Finance (No. 2) Bill (Second sitting)

Lucy Rigby Excerpts

Tuesday 27th January 2026 Public Bill Committees

[The Chair]

With this it will be convenient to discuss the following:

New clause 28—Implementation of section 35 (Restriction of relief on disposals to employee-ownership trusts—

“(1) HM Revenue and Customs must, as part of the implementation of the provisions of section 35, make an assessment of the potential benefits of establishing a digital application process for taxpayers seeking to pay capital gains tax by instalments under section 280 of TCGA 1992 in respect of disposals to employee ownership trusts.

(2) The assessment made under subsection (1) must consider potential guidance on eligibility criteria and processing timescales.”

This new clause would require HMRC to assess the potential benefits of establishing a digital application process for taxpayers to pay capital gains tax by instalments in respect of disposal to employee ownership trusts as part of the implementation of section 35.

New clause 29—Report on the impact of section 35—

“The Chancellor of the Exchequer must, within 12 months of this section coming into force, lay before the House of Commons a report assessing the impact of the changes made under section 35 on small and medium-sized enterprises, including—

(a) the number of EOT transactions completed compared to the previous three-year average,

(b) any administrative costs and burdens reported by businesses and tax advisers,

(c) the incidence and value of dry tax charges arising, and

(d) recommendations for any modifications to the instalment payment regime under Section 280 of TCGA 1992.”

This new clause would require the Chancellor of the Exchequer to lay a report before the House of Commons on the impact of section 35 on small and medium-sized enterprises.

[The Economic Secretary to the Treasury (Lucy Rigby)]

Turning to the non-Government amendments, new clause 28 asks His Majesty’s Revenue and Customs to assess the potential benefits of establishing a digital application process for taxpayers seeking to pay capital gains tax by instalments following disposals to employee ownership trusts. The facility to pay CGT in instalments is a long-standing feature of the tax code and is well understood by both taxpayers and HMRC. The process for applying to pay by instalments is clearly set out within HMRC guidance and applications are dealt with swiftly once they have been received by HMRC. My officials have met representatives from the employee ownership sector to provide bespoke guidance on how these instalment payment provisions apply to disposals to EOTs. That engagement continues. I therefore ask the hon. Member for Maidenhead to withdraw new clause 28. In any event, it should be rejected.

New clause 29 asks the Chancellor to lay a report before the House within the next 12 months assessing the impact on small and medium-sized enterprises of the changes made under clause 35. The Government monitor the impact of all changes made to existing tax reliefs. However, publishing a report on the change introduced by clause 35 within the next 12 months would not be reasonable as the first full tax year of these changes is the tax year 2026-27, so HMRC will not have complete information to assess their impact. New clause 29 should therefore be rejected.

In addition to rejecting new clauses 28 and 29, I commend clause 35 to the Committee.

[Mark Garnier (Wyre Forest) (Con)]

Clause 35 introduces a 50% chargeable gain on shares sold by a company to an EOT. That will have a direct effect on trustees’ ability to benefit company employees. The 2014 Conservative Government introduced 100% capital gains tax relief to incentivise companies to transition to EOT models. EOTs have benefited employees by rewarding and motivating them—for example, by distributing annual tax-free bonuses of up to £3,600 a year to each employee. These tax changes would hurt employees most of all.

The Office for Budget Responsibility’s “Economic and fiscal outlook” from November 2025 forecasted that this will raise just £900 million a year on average from 2027 to 2028. However, the OBR also gave this measure a “very high” uncertainty ranking. The OBR highlighted the fact that these tax changes could have a behavioural effect: company owners would instead hold on to their shares for longer before realising gains. That means that company owners will slow the flow of shares they sell to trustees, so trustees will receive far fewer shares and, as a result, less value will be passed on to employees.

It is worth mentioning the commentary from other organisations. The Financial Times reported that tax advisers have warned against this measure and are concerned that entrepreneurs would have to cover the tax bill before they receive the proceeds of the sale. Chris Etherington of RSM UK is concerned that these changes will slow the pace of change to EOTs. The Centre for the Analysis of Taxation stated that this was a “good reform” and supports withdrawing relief entirely. This is not very popular, and there is a high uncertainty of it even raising any revenue.

[Mr Joshua Reynolds (Maidenhead) (LD)]

New clause 28 in my name would require HMRC to assess the potential benefits of establishing a digital application process for taxpayers to pay capital gains tax by instalments in respect of disposal to employee ownership trusts. The digital application process would make it far easier for taxpayers to apply to pay capital gains tax by instalments, reducing delays and administrative burden. The Government aim to make tax digital—this digital application process would be a small way to help to get there. It would help to ensure that the new relief works in practice, not just in theory, smoothing the implementation process and ensuring that taxpayers know where they stand. The digital process could help improve speed, accuracy and the consistent handling of instalment applications. Including this requirement in the Bill would promote modernisation and better taxpayer services and would signal that HMRC should consider practical delivery as well as policy. I hope the Minister will support it.

New clause 29, also tabled in my name, would require the Chancellor to lay a report before the House on the impact of clause 35 on small and medium-sized enterprises. It is fairly simple. It would explain whether clause 35 is achieving the policy goal by tracking the number of employee-ownership trust transactions compared to previous years. Not until we are in the process will we actually know what the impact will be. By tracking the numbers, we can see whether the policy the Government are undertaking has been a success. I hope the Minister will support it.

[Lucy Rigby]

To the comments from the shadow Minister, the hon. Member for Wyre Forest, it is important to bear in mind that on the changes we are making to EOTs, even post these changes, the relief that will be on offer remains more generous than for many other options and deeds, such as business asset disposal relief. Of course, the fiscal climate is relevant to the changes we are making. He referred to the point at which the last Government introduced this relief, but as I said, the cost of the relief as a whole is projected to rise to £2 billion by 2029-30 without the action that we are taking. As I said, the fiscal climate is extremely relevant when looking at £2 billion of relief.

Importantly, the Employee Ownership Association has stated that the changes we are making are not such as to alter the fundamental strength and purpose of the employee ownership trust model, while also recognising that the previous level of relief, or the level of relief as it stands, was hard to sustain when set against the rapidly escalating fiscal cost. On the comments made by the Liberal Democrat spokesman, the hon. Member for Maidenhead, I set out the reasons why we reject new clauses 28 and 29. I maintain the position of rejecting those and maintaining clause 35 as it stands.

Question put and agreed to.

Clause 35 accordingly ordered to stand part of the Bill.

Clause 36

Anti-avoidance: collective investment scheme reconstructions

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss clauses 37 and 38 stand part.

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[Lucy Rigby]

Clauses 36 to 38 make changes to the CGT anti-avoidance provisions that apply to company share exchanges and reconstructions, or the reconstruction rules, as they are known. Clause 36 revises the collective investment scheme reconstruction anti-avoidance rule to align with modern provisions with a similar purpose. Clause 37 revises the share exchanges and company reconstruction anti-avoidance rule to align with modern provisions with a similar purpose, too. Clause 38 does exactly the same. The changes made by these clauses, which take effect from Budget day, modernise the anti-avoidance rule so that it focuses directly on arrangements where the purpose, or one of the purposes, is the avoidance of tax.

