated in the other place last month, Lord Bates explained that the intention is to continue the MiFID pre and post-trade transparency regime in the UK. To achieve that, the FCA will have the power to suspend the obligations for pre and post-trade transparency for a specified non-equity financial instrument or a class of non-equity financial instruments during a transitional period of up to four years beginning from exit day. That sounds to the Opposition like a very slippery slope.
Although the intention is that the balance of powers will be examined in future, we cannot be expected effectively to sign a blank cheque on the UK’s regulatory regime for four years. We understand, as the Minister explained, that the reason behind it is that the FCA will not be ready to operate the required framework of specified thresholds for transparency on day one. However, my hon. Friend the Member for Oxford East (Anneliese Dodds) raised that issue very early on in the process. It is frustrating that we are receiving clarity on it only now.
Equally, it is challenging for the Opposition to assess the transfer of powers to the FCA without an accompanying policy statement. We are told that the policy statement will be made available before exit day, but it is difficult for us comprehensively to assess the implications of the SI without that information. That is before we have even touched on the FCA’s resources to cope with the new regime, a point raised by my hon. Friend the Member for Oldham East and Saddleworth and my right hon. Friend the Member for Tottenham.
There are other issues bound up in the SI that we believe need further debate. Paragraph 7.15 of the explanatory memorandum states that EU trading venues will be denied
“the right to request access to a UK central counterparty (CCP)”
under the temporary permissions regime
“unless an equivalence decision is made by HM Treasury”
for that market segment. A lot of assumptions are bound up in that. It means that the European Commission’s function of assessing equivalence will be transferred to the Treasury, rather than the FCA. Is the Treasury set up to do that? Historically, the FCA has made decisions about equivalent jurisdictions.
Just two weeks ago, in this same Committee Room, the Minister and my hon. Friend the Member for West Ham (Lyn Brown) debated the draft Central Securities Depositories (Amendment) (EU Exit) Regulations 2018, through which the Bank of England was given powers on equivalence decisions. What governs the decision-making process for restoring those powers to different institutions? A small addendum is included on the future of UCITS—undertakings for the collective investment of transferable securities—funds, which is a significant product segment across the EU with inflows of tens of billions of dollars every month. I know from stakeholders that it suffers particular issues related to temporary permissions regime applications.
For more than a decade, MiFID has acted as the cornerstone of how financial markets operate in the UK. Today, we are proposing hauling that entire operation back into the purview of our own regulators and the Treasury if we end up leaving the EU without a deal. More than any other instrument in this process, this one cannot be subject to a top-level discussion by a small group of Members in Committee. The Government helpfully cleared an easy 90 minutes of time to debate this instrument last week when they pulled the debate on the Brexit agreement. That was our window to discuss things further.
There was ample time for this debate to take place on the Floor of the House this week, too; that would have allowed Members to contribute to the analysis. Any reasonable Government in any other reasonable circumstances would have agreed to that request, but this Government cannot afford to allow any EU-related business on to the Floor of the House of Commons, because they are not sure of their majority, but Governments who do not have a majority in the House of Commons are not Governments at all.
As stated at the outset, a no-deal scenario would be so disastrous for the UK that it is difficult to see it as much more than a negotiating tool, by means of which the Government will try to force Parliament’s hand. We do not want markets to be unprepared, but there must be proper scrutiny on what we decide, with objections recorded and recognised.
The Opposition believe that this instrument must be debated properly on the Floor of the House. That is why we intend to divide the Committee. I urge fellow Members who support real scrutiny and the sovereignty of Parliament to join us in voting against it.
Draft Capital Requirements (Amendment) (EU Exit) Regulations 2018
Draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018
Jonathan Reynolds Excerpts(5 years, 4 months ago)
General CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
It really is a pleasure, Ms Buck, to serve under your chairmanship. Once again, the Minister and I find ourselves in this room, as we work through the list of dozens of Treasury statutory instruments that are needed as we prepare for EU withdrawal. It is nice to see that there is a crowd this morning—there must be something else going on today, perhaps later on.
On each of these occasions, I and my Front-Bench colleagues have spelled out our objections to secondary legislation being used in this manner, as well as the challenges of ensuring that there is proper scrutiny, given the sheer volume of legislation passing through these Committees. All of this legislation is speculative, as it prepares us for a UK no-deal exit. It feels surreal to stand here discussing the finer points of financial regulation when the overall process is in total chaos.
It is near inconceivable that we are now so close to exit with no agreement in place and no vote scheduled on any such agreement. That places even greater importance on the work we are doing here, as with every passing day that this chaotic situation is not resolved, we inch closer to crashing out of the EU without a deal. That is a frightening prospect, particularly for financial services and especially for those parts of financial services that cannot operate within an equivalence framework.
Therefore, it is of the utmost importance that the statutory instruments are rigorous in their approach to ensuring the EU financial regulatory framework. The two instruments up for discussion today are of central importance to the stability of our financial system. Both the capital requirements and the recovery and resolution regime were designed to prevent the events of 2008 ever being repeated, given the catastrophic economic consequences. They required considerable co-operation across Europe, supported by wider efforts to comply with new rigorous international standards. Dismantling any element of that regime would be very ill advised, and we do not want to find ourselves in a position where Governments ever have to bail out the banks again.
With that in mind, I will begin by addressing the draft capital requirements instrument. I want to flag a major concern at how this provision is being transposed into UK law, and the potential disadvantage for UK banks. Colleagues will know that the EU capital requirements regulation mandates banks and financial institutions to maintain levels of sufficient quality capital, so that they are more resilient in market downturns or distress and, therefore, less likely to collapse. Different metrics are used to assess the quality of capital, and institutions are required to hold assets in certain ratios to comply with the regulation. It appears that this statutory instrument will remove preferential treatment for EU government debt for UK banks and, therefore, put UK banks holding EU government debt as a capital buffer at a disadvantage, as the Minister confirmed in his opening remarks.
EU member states’ government debt is considered very safe by the EU and banks do not need to hold much to meet regulatory requirements. If there is no agreement on equivalence for financial assets, the capital requirements statutory instrument says that UK government debt will no longer be considered so safe by the EU itself and, therefore, the UK Government will respond by removing preferential treatment for EU debt.
The guidance states:
“Once the UK has left the EU, in the absence of an agreement and where no equivalence determination has been made, the EU27 would automatically fall into the category of a third country where EU27 exposures would no longer receive preferential capital treatment. Therefore, this SI will remove preferential treatment for EU27 exposures.”
On the face of it, that will leave UK banks that hold EU government debt suddenly at a higher risk from a pricing perspective. It will become more expensive for them to hedge their risks in a no-deal environment, where markets are likely to be extremely volatile anyway. Trade publication GlobalCapital expresses that simply as a
“hit to UK bank capital ratios at the worst time imaginable”.
Where does that leave UK banks with significant EU operations, which are likely to hold this type of debt in large quantities? The Minister has repeatedly assured us that no substantive changes are being made from a policy perspective in the transposition of the rules through statutory instruments, but it seems this risks having a real and negative impact through a decision to change the treatment of EU government debt. Will the Minister please explain how the decision was reached and how it could be remedied to prevent increasing costs for UK banks and the requirement to re-hedge their positions?
The second instrument relates to a framework closely associated with the capital requirements: the recovery and resolution regime. That relates to so-called living wills for financial institutions if they fall into credit-related difficulties. That is another mission-critical strand of post-crisis regulation that continues to evolve.
The Bank of England has announced its plan to bring in a self-assessment regime for UK banks from 2020, which will require them to demonstrate their own winding down and restructuring plans for times of distress, without causing market contagion or requiring a taxpayer bail-out.
The guidance to the bank recovery and resolution statutory instrument states that:
“HM Treasury’s approach to onshoring the Bank Recovery and Resolution Directive is to ensure that the UK’s Special Resolution Regime is legally and practically workable on a standalone basis once the UK has left the EU.”
The challenge is how we can ensure that the recovery and resolution regime continues to be effective while potentially operating in isolation. Realistically, most of the biggest firms in this country are cross-border, so close co-operation will be needed with our EU counterparts to ensure that the risk of contagion is minimised and our approach is consistent. The statutory instrument is very light on detail in that regard. Will the Minister elaborate on the Treasury’s role in ensuring that this approach is followed? Is there an existing interaction with a third country or with third-country firms that the Treasury is using as a guide?