The amendments introduced by the clauses will allow HMRC to address situations where arrangements have been added to otherwise commercial transactions that reduce or eliminate, rather than just defer, a tax charge, allowing them to be more effectively challenged. The rule has been updated so that it affects only the shareholders who benefit directly from the avoidance. Where HMRC agrees that there is no avoidance and the reorganisation is carried out within 60 days of the Budget announcement or if HMRC’s decision is later, the current legislation will apply. For those reasons I commend clauses 36 to 38 to the Committee.

[Mark Garnier]

On clause 36, we support tougher measures to tackle tax avoidance and close the tax gap. Under the previous Government, the tax gap of the total theoretical tax liabilities fell from 7.5% in 2005-06 to 5.3% in 2023-24. But it is crucial that legislation is not so broad to the extent that people entering into arrangements for legitimate commercial reasons face the brunt of HMRC’s enforcement powers. The scale of genuine tax avoidance as a proportion of the total tax gap is important to note.

According to HMRC, in 2023-24, avoidance behaviour as a share of the tax gap was just 1%. It was also 1% in the 2022-23 tax year and was 2% in 2021-22, 2020-21 and in 2019-20. Avoidance ranked lowest among the behaviours that contributed to the tax gap. Contrast that with 31% due to failure to take reasonable care, 15% due to error and 12% due to legal interpretation. What those behaviours have in common is they involve genuine mistakes being made, so pursuing the route set out in clauses 36 and 37 risks hurting those who enter arrangements for solely commercial purposes who may have simply made honest mistakes.

With regard to clause 37, we support tougher measures to tackle tax avoidance to close the tax gap. The methods of deferring tax for general company reconstructions and share exchanges are identical to each other’s and to that for collective investment schemes. The key difference between clauses 36 and 37 is the business practice to which the anti-avoidance measures apply when arrangements are made to avoid tax liability. Clause 36 applies to CISs, and clause 37 applies to share exchanges and company reconstructions, so the argument pertaining to the general principle and practicality of the Government’s new anti-avoidance measures also applies to those clauses.

With regard to clause 38, we support tougher measures to tackle tax avoidance to close the tax gap. The clause seeks to change the no gain/no loss rules if HMRC suspects that a transfer of business has taken place to secure a tax advantage. Those rules have been instrumental in the process of transferring a business. They are especially useful for arrangements between complex structures. No gain/no loss rules can ensure fluidity throughout the transfer process, and they stave off cash-flow issues during the process itself.

While we support tackling tax avoidance, we must also recognise the role that no gain/no loss rules play during delicate business practice. We understand that there are already safeguards in place from HMRC, such as the general anti-abuse rule. Nevertheless, we must also ensure that no business that utilises no gain/no loss for legitimate commercial purposes is penalised or hung out to dry through denied relief claims.

[Lucy Rigby]

I welcome the support that was expressed, on the whole, by the shadow Economic Secretary to the Treasury. I suspect that that support is born from a recognition that we really do need to make the changes. Recent court decisions have shown that the rules as they stand, which date back to the ’70s, do not work as intended, especially when the avoidance carried out is a smaller part of a larger commercial reconstruction.

The main effect of the rules will be to discourage the minority—and it is very much a minority—who would otherwise seek to avoid tax. It is about protecting our tax base from abuse for the benefit of the majority of taxpayers who apply the rules correctly. For those reasons, I truly believe that the clauses strengthen the protection against avoidance and will catch tax avoiders.

Question put and agreed to.

Clause 36 accordingly ordered to stand part of the Bill.

Clauses 37 and 38 ordered to stand part of the Bill.

Clause 39

Incorporation relief: requirement to claim

Question proposed, That the clause stand part of the Bill.

[Lucy Rigby]

Clause 39 makes a change to incorporation relief for CGT, requiring taxpayers to make a claim for relief and, as a result, improving the data available to HMRC to undertake analysis and compliance activity. Specifically, the change will mean that taxpayers need to make a claim for incorporation relief on their self-assessment return. That will apply to transfers of a business on or after 6 April 2026, and it will allow HMRC to monitor the relief and tackle avoidance more effectively, protecting revenue and helping to close the tax gap, with an additional £225 million expected to be collected over the scorecard period.

[Mark Garnier]

Clause 39 requires taxpayers to claim incorporation relief or pay CGT up front. It is key that sole traders and other eligible people understand the changes the clause makes. What concerns us is whether enough awareness has been made to affected people, and that is crucial as claiming incorporation relief has always been a passive process because it happens automatically. Soon, people who have been accustomed to this passiveness must acutely manage their relief claims. We do not want anybody who has been conducting legitimate business to suddenly be hit with an unexpected tax bill. Landlords, for example, are a common entity who claim incorporation relief. They do so by transferring their rental property portfolio into a limited company. Should a landlord undertake that process and then find themselves receiving an unexpected tax bill, that could add significant pressure on their investments, which in this case involve houses occupied by tenants.

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[Mr Reynolds]

This is a small administrative change but a significant one. I share concerns about awareness on this topic and how the public will know that this has changed. For individuals who have been doing this for a significant period of time, the change will be quite significant for them. I would like to know how the Government will communicate that change to the public—what advice will be put forward, and how people will be made aware of it—rather than them being expected to know that the Government have made changes. I am pretty sure the public have not read all the pages of the Bill and understood them precisely—even though I know we all have. We would all like to how the public will be made aware of this.

[Lucy Rigby]

While it is important to be clear about the fact that the additional data is being collected, the details required from taxpayers are brief, and that goes to the question of the additional burden or, indeed, lack thereof. They are brief details of the type of business, the tax calculations for the assets disposed of, and the value of the shares received for the business. The information HMRC requests will be used in analysis and compliance activity, which will tackle abuse of this relief for the benefit of the majority of taxpayers who apply the rules correctly.

The point on awareness was fairly raised. I can confirm that new guidance will be provided alongside the self-assessment return.

Question put and agreed to.

Clause 39 accordingly ordered to stand part of the Bill.

Clause 40

Non-residents: cell companies

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to consider clause 41 stand part.

[Lucy Rigby]

Clauses 40 and 41 make various changes to the capital gains rules that apply to disposals of UK land and property by non-UK resident persons.

Turning first to clause 40, the changes that are being made have been in effect since Budget day and ensure that, for the purposes of the non-resident capital gains legislation, each cell in a cell company is looked at individually for the purposes of the property richness rules. That will prevent the use and ongoing exploitation of such entities to avoid the non-resident capital gains rules and will protect the tax base.

Clause 41 makes changes to the rules for non-resident capital gains in respect of double taxation treaties and the requirement to claim double taxation relief, and it also clarifies some unclear terminology. The effect of the changes made by clause 41 is that investors are not required to make or deliver a return in order to claim relief in respect of a particular disposal. In fact, the clause reduces administrative burdens by clarifying when non-resident companies and individuals have to notify HMRC of a disposal. I therefore commend these clauses to the Committee.

[Mark Garnier]

Clause 40 tackles the use by UK non-residents of protected cell companies to avoid paying non-resident capital gains tax. We agree that corporate structures should not be exploited to shelter people from paying their fair share of tax. However, we must consider the practicalities of how an audit of one cell may affect other cells and the PCC itself.

PCCs have their benefits. For example, the ringfencing of assets and liabilities can ensure that any issue with one cell does not spread to others. In that sense, PCCs can be more robust and durable. Audits, of course, are absolutely necessary to ensure compliance and legality. However, they can also prove costly and stressful for a company owner who is simultaneously running a business. Cells do not have full autonomy; much of that resides in the core of the PCC.

Different cells may behave differently from each other or have differing risk appetites—therein lies the risk. A situation where one cell is investigated by HMRC, and the audit process proves frustrating because that cell’s conduct is aggressive or inappropriate, risks tarnishing the entire PCC in the assumption that the other cells behave similarly. Subsequent audits could then become more aggressive and difficult. As I said, we support measures that tackle any exploitation of the corporate structure to avoid paying tax. The Government must ensure that the implementation of clause 40 protects innocent parties that may be affected.

Clause 41 focuses on non-UK residents, individuals and companies in collective investment vehicles who sell UK land or property connected to CIVs under double taxation treaties. Under the clause, non-UK residents in CIVs will no longer be required to register for corporation tax or claim capital gains tax relief if the double taxation treaties fully cover the gains they have made. The Government’s rationale for that is to streamline paperwork and reduce redundant filing—hurrah! I cannot begin to explain my happiness about trying to reduce red tape. It is fantastic to get rid of it where we can. Our tax code is 22,000 pages long and has 10 million words. Anything that makes that easier is hugely welcome.

[Lucy Rigby]

I welcome the “hurrah” from the shadow Minister. On his latter point about double taxation treaties, as he will know, many of the agreements were negotiated before the introduction of the non-resident capital gains regime. As treaties come up for renegotiation, as they do, or as we negotiate new treaties, we will seek to include a provision in the capital gains article to allow the UK to exercise our domestic taxing provisions in full.

On the shadow Minister’s point about cell companies and the extent to which they are used to avoid tax, there is anecdotal evidence that such structures have been created to help individuals avoid paying tax on gains made through the disposal of UK land and property, and the changes to the rules seek to cure that.

Question put and agreed to.

Clause 40 accordingly ordered to stand part of the Bill.

Clause 41 ordered to stand part of the Bill.

Clause 42

Abolition of notional tax credit on distributions received by non-UK residents

Question proposed, That the clause stand part of the Bill.

[Lucy Rigby]

Clause 42 abolishes the notional tax credit available to non-UK residents on UK company dividends. That credit no longer serves a purpose, under the modern dividend taxation system, and the change brings non-UK residents in line with UK residents, who do not receive the notional tax credit. It will impact fewer than 1,000 non-UK resident individuals who have UK dividend income and other UK income, such as property or partnership income, a year. The clause removes the outdated notional tax credit for non-UK residents receiving UK dividends, aligning their position with that of UK residents. I commend the clause to the Committee.

[James Wild (North West Norfolk) (Con)]

As the Minister says, clause 42 abolishes the notional tax credit that non-residents have historically been able to claim on their UK dividend income. Under the current system, non-domiciled individuals can offset that notional credit against other UK income streams, such as rented income or partnership profits. However, from April, that arrangement will no longer apply. Non-residents will no longer be treated as having already paid UK tax on dividends received from UK companies, meaning that they will lose the ability to reduce their overall UK tax liability from using the credit.

It is worth noting that UK residents lost access to the notional dividend tax credit back in April 2016, so in one sense the clause simply removes what is perceived as a potential unfair advantage enjoyed by non-UK residents. The disregarded income regime will continue to operate, providing some limitation on the tax paid by non-residents in specific circumstances.

We need to look at the clause, and the ones coming up, in the broader context. It represents a shift in how UK tax dividends flow to foreign investors and, in practice, it will effectively increase the tax rate burden on dividend recipients who are non-UK residents. At a time when the UK needs to attract international capital, we need to look at the measures in the Budget as a whole and whether they strengthen or undermine our competitive position. Attracting capital to be invested was a topic that we discussed this morning. International investors might be forgiven for concluding that the Chancellor is creating a tax and regulatory environment that feels increasingly unpredictable compared with some of our international competitors. Stability and certainty matter enormously in investment decisions. [Interruption.]

The Chartered Institute of Taxation has also raised concerns about the figures underlying this policy. The Treasury estimates in the famous tax information and impact note, which was referred to by the Minister, that fewer than 1,000 resident individuals will be affected. The institute has questioned whether that can be accurate, given what its professional members are seeing on the ground. There is particular uncertainty about whether non-resident trust taxpayers have been properly included within those calculations. I welcome a response and assurance from the Minister either way on that. That said, even the institute agrees that those impacted will represent a small minority of the overall non-resident taxpayer population. We concur that this charge brings a welcome simplification to tax calculations.

[Lucy Rigby]

Again, I welcome the shadow Minister’s support for these measures. However, he is absolutely wrong to suggest that these measures and the broader package will discourage foreign investment in UK companies. He will have heard the titter of laughter when he talked about the importance of stability—that not being something that was provided by his party at all when it was in government. The removal of the notional tax credit will not discourage foreign investment in UK companies, as it will not impact the overwhelming majority of overseas investors who remain outside the scope of UK tax.

In order to be affected by the measure, overseas investors will also need to have other taxable UK income, typically rental income or partnership income. If they do not have that, their dividends will not be taxable in the UK while they remain overseas. The shadow Minister is right to refer to my earlier figure that fewer than 1,000 non-resident individuals have taxable UK income in addition to their UK dividends, and that remains the figure that we are working with.

Question put and agreed to.

Clause 42 accordingly ordered to stand part of the Bill.

Clause 43

Non-resident, and previously non-domiciled individuals

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss the following:

Amendment 2, in schedule 3, page 268, line 14, at end insert—

“Part 1A

Amendment of transfer of assets abroad provisions

7A In section 737 of ITA 2007 (exemption: all relevant post-4 December 2005 transactions), after subsection (4) insert—

‘(4A) In relation to income falling within subsection (4B) which arises to a person abroad on or after 6 April 2025, in determining whether Condition A or Condition B is satisfied, no regard is to be had to any purpose of avoiding liability to taxation for which the relevant transactions or any of them were effected if and to the extent the relevant transfer and any associated operation were effected before 6 April 2025 in a qualifying tax year.

(4B) This subsection applies to income which would be relevant foreign income if it were the individual’s or in relation to earlier tax years was income with a non-UK source in respect of which a non-UK domiciled individual would have been taxable only on a remittance basis (assuming any required claim and other steps had been made) if it had been the individual’s.

(4C) For the purposes of subsection (4A) a qualifying tax year is one for which the individual was not resident in the UK or (for tax years earlier than 2013/14) not ordinarily resident in the UK or, if resident or, as the case may be, ordinarily resident in the UK for that year, the individual was entitled to be taxed on the remittance basis for that year.’”