The banking framework in the UK has evolved significantly since 2007 to the benefit of both the taxpayer and market stability. Much of that has been achieved through close international co-operation with the EU and G20. We need to make sure that any future framework enshrines that hard work, especially as banks and financial institutions are likely to be highly stressed by market conditions if we crash out without a deal. Sadly, given the chaotic back and forth of the Government this week, the reality is that the prospect of no deal is becoming likelier by the day.
John Glen
I thank the hon. Members for Stalybridge and Hyde and for Glasgow Central for their questions, and acknowledge concerns about the rigour of the process. All I can say to the Committee is that I am doing everything I can to ensure that it is as rigorous as possible.
For both statutory instruments, there was significant engagement with industry and the regulators. The draft Capital Requirements (Amendment) (EU Exit) Regulations 2018 were laid on 21 August, with an explanatory note seeking to draw out concerns. The draft Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 were laid on 8 October for consideration.
The hon. Member for Stalybridge and Hyde accurately characterised the global drivers of the regulations. I want to address the specific concern he raised about the directive on the change in capital requirements consequent on our leaving in a no-deal scenario. He is right to say that the capital requirements regulation specifies how much capital and liquidity firms must hold against different types of exposures. He is right that certain EU assets are subject to a 0% risk weight, meaning that no capital needs to be held against those exposures. However, in a no-deal scenario, the UK will treat the EU as a third country and vice versa.
Without an assessment of equivalence between the EU countries and the UK, the EU would end preferential capital treatment for UK exposures, so it has been Government policy not to grant the EU unilateral preferential treatment in the absence of equivalence, and the SI makes the appropriate amendments to ensure that EU sovereign debt is no longer treated more favourably than other assets of a similar nature.
John Glen
Perhaps I may just make the next point, and see whether it addresses the hon. Gentleman’s concern.
EU sovereign debt will none the less retain the low risk ratings that sovereign debt typically attracts. In addition, we are introducing transitional powers for the regulators to phase in the new requirements. That is up to two years, mitigating much of the impact.
Jonathan Reynolds
I am grateful for that clarification, and for the second point in particular. I understand the political case for not having a unilateral preferential regime that is not reciprocated by the EU. However, when we think about all the market volatility and stress that no deal gives us, to reclassify the capital adequacy of UK resident banks feels quite difficult, even if it is phased in over a period of two years, which is not that significant to be honest.
Mr Richard Bacon (South Norfolk) (Con)
May I say how delighted I am that the Government are taking an approach that allows discretion? That was one enormous problem at the time of the financial crash, which was also a sovereign debt crisis. The hon. Member for Stalybridge and Hyde forgot to mention who was in charge at the time. That crisis was exemplified perhaps most clearly by Gordon Brown standing outside the shiny new Lehman Brothers office when it opened, shortly before the crash. The capital regime was so inadequate at the time under that regime—
Oral Answers to Questions
Jonathan Reynolds Excerpts(5 years, 4 months ago)
Commons ChamberRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Mel Stride
The hon. Lady suggests that the analysis does not model the White Paper deal. It does exactly that, but it does it in terms of the future relationship and the political declaration which, as she will know, is a range of potential outcomes—so that is entirely what the analysis does. As I say, what it shows is that the deal we have negotiated with the European Union is the best deal available for the things that she and I hold dear: growth across our economy, growth in Scotland, jobs in Scotland and even lower unemployment in Scotland. The Scottish National party should now row in behind this deal to make sure that we do the best for the whole of the United Kingdom.
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
Scotland, just like the rest of the UK, has a substantial and successful financial services sector that is heavily dependent on market access to the EU. Will the Financial Secretary confirm that under the terms of the Government’s Brexit deal the financial sector gets no greater degree of market access than the equivalence arrangements that are already on offer to any third country, including for sectors such as insurance where no comprehensive equivalence regimes exist at all?
Mel Stride
I can enlighten the hon. Gentleman, although it is contained in the documentation that has come out of the negotiations. There will be an enhanced equivalence regime in respect of financial services. It is there in black and white. I am very happy to speak to him after questions and take him through the relevant paragraphs.
Finance (No. 3) Bill (Ninth sitting)
Jonathan Reynolds ExcerptsTuesday 11th December 2018
(5 years, 4 months ago)
Public Bill CommitteesRead Full debate Finance Act 2019 View all Finance Act 2019 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 11 December 2018 - (11 Dec 2018)
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I beg to move amendment 151, in clause 84,page 62, line 5, at end insert—
“(11) The Chancellor of the Exchequer must review the effectiveness of the remedy introduced by this section, together with section 85, and lay a report of that review before the House of Commons within one year of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the effectiveness of the new statutory remedy one year after its adoption into law.
The Chair
With this it will be convenient to discuss amendment
Amendment 152, in clause 84, page 62, line 5, at end insert—
“(11) The Chancellor of the Exchequer must review the expected effect of the remedy introduced by this section, together with section 85 on corporation tax receipts and lay a report of that review before the House of Commons within one year of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the impact of the new statutory remedy on corporation tax receipts.
Clause stand part.
Clause 85 stand part.
Jonathan Reynolds
It is lovely to see you in the chair again today, Ms Dorries. I will speak to clause 84 and our amendments which, as you described, also cover clause 85, which is a supplementary clause.
Clause 84 relates to a somewhat historic issue—the payment of advance corporation tax known as ACT. ACT was payable when companies distributed dividends to shareholders before main corporation taxes were due. These payments could then be offset in profit and loss calculations potentially to reduce the overall tax bill. ACT was abolished under Gordon Brown’s tenure as Chancellor in 1999 to prevent its abuse mitigating revenues to the Exchequer, and to encourage reinvestment rather than excessive dividend payments.
However, there are some legacy cases relating to ACT claims. The clauses are the result of a legal judgment from the Supreme Court test case that impacts those claims—that of Prudential Assurance Company Limited and HMRC on 25 July 2018. This case gave rise to a number of judgments in relation to ACT. I will not read it in full—
Jonathan Reynolds
I know. Prudential put the case that it was entitled to compound rather than simple interest on the repayment, given that some of the tax that was levied, it claimed, was in breach of EU law. However, the Supreme Court disagreed with this analysis and subsequently found in favour of HMRC. The amounts at stake are very significant—they were listed as £4 billion to £5 billion according to media reports at the time. Therefore, the Supreme Court decision is clearly welcome when public finances are under such severe pressure.
The test case has helped to clarify outstanding issues relating to ACT. It is important that the Statute book reflects this decision and is fully up to date to remove any uncertainty for taxpayers with historic claims. It is an additional bonus that the Supreme Court decision has not created a further liability for HMRC in repaying compound interest.
However, we must be clear whether this change, while it relates to a legacy tax, will have any impact on current taxation matters. This is especially pertinent when it relates to corporation tax receipts.
Labour has tabled two amendments. We may not necessarily press them to a Division, but they will be useful to our discussions. Amendments 151 and 152 would, respectively, call on the Government to review the effectiveness of this new statutory remedy one year after its adoption into law and review its impact on corporation tax receipts. These reviews would play an important role in judging the overall impact of the judgment. As I have outlined, the liabilities at stake are very significant. It is essential that we have a clear understanding of whether the provision will give rise to any changes in revenue collection. I call on Members to look at the amendments and ensure we have the clarity and transparency needed to scrutinise the measure in full.
Is the Minister aware of any further issues that may relate to historic ACT claims that we should be aware of? Given that the numbers at stake are so large, we seek reassurance that no other potential liabilities could arise for HMRC in relation to legacy challenges.
Mel Stride
I thank the hon. Gentleman for his contribution. On his specific question of whether any other issues related to ACT might give rise to liability to HMRC, I am not immediately aware of any, but I will write to confirm whether that is the case.
The advance corporation tax or ACT system, which was repealed as long ago as 1999, has been found to be unlawful in certain circumstances. Clauses 84 and 85 provide a new legal remedy for claims against HMRC in limited circumstances. A number of cases involving ACT have been argued before the courts over a lengthy period. This litigation continues but it is now clear that some ACT was paid unlawfully.