This amendment modifies the "motive defence" in section 737 of ITA 2007. It ensures that when determining if a transaction had a tax avoidance purpose, no regard is given to avoidance motives for transactions effected before 6 April 2025 if the individual was non-resident or entitled to the remittance basis at that time.

Amendment 33, in schedule 3, page 268, line 19, at end insert—

“TRF available to non-residents

8A Omit sub-paragraph 1(7).”

This amendment provides that the Temporary Repatriation Facility is also available to non-residents.

Amendment 34, in schedule 3, page 268, line 19, at end insert—

“Removal of requirement that individual must have been subject to the remittance basis for a past year

8A Omit sub-paragraph 1(5).”

This amendment would enable offshore trust beneficiaries who have not themselves used the remittance basis to use the TRF.

Amendment 35, in schedule 3, page 268, line 19, at end insert—

“Trustee designation

8A After paragraph 1 insert—

‘Trust cleansing facility charge

1A (1) The Trustees of a settlement may in the tax year 2025/26 or 2026/27 make a claim in relation to any or all of the following (“trust income or gains”)—

(a) a section 1(3) amount of the settlement for any tax year before 2025/26,

(b) an OIG amount of the settlement for any tax year before 2025/26,

(c) a section 1(3) amount in a schedule 4C pool of the settlement for any tax year before 2025/26,

(d) protected foreign source income or transitional trust income of the settlement for the purposes of section 643A of ITTOIA 2005,

(e) any relevant foreign income of the settlement for any tax year before 2025/26 that would, if remitted, be treated under section 648(3) of ITTOIA 2005 as arising only if and when remitted, and

(f) foreign relevant income of the settlement for the purposes of chapter 2 of part 13 of ITA 2007 (transfer of assets abroad) for any tax year before 2025/26.

(2) On the making of such a claim the Trustees shall be subject to the TRF charge and paragraph 1(8) shall apply to the Trustees as it applies to an individual.

(3) The amount of trust income or gains of the settlement for the category or categories in respect of which a claim is made shall be reduced accordingly.’”

This amendment enables trustees to pay a TRF charge on the trust’s past FIG while retaining the funds within the trust.

Amendment 30, in schedule 3, page 271, line 26, leave out from “amount” to end and insert—

“is the lower of—

(a) the value of the amount when it first arose to the individual, or

(b) its value on 6 April 2025.”

This amendment provides that where an investment derived from foreign income has fallen in value, the temporary repatriation facility (TRF) charge is paid on the reduced value of the investment at the point the TRF opened.

Amendment 1, in schedule 3, page 275, line 20, at end insert—

“Disregard of payments or transfers connected with designated qualifying overseas capital

15A After paragraph 13B (as inserted by paragraph 15 of this Schedule) insert—

‘Disregard of payments or transfers made in connection with the remittance of designated qualifying overseas capital

13C (1) This paragraph applies where an amount is remitted to the United Kingdom in a qualifying year in respect of the deemed income of an individual and—

(a) the income is treated as income of the individual under section 721 or 728 of ITA 2007 by reference to income arising to a person abroad in the tax year 2024-25 or an earlier tax year,

(b) the deemed income falls within section 721(1)(a) or section 728(1)(a) and is qualifying overseas capital by virtue of paragraph 2, and

(c) the qualifying overseas capital is designated by the individual.

(2) Subject to sub-paragraph (3), no payment or transfer of assets made in a qualifying year for the purpose of, or in connection with, the remittance of that designated qualifying overseas capital to the individual (whether by the person abroad, or any company or settlement), to the extent that the amount or value of such payments or transfers in that qualifying year does not exceed the aggregate amount of remittances within sub-paragraph (1) for that year, is capable of—

(a) being or giving rise to income which is treated as income of the individual under section 721 or 728 of ITA 2007 or any provision of Chapter 5 of Part 5 of ITTOIA 2005;

(b) satisfying the capital sum conditions in section 729 of ITA 2007;

(c) being or giving rise to income which is taken into account for the purpose of increasing the total relevant income under section 733 of ITA 2007 in relation to that individual or any other individual; or

(d) being or giving rise to income arising under a settlement for the purposes of section 648(1) of ITTOIA 2005.

(3) When making a designation as qualifying overseas capital in relation to deemed income within sub-paragraph (1) for a qualifying year, the individual must specify the amount, the nature and the parties to the payments or transfers of assets within sub-paragraph (2) which have been or will be made during the qualifying year for the purpose of, or in connection with, the remittance of such deemed income.

(4) Where a sequence of two or more payments or transfers is made in a qualifying year for the purpose of, or in connection with, the remittance of the same amount of deemed income in that qualifying year, then for the purpose of determining whether the amount or value of such payments or transfers exceeds the amount of the remittance of such deemed income, that sequence is to be treated as a single payment or transfer with an amount or value equal to the payment or transfer within the sequence with the highest amount or value.

(5) In this paragraph “qualifying year” means any of the tax years 2025-26, 2026-27 or 2027-28.

Disregard of payments or transfers made in connection with the provision of certain benefits

13D (1) This paragraph applies where—

(a) an amount of deemed income is qualifying overseas capital in relation to an individual by virtue of paragraph 6(1)(c), and

(b) the individual designates that income as qualifying overseas capital.

(2) Subject to sub-paragraph (3), no payment or transfer of assets made in a qualifying year for the purpose of, or in connection with, the provision of any benefit to the individual which gave rise to the deemed income within paragraph 6(1)(c) (whether by the person abroad, or any company or settlement), to the extent that the amount or value of such payments or transfers in that qualifying year does not exceed the aggregate amount or value of the benefits provided in that qualifying year, is capable of—

(a) being or giving rise to income which is treated as income of the individual under section 721 or 728 of ITA 2007 or any provision of Chapter 5 of Part 5 of ITTOIA 2005;

(b) satisfying the capital sum conditions in section 729 of ITA 2007;

(c) being or giving rise to income which is taken into account for the purpose of increasing the total relevant income under section 733 of ITA 2007 in relation to that individual or any other individual; or

(d) being or giving rise to income arising under a settlement for the purposes of section 648(1) of ITTOIA 2005.

(3) When making a designation as qualifying overseas capital in relation to deemed income within sub-paragraph (1) for a qualifying year, the individual must specify the amount, the nature and the parties to the payments or transfers of assets within sub-paragraph (2) which have been or will be made during the qualifying year for the purpose of, or in connection with, the provision of the benefits within sub-paragraph (2).

(4) Where a sequence of two or more payments or transfers is made in a qualifying year for the purpose of, or in connection with, the provision of the same amount or value of benefits falling within sub-paragraph (2) in that qualifying year, then for the purpose of determining whether the amount or value of such payments or transfers exceeds the amount or value of such benefits, that sequence is to be treated as a single payment or transfer with an amount or value equal to the payment or transfer within the sequence with the highest amount or value.

(5) In this paragraph “qualifying year” means any of the tax years 2025-26, 2026-27 or 2027-28.’”

This amendment prevents “double counting” and knock-on tax charges when designated qualifying overseas capital is remitted (or where related benefits are provided) during the Temporary Repatriation Facility years, by disregarding connected payments/transfers up to the value of the remittances or benefits in that year.