Earlier this year, the Supreme Court overruled an earlier decision of the House of Lords from 2007. That has created uncertainty as to what remedies might be available where unlawfully paid ACT was repaid or set against corporation tax before claims against HMRC were started. The law requires that in those cases there needs to be a remedy. The courts are able to consider that but, given the uncertainty, it is desirable for Parliament to consider what that should be in order to provide a fair and balanced outcome.
Jonathan Reynolds
I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 84 ordered to stand part of the Bill.
Clause 85 ordered to stand part of the Bill.
Clause 86
Voluntary returns
Jonathan Reynolds
I beg to move amendment 153, in clause 86, page 64, line 45, at end insert—
‘(9) The Chancellor of the Exchequer must review the effectiveness of the changes made to the Taxes Management Act 1970 and the Finance Act 1998 by this section and lay a report of that review before the House of Commons within one year of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the effectiveness of the provision for voluntary tax returns.
The Chair
With this it will be convenient to discuss the following:
Amendment 154, in clause 86, page 64, line 45, at end insert—
‘(9) The Chancellor of the Exchequer must review the revenue effects of the changes made to the Taxes Management Act 1970 and the Finance Act 1998 by this section and lay a report of that review before the House of Commons within six months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the effectiveness of the provision for voluntary tax returns.
Amendment 155, in clause 86, page 64, line 45, at end insert—
‘(9) The Chancellor of the Exchequer must review the resources that Her Majesty’s Revenue and Customs needs to implement the measures in this section relating to tax returns delivered otherwise than in pursuance of a requirement to do so and lay a report of that review before the House of Commons within two months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the HMRC resourcing needed for the provision for voluntary tax returns.
Clause 86 stand part.
I call Anneliese Dodds to move amendment 153—[Interruption.] I am sorry: Jonathan Reynolds.
Jonathan Reynolds
Thank you, Chair. The most exciting clauses have been taken from me. I am very grateful to have been allowed to take this on voluntary returns. On occasion, individuals submit returns to HMRC before a statutory notice requiring the return has been delivered. That applies to many different types of individuals, including those carrying out an income tax self-assessment, and individuals on PAYE who believe they are due a return.
HMRC has historically accepted such returns, given that it would be a considerable drain on resources to reject them and ask taxpayers needlessly to resend them. However, following a ruling by the first-tier tribunal in April 2018, it has been decided that that policy is not supported by law. Therefore, to ensure that the practice can continue, we understand the clause will bring about the legislative change needed so that the position is supported in law. An HMRC appeal is under way because it is possible that this could invalidate historical returns if it is refused by a higher court.
We are talking about significant numbers of returns, as was revealed during the tribunal hearing by HMRC. The Government receive about 350,000 returns of this type each year. Those are in the main from PAYE taxpayers who do not need to complete the self-assessment return but who are seeking a repayment. In its statement accompanying the case, HMRC stated:
“This policy provides a mutually beneficial administrative arrangement for customers and HMRC. The alternative would be that HMRC would have to reject returns submitted voluntarily, issue a formal s8 notice and the customer would have to resubmit the return. This would add unnecessary administrative burdens to both customers and HMRC, causing unnecessary delay in HMRC processing returns, claims and repayments.”
As part of the ambition to put the customer at the heart of what HMRC does, it has introduced a simple assessment for 2016-17 onwards, to enable HMRC to send customers with straightforward tax affairs a simple assessment notice of their liability, without the need for them to resubmit a self-assessment return. It expects that this will significantly reduce the number of voluntary returns it receives each year, and PAYE customers who are not already in self-assessment will not need to complete a self-assessment tax return to get a refund. HMRC also has long-term plans to abolish annual tax returns as part of the Making Tax Digital strategy.
As we are near the end of the Committee, I do not think we need to go through the long history of issues relating to Making Tax Digital, but we have made these points many times before, both in this Committee and in previous Finance Bill Committees. For smaller businesses, Making Tax Digital will add a significant reporting burden by requiring them to switch from one report a year to four. Making Tax Digital will still be being implemented in April 2019, coinciding with our departure from the EU, and putting a significant compliance burden on businesses if there are also VAT changes.
In addition, according to HMRC’s own figures, a shocking 4 million calls to HMRC went unanswered in 2017. As my hon. Friend the Member for Bootle said in the previous Finance Bill Committee, if people call up to pay their taxes, they should be able to get through. Given that the deficit has not yet been eliminated, one would think that the Government would welcome people voluntarily ringing up to pay more tax. Therefore, this change to legislation seems sensible. It would avoid any further costs or administrative pressures on HMRC at an already challenging time for the organisation. I can only imagine the enormous burden it would present if the historical treatment of 350,000 returns was judged to be invalid.
We need more insight into how HMRC resources might be affected to ensure that this measure does not have any unintended consequences. Therefore, Labour has tabled three amendments to give us the information needed to assess this properly. Amendment 153 would require the Government to review the effectiveness of this provision for voluntary tax returns within one year. It seems that the process of submission for voluntary tax returns is working reasonably effectively at present. This review would allow us better to understand whether moving into a more formal framework has any potential negative impacts.
Amendment 154 would allow us to make the same assessment, but with regard to the effects on revenue. If the provision has any impact on tax collection, it is important that it is quickly identified and remedied.
Finally, amendment 155 would require the Government to review the HMRC resourcing needed for the provision of voluntary tax returns by publishing a document to that effect within one year. As I have outlined, HMRC has faced severe cuts at a time when demands are increasing across several fronts—particularly as the UK leaves the European Union. Therefore, it is critical that we understand whether there will be any further draws on HMRC resources over the course of the provision’s implementation. I urge hon. Members to support the amendments and Labour’s efforts to guarantee that we have an HMRC that functions effectively, both for taxpayers and for tax collection.
Mel Stride
Clause 86 makes changes to HMRC’s ability to treat tax returns sent involuntarily like any return on a statutory basis with retrospective and prospective effect. It is necessary because these returns have been accepted and treated in the same way as any other tax return received by HMRC for more than 20 years using its collection and management powers. However, a tax tribunal ruled earlier this year that this policy was not supported by the law.
HMRC receives about 600,000 voluntary tax returns each year. They are voluntary because they are made without any requirement or request from HMRC to do so. People in businesses send them in because they want either to pay tax or to make tax repayment claims. HMRC has always accepted those returns and treated them like any other return. This policy is helpful for taxpayers who send in returns because they are concerned that their affairs are not up to date. If HMRC did not accept voluntary returns when a taxpayer sent in a return, it would have to formally ask them for a return, and they would need to refile it.
Amendments 153 and 154 would require the Government to publish reports about the effectiveness and revenue effects of the clause. Such reports are unnecessary. The purpose of the clause is not to change existing practice but to give it legal certainty. Reporting on its impact is therefore unnecessary, as there will be no change in either practice or revenue. Amendment 155 would require the Government to lay a report into the resources that HMRC needs to implement the clause. The clause will have no impact on HMRC’s resources and will not change HMRC’s practice of accepting returns sent in on a voluntary basis. I therefore commend the clause to the Committee.
Jonathan Reynolds
I wish to press the amendment to a vote.
Question put, That the amendment be made.
Jonathan Reynolds
As the Minister has said, the clause relates to two legislative changes that would alter the way that interest can be charged and paid on tax under section 178 of the Finance Act 1989, as well as setting interest rates for certain purposes, including retrospectively for diverted profits tax, and providing for interest to be charged under section 101 of the Finance Act 2009 on particular penalties for PAYE from 6 May 2014.
The charging of interest is an important source of revenue to the Exchequer. It is a fundamental principle that the same rules apply to all taxpayers and there may therefore be circumstances in which it is appropriate to charge interest on late payments in the same way that HMRC offers interest on tax refunds that exceed a period of one tax year. That charge is an important tool and deterrent for tax avoidance and late payments.
The diverted profits tax in particular, which was introduced in 2015 as the so-called Google tax, is at least a step in the direction of ensuring that large multinational companies pay their fair share. As the Committee has discussed in previous clauses, certain multinational companies, through dint of their presence in multiple jurisdictions and the armies of tax planners at their disposal, have used a variety of tactics to minimise their tax obligations. While we welcome DPT as step in the right direction, the public are clear that more action should be taken.
My hon. Friend the Member for Oxford East spoke in depth about DPT in an earlier sitting of the Committee. She explained that the diverted profits tax focuses on two forms of tax avoidance. The first is where a company with a UK-taxable presence uses arrangements lacking economic substance to artificially divert profits from the UK. The second is where a person carries out activities in the UK for a foreign company that are designed to avoid creating a permanent establishment through which they would be taxable. The Minister promised to lay before the House a report on the impact on revenue made by the mechanics of the application of DPT. When that information is made available, the Opposition will carefully consider it to assess the efficiency of the diverted profits tax. It must be considered in the round, in the light of the incoming digital services tax, which will struggle to be effective if it is not carefully planned around the unique structure of digital companies across multiple jurisdictions.
In relation to PAYE penalties where interest may be chargeable, I ask the Minister to provide further clarity around the changes. While I reiterated previously that there must be a fair and equal application of the rules, interest and penalty charging can cause serious hardship for individuals, especially when applied retrospectively for unintentional and unwitting errors committed by the taxpayer. Can the Minister elaborate on what consultation has taken place with low-income groups on the provision, to give us a sense of whether an impact assessment has been carried out? To which sections do the retrospective aspects of the legislation apply?
In the current situation with the 2019 loan charge, which stretches back over many years having been applied retrospectively, there is ample evidence that it causes serious hardship for individuals who, in some cases, say that they have been induced into such a scheme by a third-party, without full knowledge of its application. We must therefore exercise the utmost caution when applying any retrospective rules that cover individuals. I was pleased to read, however, that the legislation allows for interest charging on promoters of tax avoidance, in line with section 101 of the 2009 Act. We must ensure that we are pursuing promoters with the full force of the law, to tackle the root causes of avoidance and evasion.
The Opposition have therefore tabled a number of new clauses to the Bill. New clause 17 would require the Chancellor to review the viability of equalising HMRC’s late payment interest rate with the repayment interest rate. The new clause attempts to address a clear imbalance and perceived unfairness in the current interest rates set by HMRC. As it stands, if a taxpayer owes HMRC tax and is late in paying it, a charge of 3.25% interest is added. That is in stark contrast to HMRC’s own repayment rate, which, when paying things back, stands at just 0.5%. That double standard is exacerbated by the Government’s recent raising of late payment interest rates for all taxpayers by 0.25%.
The ACCA accountancy body has described that imbalance over late payments as “simply unfair,” and called for a level playing field to ensure that HMRC sets the same late payment rate as it charges. That is certainly something that the Opposition believe that the Government should review because it is ultimately a question of fairness. There should not be one rule for taxpayers and another for HMRC, as that simply breeds dissatisfaction with the tax system and those who enforce it.
Labour Members are committed to a tax system with justice and fairness at its heart, and we recognise the Government’s clear failings on the handling of HMRC’s powers, which were recently recorded extensively by the Lords Economic Affairs Committee. I hope that all sides of the House will consider supporting this review.
The Opposition’s new clause 16 would require the Chancellor to review the interest rate on late payment of penalties for the promoters of tax avoidance schemes. New clause 15 would require the Chancellor to consider raising the interest rate on late payment of penalties to 6.1%. The introduction of penalties for the promoters of tax avoidance schemes is relatively new. However, it is rather depressing to think that the promoters of tax avoidance schemes, who are then issued penalties, will pay less interest on late payments than the interest currently applied to student loans. Surely it says something about the Government’s priorities that they would allow a lesser interest rate on the late payment of penalties by those who advertise and encourage people to use tax avoidance schemes than the 6.1% interest rate that is charged to students in the UK.
New clause 15 would instead force the Chancellor to review the interest charged on late payments of penalties by the promoters of tax avoidance schemes and consider raising them to 6.1%. This would act as a deterrent when it comes to the late payment of penalties and it would also force the Government to consider the absurdly high interest rates that student loans are currently subject to. I call on Members to support the Opposition’s amendments on these issues today, to ensure that HMRC can operate fairly and effectively. I would also be grateful to hear some clarity and reassurance from the Minister about the retrospective elements of this legislation.
Mel Stride
There is no need for consultation on this measure because, as the hon. Gentleman will know, it was just putting beyond doubt what has been established practice over a very long period. He raised the issue of retrospection. The measure is retrospective, inasmuch as it is putting beyond doubt the fact that these rates were appropriate in the past. We are just bringing the long-standing practice out of any sense of uncertainty.
The hon. Gentleman suggested that the loan charge was retrospective. It is not, because the arrangements entered into under the loan charge scenario were always defective. They never worked at the time when they were entered into, and therefore the tax was due in the past. It is being collected in the present.
Jonathan Reynolds
I rise to make my final speech to the Committee on clause 88. [Hon. Members: “Shame!”] I know; it is a shame. The fun must end, but there will always be another Finance Bill.
The clause is enticingly named “Regulatory capital securities and hybrid capital instruments”. As the Minister just told us, it will introduce new tax rules for loan relationships that are hybrid capital instruments. According to the Bill’s explanatory notes, it will also revoke regulations dealing with the taxation of regulatory capital. The clause and schedule refer to the issuance of instruments by companies and financial institutions that contain debt and equity-like features, which, in investment terms, are more commonly known as convertible bonds.
Convertible bonds are having something of a renaissance, as some investors argue that they are well suited to current market conditions, especially the potential rise in interest rates. Practically, a convertible bond pays a fixed coupon, like a debt, but gives the holder the right to exchange the instrument for equity on redemption. In uncertain times for the markets, the appeal is clear: the investor is exposed to a fixed income-type risk in terms of downside, while being able to participate in an equity-like upside. That risk profile has been especially popular in recent years. Subsequently, 2018 has been the year of the highest convertible bond issuance since 2007.
If issuance is on the rise, it is important that investors understand what they are buying and the precise risk profile of how the instruments will perform in different market conditions. It is also important that any tax mismatches are corrected, so the Exchequer is not missing out. That brings us to the substance of the clause.
Hybrid instruments present a taxation challenge, precisely because they change in nature throughout their duration. The distribution of profits would not attract the same tax treatment as interest payments. For financial institutions, that problem was solved by legislation that related to capital requirements—the Taxation of Regulatory Capital Securities Regulations 2013.
Given that the issuance of different hybrid securities was required by a more recent exercise in assessment of loss-absorbing liabilities by the Bank of England in June 2018, the change forms part of a comprehensive review across sectors to remove tax uncertainty. That is timely, given the rising popularity in other sectors of issuing convertible debt, which I referred to earlier. It is important that the Exchequer does not miss out on any revenue as a result of uncertainty. I understand that the Taxation of Regulatory Capital Securities Regulations will be revoked for that reason and replaced by a new taxation policy for hybrid capital instruments, which will be applied across all sectors.
My first question for the Minister is how confident he feels that HMRC and financial taxpayers will have time to comply with the new rules. What consultation has taken place, and what guidance will be made available to those for whom the regulations are changing? The Bank of England’s changes, which demand the issuance of new instruments, will take effect from January 2019. The timeline feels extremely tight from a compliance perspective, if the tax rules are changing only now to accommodate the modification.
We are discussing a comprehensive and detailed set of changes that will affect huge amounts of capital from financial institutions. The technical note published by HMRC on 29 October goes into some depth about the changes, but the Opposition believe that further insight must be given on what feedback and concerns were raised by those who will be affected by the measure. We therefore tabled amendment 156, which would require the Government to make a statement on what consultation there has been on schedule 19.
Amendment 158 goes further by obliging the Government to publish a review of the revenue effects of the measure. According to statistics from Scope Ratings, the European issuance of hybrid bonds from non-financial corporates alone reached more than €10 billion in the first four months of 2018. Together with issuance from financial institutions, we are talking about an enormous source of revenue. We need to understand whether the reforms have been effective.
In connection with that, I ask the Minister to clarify how the stamp duty rules will apply to the measure. The technical note explains that
“The hybrid capital instruments rules provide an exception from all stamp duties on the transfer of these instruments.”