Amendment 31, in schedule 3, page 275, line 38, leave out “paragraphs 9 to 16” and insert—

“paragraphs 9 to 12 and 14 to 16”.

Amendment 32, in schedule 3, page 276, line 3, at end insert—

“(3) The amendments made by paragraph 13 of this Schedule have effect where the matched capital payment referred to in sub-paragraph 8(2C)(b) Finance Act 2025 (as inserted by paragraph 13 of this Schedule) is made on or after 26 November 2025.”

These amendments provide that a double tax charge created by paragraph 13 of Schedule 3 shall not apply retrospectively.

Schedule 3.

Clause 44 stand part.

[Lucy Rigby]

Clause 43 makes amendments to the residence-based tax regime that was introduced in the Finance Act 2025. These changes reflect feedback from the Government’s continued engagement with stakeholders to make sure that the regime works as well as possible. Clause 43 and schedule 3 consist of three parts. Part 1 of the schedule makes minor corrections to the foreign income and gains regime and to legislation connected with the ending of the remittance basis. Part 2 of the schedule makes technical amendments to the legislation for the temporary repatriation facility. Part 3 of the schedule amends the temporary non-residence rules by removing the concept of post-departure trade profits from legislation.

Clause 44 makes minor amendments to the residence-based tax regime, as introduced in the Finance Act 2025, to ensure that tax-free or exempt income is taken into account correctly under the settlements and transfer of assets abroad matching rules. The clause ensures that the internationally competitive residence-based tax regime operates as intended in relation to foreign income and gains from non-resident trusts and similar structures.

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[Blake Stephenson (Mid Bedfordshire) (Con)]

I will speak to amendments 1 and 2 in the name of my hon. Friend the Member for Windsor. The Government and those of us supporting the amendments are trying to achieve the same outcome. The aim of the amendments is simple: to enable the Government to achieve their goal of raising billions in tax revenues from former non-doms—money that is needed to pay for public services, as the hon. Member for Burnley said earlier.

The Government set out the policy intention to replace non-dom status with a UK residency tax to raise more tax from those with the greatest capacity to pay, while simplifying the system. They introduced the temporary repatriation facility—or, given that we like three-letter acronyms, the TRF—as the central part of that strategy. It is designed to encourage people to remain in the UK, to come to the UK and invest in the UK, and to bring historically offshore capital into the UK tax net. The TRF offers a reduced rate of taxation of 12% on all non-UK assets brought into the country as an incentive to do just that. We all want the same thing: we want the TRF to work, because if it does not, the money does not come here and the Exchequer and the public lose.

The Government are relying on the reforms to raise very substantial sums—about £34 billion overall. The concern I express is not ideological or about the tax rate; it is about legal certainty and deliverability. The problem is that a number of the wealthiest people have left the country, and many more are doing so as we debate these amendments. Why? Odd as it may seem, it is not because they are unwilling to pay more tax; it is because of the legal uncertainty in the Bill as drafted.

Using the TRF as set out in the Bill exposes people to serious legal uncertainty. First, they are subject to double taxation through double counting of the same economic value. Secondly, they are vulnerable to retrospective taxation. Thirdly, they face allegations of tax avoidance simply for using a scheme that Parliament itself has created. Fourthly, they expose themselves and their families to potentially decade-long investigations into arrangements that were entirely lawful at the time they were entered into. That is why they are watching this Bill proceed with their bags packed, waiting to see if it will fix the problems.

The advisers of such people are warning them to leave, but I know that the Government’s intention is not to drive them away. We need their taxes, fairly paid, to fund the renewal of our public services. That is why amendments 1 and 2 were tabled, in a constructive spirit of co-operation, as my hon. Friend the shadow Minister mentioned. Amendment 1 would stop double counting; and amendment 2 would ensure that retrospective and unfair action does not continue. Had amendment 49, which goes further, been selected for debate, I would have spoken to it as well, but I will resist doing so because it has not been selected.

Amendments 1 and 2 would provide the needed certainty and make the TRF usable in practice, not just in theory. I hope that the Minister can give me some assurance that the Government recognise some of the technical problems highlighted by the amendments and intend to resolve them. I noted earlier that the Minister rejected amendments 1 and 2, giving a brief reason why, but given the representations, certainly by the Opposition, a more detailed response as to why the amendments have been rejected by the Government would be worthwhile.

Much careful work has gone into the construction of amendments 1 and 2. Again in the spirit of co-operation, I am sure that Conservative Members would be happy to provide input to the Minister and officials as they consider how best to address the issues. With that, I commend the amendments to the Committee.

[Lucy Rigby]

A criticism of complexity has been made. The aim of these reforms is, of course, simplicity. I think it is recognised across the House that in matters of taxation, simplicity is better. We are ensuring that the legislation works as it is intended to do. The shadow Minister, the hon. Member for North West Norfolk, referred to the Chartered Institute of Taxation. It is important to note this quote from the institute:

“Moving from domicile to residence as the basis for taxing people who are internationally mobile makes sense.”

As well as being a major simplification, it is a fairer and more transparent basis for determining UK tax. Residence is determined by criteria far more objective and certain than the subjective concept of domicile. Replacing the outdated remittance basis is sensible, and the temporary repatriation facility offers a helpful transition.

Another criticism is retrospection. In this instance, the Government feel that a retrospective change is a proportionate response to protect revenue, which, as the hon. Member for Mid Bedfordshire said, is essential for public services. This change will prevent taxpayers from benefiting from unintended windfalls and promotes consistency in the application of rules, bringing the capital gains position into line with the income tax provision. In most cases, trusts will not yet have made capital distributions, meaning that beneficiaries and trustees will have advance notice and can plan their affairs.

A further topic that that came up is the reporting of every element of FIG. I have a note on that somewhere, so I will come back to it. I will deal first with the suggestion that restrictions on the TRF are arbitrary. The position of someone who is temporarily abroad arose. The TRF is designed to encourage people to be UK-resident and bring funds into the UK economy. Allowing non-residents to use the TRF would let individuals benefit from the reduced charge without living here or contributing to the UK economy, which would reduce the incentive to become or remain UK-resident.

As I said, I reject amendment 1 because there are already measures in place that prevent double counting. I have dealt with amendment 2. I want to deal with the reporting of every element of FIG, which I have a note on, as I said. [Interruption.] That is the wrong note. I will have to come back to that.

[Sean Woodcock (Banbury) (Lab)]

We have heard from Opposition Members that there are families watching this Finance Bill Committee with their bags packed in case their amendment does not pass. Does the Minister share my scepticism that people who hung around through a botched Brexit, Liz Truss and 11% inflation will leave the country on the basis of whether an amendment passes or not?

[Lucy Rigby]

I am grateful to my hon. Friend for his intervention. I think it is right to say that the reporting of every element of FIG will not be necessary. I am afraid I shall have to confirm in writing exactly why that is the case.

Question put and agreed to.

Clause 43 accordingly ordered to stand part of the Bill.

Schedule 3

Non-resident, and previously non-domiciled individuals

Amendment proposed: 30, in schedule 3, page 271, line 26, leave out from “amount” to end and insert

“is the lower of—

(a) the value of the amount when it first arose to the individual, or

(b) its value on 6 April 2025.”—(James Wild.)

This amendment provides that where an investment derived from foreign income has fallen in value, the temporary repatriation facility (TRF) charge is paid on the reduced value of the investment at the point the TRF opened.

Question put, That the amendment be made.

--- Later in debate ---

[The Chair]

With this it will be convenient to discuss schedule 4.

[Lucy Rigby]

Clause 45 and schedule 4 will make changes to the pay-as-you-earn notification process that enables employers to give provisional in-year tax relief to globally mobile employees, including those eligible to claim overseas workday relief.

The majority of changes made by the clause and schedule are minor, technical changes that will help the legislation relating to the PAYE notification process to operate as originally intended, but a few are more substantial. For example, treaty non-resident employees—that is to say, UK residents who are covered by a double taxation agreement between the UK and another country—have been permitted to benefit from provisional in-year tax relief by concession, so they are now being added to the legislation to formalise that treatment. We will also specify that if the employer’s best estimate of qualifying employment income for an employee eligible for overseas workday relief is more than 30%, it must be limited to 30%. That should ensure that in most cases the provisional overseas workday relief received in-year does not exceed the relief that the employee can claim when they file their tax return.

These changes will place the treatment of treaty non-residents on a statutory basis, prevent excessive in-year provisional overseas workday relief and ensure that the PAYE legislation operates as intended. I commend clause 45 and schedule 4 to the Committee.

[James Wild]

Clause 45 will extend the PAYE notification process to include treaty non-residents and introduce the 30% cap, to which the Minister referred, on overseas workday relief that can be claimed through PAYE. In simple terms, clause 45 and schedule 4 will change how employers operate PAYE for people who move to the UK but are treated as resident in another country under a tax treaty. The clause will let employers agree with HMRC that the part of the employee’s salary that is expected to be exempt overseas be left out of PAYE during the year, and it will formally limit how much foreign employment relief can be given to 30%.

The changes under the clause will require employers to send further notification to HMRC whenever there is a change in the employee’s circumstances that affects the proportion of earnings subject to PAYE. That sounds reasonable in practice, but I want an assurance from the Minister about the potential administrative burden that it will place on employers. It could mean that employers will now be expected to monitor the day-to-day working practices of globally mobile working employees. They will need to track whether individuals are working from home or from a hotel room in Boston, which is not necessarily a simple task. For multinational companies with hundreds of employees, this represents a potentially significant compliance burden at a time when we want to reduce the burdens on business. For smaller businesses venturing into international markets for the first time, it could be a disincentive—indeed, a barrier—to their trying to do so.

The Government must provide clear, comprehensive guidance on exactly what level of review and monitoring employers are expected to undertake not to fall foul of the rules. Without that clarity and guidance, we risk creating a compliance minefield in which well-meaning employers inadvertently break rules that they could not reasonably be expected to follow. Guidance can help employers to comply with the law, as we all want them to do.

The Government like to talk about making Britain the best place to do business and to champion our competitive advantage in attracting global talent—we have just discussed one area in which that may or may not be the reality—but we should seek to avoid introducing measures that potentially add to the compliance burden without giving guidance to employers. I hope that the Minister can assure the Committee that she will look at the case for publishing clear guidance to ensure that businesses are not adversely impacted.

[Lucy Rigby]

I can confirm that guidance will be forthcoming, and I am absolutely sure that it will be clear. I am also pleased to confirm that there will be no additional administrative burden on employers, because employers already have to enter a percentage figure on the PAYE notification form; as I say, this change will just require them to limit the in-year relief provided to no more than 30%. The guidance will be given to employers in April when the changes go live.

Question put and agreed to.

Clause 45 accordingly ordered to stand part of the Bill.

Schedule 4 agreed to.

Clause 46

Unassessed transfer pricing profits

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss schedule 5.

[Lucy Rigby]

Clause 46 will introduce a new corporation tax assessing provision for unassessed transfer pricing profits. It will replace the diverted profits tax, a stand-alone tax that will be repealed in its entirety, providing a significant simplification.

The changes made by the clause will make the rules clearer and more straightforward for businesses to implement, and will support access to treaty benefits, including relief from double taxation under the mutual agreement procedure. The removal of the diverted profits tax as a stand-alone tax is a very significant simplification, and bringing the rules into the corporation tax framework will clarify the interaction with transfer pricing and access to treaty benefits. I therefore commend clause 46 and schedule 5 to the Committee.

[James Wild]

The clause introduces schedule 5, which will repeal the diverted profits tax and replace it with new rules to tax unassessed transfer pricing profits within the corporation tax regime, coming into effect for periods beginning on or after 1 January. The diverted profits tax will continue to apply for prior accounting periods. In effect, the clause creates a higher tax charge on profits that should have been taxed here, but were shifted out of the UK by using non-market prices between groups.

Like the DPT, the new transfer pricing profits rules are intended to target structured arrangements that are designed to erode the UK tax base by omitting profits that are subject to transfer pricing. These unassessed transfer pricing profits will be taxed at a rate that is six percentage points higher than corporation tax. In simple terms, if a global business structures its arrangements to shift profits from the UK in a pricing manipulation, HMRC will be able to bring those diverted profits into UK tax at a higher, penalty-style rate.

In principle, we support that approach. Moving away from the stand-alone tax and bringing diverted profits under corporation tax provides better treaty access and clarity, and clearly the six percentage point charge works as a deterrent, as countries that play games with their transfer policies will risk paying more tax than if they had priced their UK dealings properly in the first place. However, I would welcome the Minister’s response to the concerns that the Chartered Institute of Taxation has raised about the drafting of the clause.

First, the new tax design condition is very broad: it captures transactions designed to reduce, eliminate or delay UK tax liability. There is a question as to whether legitimate commercial decisions made for regulatory compliance or capital requirements could be caught by the condition simply because they are deliberate and happen to reduce tax liability, even when tax planning is not the primary motive. I know that is not the intention behind the drafting, but that point has been raised, so I hope that the Minister will respond in order to avoid any uncertainty as to whether businesses that think they are operating within the law, without seeking to reduce, eliminate or delay tax liability, may be captured.

Will the existing arrangements be grandfathered? Can HMRC revisit settled positions under these broader rules? As the Chartered Institute of Taxation rightly says, it is unsatisfactory to pass legislation with a wide definition and simply hope that HMRC guidance and rules will narrow it down later. That is not how we in Parliament should legislate. We discussed the loan charge during this morning’s sitting; HMRC applied rules in a way that most MPs did not consider reasonable, and we have now had to make changes through this Bill to address that historical issue. The law should be made clear in the Bill, not left to administrative interpretation.

I would be grateful if the Minister confirmed how many multinational companies HMRC estimates are using pricing manipulation to avoid tax. Can she guarantee that legitimate business structures that have previously been accepted by HMRC under the DPT will not suddenly fall foul of the scope of the new rules? Will she also comment on the main purpose test, to provide clarity and certainty for businesses?