However, it goes on to stipulate conditions under which it might apply. Objectively, it seems that where the instrument is converted to equity, it should be subject to stamp duty, like ordinary shares, but the technical note seems to apply a number of contingencies. I would be grateful if the Minister clarified that one way or the other. I call on hon. Members to support the amendments and ensure that we have transparency on a potentially crucial issue of revenue for the Exchequer.
Mel Stride
I thank the hon. Gentleman for his contribution. He raised the issue of whether those affected by the measures in the clause will have time to adjust and take on board the new regime. I can assure him that we are confident that is the case, albeit, for the reasons I gave in my opening remarks, we were not able to have a full consultation on these measures given the timing as between consideration of the Finance Bill and the decisions taken by the Bank of England.
Specifically on that point, the Bank held a public consultation on the MREL rules, but the outcome was not published until June 2018. The rules apply from 1 January 2019 and any changes to our tax laws are necessary before then. The Finance Bill timetable means it is not possible to put that out for public consultation on the clause. We consulted on those measures with a number of those who will be affected, so we did what we could in the time available.
As to the hon. Gentleman’s question regarding stamp duty exemptions, those will continue to be in force as under the current regime.
Question put and agreed to.
Clause 88 accordingly ordered to stand part of the Bill.
Schedule 19
Taxation of hybrid capital instruments
Amendment proposed: 156, page 315, line 15, schedule 19, at end insert —
“Part 4
Statement on consultation
“22 The Chancellor of the Exchequer must lay before the House of Commons a statement on the consultation undertaken on the provisions of this Schedule no later than two months after the passing of this Act.”—(Jonathan Reynolds.)
This amendment would require the Chancellor of the Exchequer to make a statement on the consultation undertaken on the measures introduced by Schedule 19.
Question put, That the amendment be made.
Finance (No. 3) Bill (Eighth sitting)
Jonathan Reynolds Excerpts(5 years, 5 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I beg to move amendment 122, in clause 65, page 46, line 6, at end insert—
“(7) The Chancellor of the Exchequer must review the revenue effects of the changes made in this section and lay a report of that review before the House of Commons within six months of the passing of this Act.”
This amendment would require the Chancellor of the Exchequer to review the revenue effects of the changes made by Clause 65.
Jonathan Reynolds
It is lovely to be able to give my hon. Friend the Member for Norwich South some well earned respite before he leaves the Committee briefly.
Opposition amendment 122 would require the Chancellor to publish a review of the impact on inheritance tax revenue of clause 65’s changes to the residence nil-rate band, six months after they are adopted. As we have stated in debates on previous clauses, the lack of an amendment of the law resolution has significantly hindered our ability to properly amend such clauses, beyond requesting a general review.
The nil-rate band, also known as the inheritance tax threshold, is the amount up to which an estate does not have to pay inheritance tax. Everyone has their own nil-rate band, which is currently £325,000, or £625,000 for a married couple. Any part of the estate up to the nil-rate band threshold is chargeable to inheritance tax at a rate of 0%. Any part of the estate that exceeds the nil-rate band threshold is usually chargeable to inheritance tax on death at 40%. The nil-rate band applies to non-exempt property passing on death, together with any taxable gifts made within seven years of death.
Clause 65 focuses specifically on the residence nil-rate band—an additional nil-rate amount available on top of the nil-rate band when the deceased has left a residence, or the proceeds of the sale of a residence, to his or her direct descendants. In its current form, the residence nil-rate band is particularly complicated when the individual in question has downsized before their death by selling their residence and either buying a less valuable property or going into residential care. Given the crisis in social care and the growing pressure on elderly people to sell large homes and downsize, that is sure to be fairly common. A recent survey by McCarthy and Stone, one of the UK’s leading retirement house builders, found that 48% of pensioners—nearly 6 million people—are considering moving to smaller homes, or would be encouraged to do so if there were a stamp duty exemption. The attraction of downsizing is clearly growing.
The Opposition understand the logic behind the Government’s proposed change, which aims to simplify the residence nil-rate band in cases where homes are downsized. However, we remain concerned about the rate at which the residence nil-rate band is set, particularly since the Government plan to increase it from £125,000 to £150,000 in 2019-20, and to £175,000 in 2020-21. For estates with a net value of more than £2 million, there is a tapered withdrawal of the residence nil-rate band at a rate of £1 for every £2 over the threshold.
Like many colleagues in the Opposition and some on the Government Benches, I have profound concerns about the impact of inherited wealth on social mobility, inequality and social cohesion in the UK, but I think there is a consensus that people should be able to pass properties and family homes—or, if they have sold that home and downsized, the equivalent material value—to their direct descendants. However, we believe that inheritance tax on the whole is simply not fit for purpose. It is not only a universally unpopular tax, but one that fails to raise significant revenue.
According to the Government’s own figures in this year’s Budget Red Book, the Treasury is set to raise just £5.5 billion in inheritance tax receipts—substantially less than it raises from tobacco duties, alcohol duties, environmental levies, vehicle excise duties and even the insurance premium tax. It is therefore no surprise that there is a growing surge of public opinion in favour of reforming inheritance tax and replacing it with something better. The Institute for Public Policy Research’s commission on economic justice, which brought together economists, academics, the business community and members of civil society, recommended scrapping the tax and replacing it with a new gift tax.
The commission’s report identified that the inheritance tax system is easy to avoid and favours the wealthy, healthy and well advised. It concluded that wealth transfers confer an unearned advantage on the recipient, and should be taxed more effectively to promote equality of opportunity. I would go further and say that the principle of taxing income from work more heavily than income from wealth heavily distorts the UK tax system.
Mel Stride
As my hon. Friend pointed out in his remarks on earlier clauses, we have frozen fuel duty for nine successive years—but perhaps we had better get back to the matter in hand, revolutions and fuel not featuring particularly in clause 65.
First, the hon. Member for Stalybridge and Hyde feels that this tax is seen as one of the least fair. It is certainly true that it is one of the least popular taxes; I would accept that. However, it only typically applies to about 4% or 5% of estates, although the public generally assume that it applies much more widely. That, of course, is a consequence of the policies we brought in to extend the thresholds, which we have been discussing. As the hon. Gentleman suggests, it brings in about £5 billion a year and, in terms of its fairness across the range of different wealth levels, I can inform him that 70% of inheritance tax is raised from those with estates valued at over £2 million, so the vast bulk of it comes from those who are significantly wealthy.
The hon. Gentleman quite rightly raises the general question of keeping taxes under review and looking at inheritance tax. He gave various examples of the work of others in that respect and made various suggestions. He will be aware that the Office of Tax Simplification is reviewing inheritance tax, and has already reported on the administration and guidance relating to it, with which there are various issues. In the spring of next year, it will also report on the policy area itself, and we will look with great interest at the report when it comes out. [Interruption.] May I correct something I have just said? Perhaps I am bad at reading handwriting here. The 70% relates to those with an estate of over £1 million, rather than £2 million.
The hon. Gentleman raises perfectly legitimate questions that we should be asking about the reliefs associated with agricultural land and woodlands, and the different approaches that those who can afford advisers and so on may seek to take to lower their inheritance tax. All those things will make for interesting debate and consideration when the OTS reports back in spring.
The Government are introducing these changes to clarify the working of the downsizing rules, and to provide certainty about when a person is treated as inheriting property. The residence nil-rate band reduces the burden of inheritance tax for families by making it easier to pass on the family home to children or grandchildren, and the band is an additional threshold available when a residence is being passed to a direct descendant. As the hon. Gentleman set out, the value in 2018-19 is £125,000. That will rise to £175,000 by 2020-21. Any unused threshold can be transferred to a surviving spouse or civil partner. The unused threshold is also available when a person has downsized to a less valuable property and passes on the proceeds from selling their home, instead of the property itself, to their children or grandchildren.
The Government announced those reforms in 2015 to ensure there would be an inheritance tax threshold of up to £1 million for married couples and civil partners by the end of this Parliament. That was a manifesto commitment, which I am pleased we have delivered, but it is right that we make changes to the legislation where necessary to ensure that the policy works as intended.