[Lucy Rigby]

I hope that what I am about to say will provide a good deal of reassurance to the shadow Minister. The purpose of the reform was to simplify the legislation and bring the regime into the corporation tax framework. There is no intention at all to change the scope of the regime.

I appreciate that the question as to when the reforms will come into effect is of some importance. I can confirm that they will take effect for chargeable periods beginning on or after 1 January 2026. For prior periods, the diverted profits tax will continue to apply.

The shadow Minister asked how many companies would be affected. I am afraid that I do not have the statistics to hand, but I can investigate and confirm them to him in writing.

Question put and agreed to.

Clause 46 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.

Clause 47

Transfer pricing reform

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss the following:

Government amendment 20.

Schedule 6.

[Lucy Rigby]

Clause 47 will simplify the UK’s transfer pricing rules, which protect our tax base by ensuring that transactions between UK companies and related parties are priced appropriately. The changes made by the clause include the general repeal of UK-to-UK transfer pricing where there is no risk of tax loss. This will provide a meaningful simplification for businesses. Alongside it, amendments have been made to the participation condition, intangibles, commissioners’ sanctions, interpretation in accordance with OECD principles, and financial transactions.

Government amendment 20 will ensure the consistent use of terminology with respect to financial transactions throughout the legislation.

The changes made by the clause will update UK law in line with international standards, will reduce compliance obligations and will address areas of potential legislative weakness. I commend clause 47, schedule 6 and Government amendment 20 to the Committee.

[James Wild]

Clause 47 and schedule 6 mark an evolution in the UK’s transfer pricing regime. The Opposition recognise the importance of getting this right: it goes to the heart of how multinational profits are attributed and taxed, and therefore how we ensure that companies pay the correct amount of tax in this country. The principle behind transfer pricing is simple, even if it is rarely simple in practice. I believe that these measures flow from a consultation process launched by the last Conservative Government, so they have a good origin. I hope that they will lead to greater certainty and reduce the burden that some companies may face.

[Lucy Rigby]

I confirm that the shadow Minister is right about the origin of the proposals and the date of the consultation. It is entirely right that we are bringing UK transfer pricing legislation up to date; it was last materially updated in 2004, so it is high time that these rules were updated.

Question put and agreed to.

Clause 47 accordingly ordered to stand part of the Bill.

Schedule 6

Transfer pricing

Amendment made: 20, in schedule 6, page 318, line 41, at end insert—

“(ba) in subsection (4)(b), for ‘issuing company’, in both places it occurs, substitute ‘borrower’,”.—(Lucy Rigby.)

The amendment deals with a missing consequential change to section 154 of the Taxation (International and Other Provisions) Act 2010 (transfer pricing).

Schedule 6, as amended, agreed to.

[The Chair]

This is an opportune moment for a five-minute comfort break.

--- Later in debate ---

[The Chair]

With this it will be convenient to discuss new clause 4—Report on the impact of section 48 (international controlled transactions)—

“(1) The Chancellor of the Exchequer must, within 6 months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 48 on—

(a) cross-border trade, and

(b) administrative burdens on businesses.

(2) The report under subsection (1) must in particular set out the steps the Government intends to take to consult affected businesses and stakeholders on the operation of section 48.”

This new clause would require the Chancellor of the Exchequer to report to the House on the impact of section 48 on cross-border trade and business administrative burdens, and to set out how affected businesses and stakeholders will be consulted.

[Lucy Rigby]

Clause 48 will create a power for the commissioners of HMRC to issue regulations requiring certain taxpayers to file an international controlled transactions schedule. This measure is expected to have an impact on approximately 75,000 businesses within the scope of the UK’s transfer pricing and related rules. Most of these businesses are part of large multinational groups.

New clause 4 would include a requirement for the Chancellor to lay a report before the House of Commons, within six months of the Act being passed, on the impact of the implementation of clause 48 on cross-border trade and administrative burdens on business. It asks that the report focus on Government steps to consult affected businesses.

Most major economies have similar requirements, and we do not expect the international controlled transactions schedule to have a significant impact on cross-border trade. Rather, this measure is expected to improve fairness, ensuring that multinational enterprises pay tax on profits generated from economic activity in the UK. It is also expected to increase efficiency, meaning that HMRC compliance activity can be more effectively targeted, benefiting compliant taxpayers. I urge the Committee to reject new clause 4.

[James Wild]

New clause 4 stands in my name and that of my hon. Friend the Member for Wyre Forest. As the Minister says, clause 48 introduces a power for HMRC to implement a new reporting obligation: the ICTS, which will come into force in 2027.

This new power would require businesses engaged in significant cross-border transactions to disclose specified information about their dealings. Rightly, the intention is to give HMRC better tools to identify transfer pricing and international tax risks that could affect the tax take, and to allow it to conduct more efficient and better-targeted compliance activity. I recognise that objective and support it in principle. I agree that the ICTS could help HMRC to identify risk earlier and to avoid wasting the time of the Department and businesses. Chasing down questions and embarking on inquiries can often lead nowhere and can cost businesses time that could be spent on growing their business.

However, it is also important that the Government explain how the system will work in practice and how it will be seen to work. Our new clause 4 would therefore require a report on the impact of these changes on cross-border trade and the administrative burden on businesses.

During the consultation last year, the Treasury acknowledged that more needed to be said about how the data collected through the ICTS system would be used and how it would fit alongside existing obligations such as master and local files. That remains a crucial point of detail that the industry and advisers will be looking for as this measure is implemented. Can the Minister shed some light on those concerns today?

As the Minister rightly says, most major economies already have some equivalent form of reporting, but it should be pointed out that the differences between them are significant. Australia, for example, operates a single transaction-driven disclosure process through its international dealings schedule; the United States of America relies on a more fragmented, relationship-based approach spread across multiple forms. Each system clearly has its benefits and disadvantages. What matters is that each country has a clear, consistent model to which businesses can understand and readily adapt.

What the Government seem to be proposing is a hybrid. That might mean that we have the best of both worlds—let us all hope so—but it might also lead to an approach that is inconsistent with the systems that some multinationals already have.

The Treasury has said that it will consult on detailed regulations in the spring of this year. We welcome that commitment. Can the Minister give an assurance that she will make sure that businesses and representative bodies will be closely involved in shaping how the system is put into practice? With the planned 2027 start date, there is not a lot of time to get the rules in place or for companies to build or modify systems to provide the new data. Can that be done without causing undue cost and disruption to businesses?

Finally, I want to make a slighter broader point on the clause. We clearly understand the importance of robust compliance and the need to protect the UK tax base on behalf of our constituents so that we can deliver public services. However, each new requirement—whether it is the ICTS, pillar two returns or transfer pricing documentation—adds to the cumulative impact on businesses.

We need to see these obligations in the round, not as each one being reasonable on its own terms. What is the overall picture of what we are imposing on companies? If that load becomes too great, the UK will be seen as a less attractive place to invest, which is certainly not what we want. Although we support the principle of better risk assessment, we continue to press Ministers to ensure that we have proportionate and workable solutions that add value for HMRC, businesses and our constituents. New clause 4 would simply require a report setting out those impacts.