The changes made by clause 65 will correct two areas of the residence nil-rate band. First, the downsizing provisions were introduced to ensure that people would not lose access to this additional nil-rate band by, for example, moving house to meet their long-term care needs. However, the wording in the current legislation means that these provisions could apply in an upsizing scenario. That was never the intention and the changes will correct it.
Secondly, we believe that the additional threshold should be available only when the family home passes directly from an individual to their direct descendant on death. The changes will correct an anomaly in the legislation whereby the threshold could be available for a family home passed into a trust, where the direct descendants do not inherit the property. While the changes are important for revenue protection, we expect them to affect very few estates.
There has been one amendment proposed to this clause, which proposes reviewing and laying a report on the revenue effects of the changes. Amendment 122, however, is not necessary. The clause corrects the working of the residence nil-rate band and has no impact on wider inheritance tax policy. Consequently, there will be no revenue effects as a result of the clause. I therefore ask that the amendment be withdrawn and commend the clause to the Committee.
Jonathan Reynolds
I wish to press the amendment to the vote.
Question put, That the amendment be made.
Finance (No. 3) Bill (Seventh sitting)
Jonathan Reynolds ExcerptsThursday 6th December 2018
(5 years, 5 months ago)
Public Bill CommitteesRead Full debate Finance Act 2019 View all Finance Act 2019 Debates Read Hansard Text Read Debate Ministerial Extracts Amendment Paper: Public Bill Committee Amendments as at 6 December 2018 - (6 Dec 2018)
Clive Lewis
I begin by welcoming the long overdue change to the heavy goods vehicle road user levy. As the Minister will no doubt lay out, the clause will differentiate the rates paid by efficiency, rewarding freight operators for using less polluting trucks on the UK’s roads.
Department for Transport statistics show that HGV traffic has grown on average by 2.3% per year since 2008, making it the second fastest growing type of traffic in that period. That has resulted in HGV traffic increasing, on motorways and rural A roads in particular, to an overall 17.1 billion vehicle miles. Inevitably, that has had an enormous impact on greenhouse gas emission and climate change targets, road congestion and traffic levels, road safety, and air quality—the key issues on which our amendments are based.
Amendment 115 would require the Chancellor to review the revenue impact of the clause. We believe that there is an urgent need for a financial assessment of the measure, as the freight sector has been left in the dark about the overall impact of these tax reforms. The Department has failed to publish any conclusions from its call for evidence, which closed in January. We therefore argue that it is the Treasury’s responsibility either to produce the evidence and conclusions or to undertake any new research that is needed.
We believe the analysis should focus on the costs and benefits of remaining on a time-based charging system rather than one based on distance. Will the Minister tell us what comparative analysis has been undertaken to date by Government, and agree either to publish it or to commission the relevant work and publish it in due course?
The analysis should also assess how well the HGV road user levy reflects the costs imposed by road freight on other road users, the road network itself and society at large. Metropolitan Transport Research Unit research, issued in April 2017 and sponsored by the DFT, suggests
“that a very significant amount of the real marginal costs imposed by the largest HGVs is not being met.”
That has led to poor economic efficiency and a misallocation of scarce resources. Will the Minister undertake a review of the real marginal costs imposed by the latest HGVs so that we may assess their relative economic efficiency?
Similarly, when considering the overall revenue effect of differing levels of road user levy for different categories of heavy goods vehicles, we believe it is important to factor in the huge disparity between the costs of wear and tear on road surfaces caused by HGVs and those caused by cars and lighter vehicles. The Campaign for Better Transport estimates that the standard 44-tonne HGV does 100,000 times more damage to road surfaces than a Ford Focus.
Clive Lewis
Yes. An update of the DFT’s mode shift benefit values technical report in 2015 doubled previous estimates of the cost per HGV mile to road infrastructure. Campaign for Better Transport research suggests that HGVs are paying for only 11% of their UK road infrastructure costs, predicting a shortfall of about £6 billion.
Will the Minister tell us whether the Government have made their own such estimate during the development or passage of the Bill, or does our amendment give them the opportunity to assess it for the first time? Will he produce a fresh assessment of the cost shortfall that the new HGV road user levy rates will leave for other road users and taxpayers in general to pick up? In any case, will he give us the Government’s view of whether the total revenue raised will reflect a fair share of the total tax take from road users, as compared with that of those who drive smaller vehicles? In the Chamber, many MPs complain about potholes and funding for them. The statistics give a clue as to where in part the responsibility lies for so many potholes on our roads.
Finance (No. 3) Bill (Sixth sitting)
Jonathan Reynolds Excerpts(5 years, 5 months ago)
Public Bill CommitteesRead Full debate Read Hansard Text Read Debate Ministerial Extracts
Anneliese Dodds
I am willing to withdraw amendment 91, given the Minister’s clarification, and I am grateful for his willingness to write to me about the issue that I raised. I make the general point that it is important that we consider these interactions between the social security system and the taxation system. It is particularly important for people on low incomes that we always bear that in mind. I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
Clause 49 ordered to stand part of the Bill.
Clause 50
Duty of customers to account for tax on supplies
Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)
I beg to move amendment 92, in clause 50, page 33, line 11, at end insert—
“(9B) An order made under subsection (9) for the purposes of subsection (9A) must be accompanied by a statement by the Treasury of the expected impact of that order on—
(a) the number of traders who are expected to benefit from the reduction of a burden, and
(b) the supply chain in respect of the description of goods or services.”.
This amendment would require an order made under the new provision of Clause 50 to be accompanied by an impact statement.
Jonathan Reynolds
We now turn to the part of the Bill that addresses value added tax, which is always a much-anticipated part of a Finance Bill. There is a lot to look forward to. Clause 50 relates to the duty of customers to account for VAT on supplies. It is designed to give the Government the flexibility to mend some items of anti-fraud legislation so that there does not end up being an undue burden on small businesses. It works in conjunction with an order of the Value Added Tax Act 1994, specifically section 55A, which aims to prevent so-called missing trader fraud.
I will provide some context about the ongoing challenges presented by VAT. These appear to fall into two categories, which I believe overlap: fraud, and the complications that administering and reporting VAT poses for businesses. Tackling those challenges is impossible if they are considered to be mutually exclusive. Fraud continues to be a major issue for the Exchequer in collecting the level of VAT that is owed, and VAT fraud costs the UK at least £1 billion a year.
That was discussed at length in last year’s Finance Bill Committee, in October 2017, when the Government introduced a clause to place new obligations on fulfilment houses to help to tackle VAT fraud, which has, understandably, worsened with the rise of online sellers that obtain goods through third-party sellers based abroad. As my hon. Friend the Member for Bootle said at the time:
“Many small businesses find themselves outcompeted and outpriced by overseas traders, which not only have lower operating costs but artificially lower their prices by failing to pay VAT on the goods they sell to UK consumers through fulfilment houses based here.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 117.]
That is something that we will all recognise.
My hon. Friend further highlighted that we will all have received casework from small businesses
“that found themselves severely disadvantaged when filling out their VAT returns when they were unable to obtain VAT receipts from either their overseas supplier or the fulfilment business in question. In one case, the reason for the problem was simple: there were no VAT receipts because the seller had not charged VAT, unbeknownst to that particular British business. The online fulfilment house involved simply washed its hands of the matter and blamed a third-party seller that it supposedly has no control or influence over.”––[Official Report, Finance Public Bill Committee, 24 October 2017; c. 117.]
That flags just one of the multiple VAT issues that small businesses face. The Opposition believe that they need more support in getting to grips with the tax if we are ever to close the VAT gap. The situation has been worsened by the Government’s disaster-stricken attempts to transition to “Making tax digital”, which have thankfully been delayed to next year to give businesses some chance to adapt.
HMRC believes that there is a £3.5 billion VAT gap resulting from mistakes made by businesses when they submit VAT returns. Tax professionals, via the Chartered Institute of Taxation, said in written evidence to the Treasury Committee’s VAT inquiry earlier this year that HMRC must improve its VAT guidance and show a greater willingness to provide rulings where businesses want certainty over VAT treatment. It also echoed the Opposition’s repeated warnings over the diminishing resources and capacity of HMRC, which has been subject to a series of cuts resulting in staff reductions and office closures. That was admirably highlighted by my hon. Friend the Member for Oxford East in her summer tour of HMRC office closures, which was well received across the country. I should say that the cuts were not well received, but the attention that she was able to bring to them was.
The Chartered Institute of Taxation makes six recommendations to help address the VAT gap, which it estimates at a shocking £12.6 billion. I will focus on just one today, which is its request that the Government resist the temptation to
“introduce widespread changes that are disruptive to the majority of compliant businesses”.
That is tied to concerns around the clause, despite what appear to be quite laudable intentions behind it. The clause relates to so-called missing trader fraud. It is a huge problem, and not only in the UK; it is perpetrated across the EU in several different ways. Europol estimates that the cost to the EU is about €60 billion. Fraud is carried out in supply chains, sometimes by organised criminal gangs. They take advantage of the VAT exemption across borders, charge VAT in the UK when the product is sold on and subsequently disappear without relaying it to the Exchequer. As referred to earlier, section 55A of the Value Added Tax Act 1994 helps to prevent that by making the customer, rather than the supplier, responsible for declaring the VAT on certain goods and services, thus taking the benefit of VAT away from the seller.
Mel Stride
I think that issue may be outside the scope of the clause, tempted though I am to be drawn into the issue of childcare and vouchers. The hon. Lady will have noted the delay that we implemented in that respect, to make the transition that little bit easier for some of those who might have been impacted.
The clause transposes new EU law, which we pressed the European Commission to introduce, to help combat tax avoidance. The new law has to be in place by 1 January 2019 and the Provisional Collection of Taxes Act 1968 will give the measure effect until Royal Assent of this Finance Bill.
From a VAT perspective, vouchers are unexpectedly complex. That is because, for one payment, a buyer gets two things: a voucher and an underlying good or service. Without special rules, we risk taxing twice: once for the voucher and a second time for the underlying supply. Gift vouchers could be used to buy products with different VAT rates. It is therefore often difficult to apply VAT at the time the gift voucher is bought. Furthermore, gift vouchers are now often sold at a discount to the face value, via distributors to businesses, which give them away for free in business promotion or staff incentive schemes. It is then not always clear to the shop accepting the voucher exactly what has been paid.
Finally, trading vouchers across borders resulted in problems of double and non-taxation, as different countries have different rules. The changes made by clause 51 and new schedule 16 will standardise these rules. First, the legislation specifies the type of voucher covered. Quite a few things nowadays look similar to vouchers, but are not recognised as vouchers under the VAT system—for example, the type of card many of us store money on to go on holiday or give to our children. We are not talking about vouchers that are totally free from when they are issued to when they are used to buy something, such as discount vouchers found in magazines or toothpaste money-off tokens.
The legislation identifies two distinct types of voucher and sets out specific VAT treatments for each. If we know what the voucher can buy and where, that can be charged at the point of issue and at any subsequent transfer of a voucher through its distribution network. If these details are not known at the time of issue, because it is a general gift voucher, we must wait until it is used to be able to apply the correct VAT. Therefore, the law identifies single-purpose vouchers, such as a traditional CD token that can be used only to buy CDs, which are limited to specific products, and multi-purpose vouchers, such as a WHSmith gift voucher, which can be used to buy many things,.
To avoid charging VAT twice, single-purpose vouchers are subject to VAT throughout distribution, but no VAT is charged on redemption. In contrast, multi-purpose vouchers are VAT-free through distribution, but are subject to VAT at redemption. For the multi-purpose voucher, the redeemer—the shop—must account for VAT. If they know the amount paid for the voucher, they should account for the VAT on that value. If they do not know the amount paid, they should account for VAT on the face value of the voucher.
Because the activities of any distributor of multi-purpose vouchers are disregarded for VAT purposes, there will be certain restrictions on the extent to which they can reclaim VAT incurred on related costs. I hope that the Committee is following this very closely, because it is an extremely important series of elaborations on how these vouchers work. HM Treasury and HMRC have consulted with the relevant businesses represented, and HMRC will be clear in guidance on how the rules will work.
The two new clauses would require two reviews by the Government within three months of the passing of the Act. New clause 8 concerns the impact of the provisions on the circulation and distribution of vouchers in the UK and the EU. New clause 9 concerns potential revenue and other impacts that could arise if UK law were to diverge from EU law.
Collecting VAT when vouchers are used is always complex, and it will inevitably take some time for the new rules to bed in. Throughout the negotiations about the changes in the underlying EU law, the Government were in regular contact with the UK businesses affected by the changes, and it was generally felt that this option was the best of the various options identified. Officials have worked hard with businesses to ensure as smooth a transition as possible, and HMRC has offered to be pragmatic as businesses get to grips with the new system.
I can reassure the Committee that the Government will continue to monitor the effects of the change and other developments in this area, including impacts on revenues. With regard to divergence from EU law, it is far too early to consider such impacts, given that we do not yet know the future agreement with the EU and what it will look like in respect of the VAT system more generally. However, I stress to the Committee that a key advantage of this measure is to ensure a level playing field across the EU, so that UK businesses are not disadvantaged by different rules in other EU member states, which they would need to understand and which could result in double taxation or—in terms of Exchequer impact—no taxation at all. I therefore ask the Committee to reject the new clauses, and I commend the clause and schedule 16.
Jonathan Reynolds
I begin with a word of apology to the hon. Member for Aberdeen North for mixing up my Aberdeen constituencies. I can only say to her that in a former Parliament a former Member for Aberdeen South and I were both shadow Energy Ministers, and that at some level I must be missing him and I cannot bring him back. However, that is no excuse for mixing up the two parts of Aberdeen.
Clause 51 relates to gift vouchers and the transposition of an EU Council directive clarifying the consistency of treatment of vouchers. I thought that this was more interesting than it sounded in the explanatory notes; the Minister has done a very good job on that. As he said, this Christmas, when people are out shopping, not many of our fellow citizens will understand that vouchers pose a challenge to HM Treasury in charging VAT, because when a customer buys a voucher, should we charge the VAT on that, or should we charge it when they spend the voucher?
As the Minister said, the discrepancy is further complicated because there will be some stores that sell gift vouchers that then offer zero-rated VAT items, such as children’s clothes. I understand that there have been mismatches in the way that different member states have approached these questions, and that this situation has potentially led to double taxation or no taxation at all across borders. That is the background to the introduction of the EU vouchers directive agreed in June 2017.
The Minister outlined the new regime of single-purpose vouchers and multi-purpose vouchers; I do not think that anyone wants me to repeat that. However, it makes sense that there is clarity on vouchers, finally, and that the risk of there being either double taxation or intra-EU taxation is avoided.
However, professional bodies have raised a number of issues, which I would appreciate some further detail from the Minister on. It is my understanding that there is still no new guidance available from HMRC on this measure, even though implementation is from 1 January 2019. As I mentioned in relation to the previous clause, VAT is a complex and time-consuming area for businesses, so they need as much advice and notice about it as possible. The timing of this implementation, in January, will also coincide with one of the peak times of the year for voucher redemption—hopefully, all of us will get a voucher for Christmas—and that could create a further burden. Gift vouchers are an important part of revenue for UK businesses.
This is a very challenging time for the high street, so the Opposition are mindful that we do not want to create any additional administrative barriers for smaller shops as they develop their businesses. As the Chartered Institute of Taxation has highlighted, shops will need to be able to identify the date of purchase for vouchers, to assess whether they need to declare VAT, given that the rules will be changing. It is surely important, therefore, that they receive as much support as possible from HMRC through the process and receive as much guidance as they can. Those technical details are a concern, and I would appreciate further context from the Minister on how they might be mitigated.
Clause 51 also raises a wider issue, given that it relates to the transposing of EU laws into the UK and our future compliance with EU VAT regulations. Historically, it has not been possible for the UK to fully diverge from the EU on setting rates for VAT. VAT revenues to the Exchequer are a crucial part of the UK’s tax landscape, and we need to know how crashing out without a deal or abruptly pulling out of the customs union will affect how we set VAT rates in future. That is why Labour has tabled new clauses 8 and 9, in relation to schedule 16, which is associated with this clause. New clause 8 would oblige the Government to
“commission a review of the expected impact of the provisions of Schedule 16 on the circulation and distribution of vouchers in—
(a) the United Kingdom, and
(b) the European Union.”
Vouchers are an important part of business for UK retailers. As we leave the EU, questions should be raised about whether this decision on compliance will still work best for both sides, as it has been drafted on the basis that the UK is a member of the customs union. Given that circumstances will change quite dramatically in future, we must be mindful of how this will impact on ongoing changes.
Subsequently, new clause 9 mandates the Government to produce a review of the potential divergence from EU policy of the VAT treatment of gift vouchers, so that we can properly assess its implications. Supporting our high street in today’s challenging environment is a priority for all of us. I therefore urge Members to vote for our new clauses, to make sure that we create the best possible taxation framework for vouchers and help our retailers to succeed.
Mel Stride
I will be brief, but will hopefully answer the questions that the hon. Member for Stalybridge and Hyde has posed. First, as regards guidance, these measures were consulted on widely with UK businesses and stakeholders, and HMRC has recently shared draft guidance with stakeholders for comment. HMRC’s guidance was published yesterday, so that is now in the public domain. Of course, if the hon. Gentleman has any particular observations on that, I would be happy to take representations from him. The Government have also given businesses advance notice of the changes. A consultation document was published last December, HM Treasury and HMRC have been in constant discussion with businesses, and we published the draft legislation last July on L-day, with an impact assessment last month.
My final point relates to the hon. Gentleman’s comments about future VAT arrangements in the context of our departure from the EU. Of course, at this stage, we do not know exactly what those will look like. However, the Government have made a general statement that we are seeking to have arrangements that are broadly in line, so that we do not have very dramatic changes when we depart from the European Union.
Question put and agreed to.
Clause 51 accordingly ordered to stand part of the Bill.
Schedule 16 agreed to.
Clause 52
Groups: eligibility
Question proposed, That the clause stand part of the Bill.
Jonathan Reynolds
I will speak briefly to clause 52, schedule 7 and our related amendments. As the explanatory notes say, UK VAT grouping already allows for two or more bodies corporate, such as limited companies or limited liability partnerships, to register collectively as a VAT group if they are both established in the UK and under common control. Their VAT return is considered as one and, therefore, supplies between the individual subsidiaries are disregarded for tax purposes.
However, a judgment from the European Court of Justice in September 2015 on a case relating to a shipping company widened this definition beyond bodies corporate. After consultation, this has been extended to a wider definition, including non-corporate entities such as partnerships and individuals that have a business establishment in the UK and control a body corporate.
We are awaiting further guidance from HMRC in relation to non-corporate entities, which we are told by the Government will be published after Royal Assent. Outstanding issues remain that the guidance will urgently need to address. The Chartered Institute of Taxation, which has been helpful in providing briefings on the VAT-related issues in the Bill today, has outlined a number of these questions already. We need to know whether partnerships could have partners that were both UK and non-UK resident, and whether a partnership that had UK business premises with entirely non-resident partners would be eligible. How would the ongoing challenge of the physical presence test be monitored and policed? That is especially pertinent given HMRC’s constrained resources.
Equally, it is important to understand how ongoing eligibility for partnership will be assessed. Questions that need to be answered include whether there should be an annual declaration or tick box on the VAT return to encourage regular self-assessment. Will VAT groupings be cross-referenced with partnership or sole trader tax returns within that group to ensure accuracy? Another issue raised by the Chartered Institute of Taxation is whether partnership and sole trader tax registration details should be used to tag and monitor which partnerships or sole traders were within a VAT group, both for HMRC administration and for taxpayers’ reference when dealing with such entities and checking VAT registrations.
The Government’s 2017 consultation document stated:
“The government recognises that any widening of grouping will come with a revenue cost unless it excludes businesses that make exempt supplies. This is not something that the government is planning to do, so any potential change must be assessed to fully understand the effect on UK revenue.”
I appreciate that the Minister’s comments appeared to contradict that, but that also appears to be contradicted by the wording in the consultation document last year.
The consultation also says:
“Whilst we agree that there may be implications with joint and several liability for certain entities, the government has no immediate plans to make any changes to joint and several liability rules.”
Can the Minister confirm that both statements still apply 12 months later, and that there is no intention to change joint and several liability rules now or widen grouping in a way that impacts on revenue?
Ensuring compliance and that revenue is fully collected must be our priority. It is noted that, in the 2017 consultation, the majority of respondents agreed with HMRC’s view that an entity could be excluded to prevent evasion, avoidance and abusive practices. However, given the large VAT gap in the UK, the Opposition believe we must be vigilant to any potential opportunities that arise that can be exploited with regard to VAT treatment by incentivising individuals or businesses to enter into groups for tax purposes when they might not otherwise have done so. That is why Labour has tabled amendment 93; I encourage Committee members to vote for it. It mandates the Government to commission a review on the impact of provisions made on the number of individuals entering into VAT groups for the purposes of tax planning by the end of the tax year 2019-20. That will help us to identify quickly whether a distorting effect has been created by the legislation.
The second, wider issue in relation to the clause and schedule is how our own changes in VAT legislation will be impacted by our departure from the EU. Amendment 94 would require a review of the potential revenue changes if domestic law were to diverge from EU law in relation to VAT groups. As we outlined when discussing clause 51, we must take stock of the full impact as the Government propose our departure from the customs union. That will have a huge bearing on how we collect VAT, and potentially VAT revenues, if we choose to deploy flexibility in what we do and do not accept. This measure is no exception and for the purposes of scrutiny it is critical that we have a full understanding of its impact on the UK.
Kirsty Blackman
It is not our position that the UK should leave the common VAT area, but we support both Labour amendments, because it is sensible that we have more information about all these provisions, so that the House can take better-informed decisions.
Jonathan Reynolds
I am extremely grateful for the hon. Lady’s intervention and entirely agree with it.
On the access of financial services to the single market once we leave the EU, under the terms of what the Government have negotiated—that single market access will almost certainly be denied unless the equivalence provisions prove adequate, although most people expect them not to be—the Government’s advice to firms in the UK is to set up subsidiaries in the EU. It was reported to me in meetings yesterday in the City that there is concern that when those subsidiaries are created, the connected UK entities will not be able to enter VAT groups in the UK, which would therefore trigger a substantial tax liability in order for firms to comply with the Government’s own advice on market access to the EU. The Minister may not be able to answer that now, but I want to put it on the record.
I call on all Committee members to support both amendments today so that we can get a clear and full picture of the wider impact of the measures on the future VAT policy approach outside the EU and on closing our own VAT gap here in the UK.
Mel Stride
The hon. Gentleman raised a large number of questions, most of them very specific and quite technical, not least around the treatment of UK resident individuals in the context of VAT grouping, as opposed to non-residents in a similar situation, where perhaps a business has—my terminology—a permanent establishment here, but is run by non-residents. He also made various points about the administration of VAT groups. I will write to him about those issues and the other points he raised in that part of his contribution. He asked a specific question about whether we are updating joint and several liability rules for these changes. The answer is that we are not. HMRC will continue to monitor the rules, of course, to ensure that they work effectively for UK businesses.
The final point that the hon. Gentleman raised related to our future relationship with the European Union. His specific question, as I understand it, was about compliance with the financial services arrangements that might be in place once we have left the European Union: if, as a consequence of that, a UK financial services business had a subsidiary or another operation within the EU27 as opposed to here, would that prohibit that particular operation from participating in a VAT group with the UK domicile concern? I have absolutely no idea what the answer to that is, but I did at least understand his question and I am happy to look into it and get back to him.
Question put and agreed to.
Clause 52 accordingly ordered to stand part of the Bill.
Schedule 17
VAT groups: eligibility
Amendment proposed: 93, page 305, line 28, at end insert—
Part 3
Review
16 (1) The Chancellor of the Exchequer shall commission a review on the impact of the provisions in this Schedule on the number of individuals and businesses entering into VAT groups.
(2) A report of the review under sub-paragraph (1) must be laid before the House of Commons before 1 April 2020”. —(Jonathan Reynolds.)
This amendment requires a review of the impact of this measure on the number of individuals and businesses entering into VAT groupings for the purpose of tax planning, and for that review to report by the end of the tax year 2019-20.