I would add that, according to the Budget costings, the reporting duty would raise around £25 million in 2026-27, growing to £350 million a year, helping HMRC to tackle artificial profit shifting. That is welcome, but we should also consider the one-off and ongoing costs for businesses that have to re-engineer their systems. I would be grateful for the Minister’s response to my points about implementation and whether the hybrid model will actually be the best of both worlds.

[Lucy Rigby]

The ICTS will help HMRC to focus compliance resources, as has been discussed, on the most meaningful transfer pricing risks. We think that it will also lead to greater efficiencies by encouraging up-front compliance and reducing the length of transfer pricing inquiries. Those outcomes will benefit the compliance of taxpayers and HMRC.

Clause 48 gives the commissioners of HMRC the power to issue regulations that will determine the detailed design of the ICTS, including the information to be provided, the format of the schedule and the commencement date of the filing obligation. A consultation was held in 2025, and we will carry out a technical consultation on the draft regulations in spring 2026. The obligation is expected to take effect for accounting periods beginning on or after 1 January 2027, which is designed to allow time for businesses to adapt to what they need to do.

The shadow Minister suggested that the proposal will lead to an administrative burden; actually, it is intended to mitigate additional administrative burdens by requiring the reporting of readily available objective information. We will continue to be guided by these principles as we move into the detailed design phase, working—as one would expect—with affected businesses.

Question put and agreed to.

Clause 48 accordingly ordered to stand part of the Bill.

Clause 49

Permanent establishments

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss schedule 7.

[Lucy Rigby]

Clause 49 modernises and simplifies the UK’s law on permanent establishments, which governs how the UK taxes non-residents who are carrying out business here. Specifically, the changes made by clause 49 reduce uncertainty over how profit should be attributed to permanent establishments under UK law. The greater clarity provided by these changes, in the same way as the previous clause, will assist taxpayers and HMRC by offering greater clarity. I commend clause 49 and schedule 7 to the Committee.

[James Wild]

Clause 49 and schedule 7 make changes to the rules that decide, where a company has a permanent establishment in the UK, how its profits are then taxed and when they apply. The Minister talked about modernising and simplifying the rules to bring them into line with international best practice.

To clarify, in November 2025 the OECD published new guidance on the definition of a “permanent establishment”. Can the Minister confirm whether the UK’s current approach reflects that updated guidance, as I have been advised that it does not? Some expert bodies have pointed out that the OECD changes are generally helpful and would bring more consistency across countries, so does the Minister agree that it would make sense for the UK to broadly adopt them? Is that the Government’s approach, or have they deliberately decided to have a set of UK rules? If so, what is the purpose of that, considering that we might be dealing with multinational companies operating in multiple jurisdictions that would have to follow separate rules when the OECD has brought together a coherent package?

[Lucy Rigby]

It important to recognise that, as I perhaps should have explained at the outset, the legislation in this area is 20 years old. The purpose of making the changes that we are making is to update it and to account for the fact that there have been considerable developments in the international tax landscape since it was first drafted, most notably in relation to the attribution of profits to permanent establishments.

The shadow Minister mentioned the OECD. This legislation is interpreted in accordance with the OECD model tax convention and commentary, so it will always be interpreted using the most recently available model and commentary. The OECD council approved a 2025 update in November 2025, which can be found online. The full update will be published in 2026, if it has not been already. I hope that gives the shadow Minister some assurance.

Question put and agreed to.

Clause 49 accordingly ordered to stand part of the Bill.

Schedule 7 agreed to.

Clause 50

Pillar two

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss the following:

Government amendments 21 to 24.

Schedule 8.

New clause 5—Pillar Two competitive safeguards and review—

“(1) The Chancellor of the Exchequer must, every six months beginning from the day on which this Act is passed, review the implementation of the provisions of section 50 and Schedule 8.

(2) Any review under subsection (1) must consider—

(a) whether other major economies are implementing Pillar Two on comparable timelines and with comparable scope,

(b) any competitive disadvantage to UK-based multinationals from implementation of section 50,

(c) any impact arising from differentiated treatment for the US, and

(d) proposals for remedial measures to address any competitive disadvantage to the UK that has been identified.

(3) The Chancellor of the Exchequer must lay before the House of Commons a copy of any review undertaken under subsection (1).”

This new clause would require regular reviews of the implementation of section 50 and Schedule 8, including consideration of international implementation of Pillar Two, any competitive disadvantage for UK-based multinationals and possible remedial measures.

[Lucy Rigby]

Just to warn anyone who is not aware, clause 50 and schedule 8 are not the shortest. The changes they make are technical, but very important. Paragraphs 20 to 22 of schedule 8 prevent multinationals from trying to reduce their pillar two liability by entering into favourable tax arrangements to create pre-regime deferred tax assets or liabilities. Paragraphs 24, 25 and 34 ensure that the profits and losses relating to a UK real estate investment trust are excluded from the charge to domestic top-up tax to avoid double taxation. Paragraph 32 allows the UK to recognise the qualifying undertaxed profit rules of other jurisdictions before the OECD inclusive framework has completed a formal peer review.

Paragraphs 36 and 37 provide for a payment for group relief to be treated as a covered tax amount for domestic top-up tax purposes. Paragraph 39 reduces compliance burdens for smaller or non-material entities within a multinational group. Finally, paragraphs 2, 3, 6 to 12 and 16 to 19 update the rules on flow-through entities, permanent establishments, intragroup amounts and cross-border allocations of deferred tax so that the regime operates more smoothly in practice.

Taxpayers can elect for most amendments to apply retrospectively from the introduction of pillar two on 31 December 2023. However, taxpayers cannot select individual amendments to apply retrospectively; one election covers the whole package to prevent cherry-picking of favourable amendments. I should remind Members that, in line with the written ministerial statement of 7 January 2026, the clause does not include any amendments connected with the publication of the side-by-side agreement by the OECD/G20 inclusive framework earlier this month. The Government will introduce legislation to do that in the next Finance Bill following a technical consultation.

Government amendment 23 ensures that the legislation works as intended by making a small correction to legislative references used. Government amendments 21, 22 and 24 temporarily extend the deadline for making elections to give taxpayers more time to bed in the new IT systems needed to meet their filing obligations.

New clause 5 would require the Chancellor to review those technical amendments to the pillar two rules every six months and report on the international implementation of pillar two, among other things. We have already committed to the implementation of pillar two, which, as hon. Members will know, aims to ensure that large multinationals pay their fair share of tax. As a matter of course, the Government keep all areas of tax policy under review, so I reject the new clause.

Taken together, these changes implement internationally agreed changes, respond to taxpayer consultation, and ensure that the pillar two rules continue to be effective and administrable in the UK. I therefore commend clause 50 and schedule 8, together with Government amendments 21 to 24, to the Committee.

[James Wild]

I rise to speak to clause 50 and to new clause 5, which is in my name. Clause 50 will amend parts of the Finance (No. 2) Act 2023 and implement the multinational top-up tax and domestic top-up tax. As I set out in the last Finance Bill Committee, in October 2021 more than 135 countries signed up to the G20/OECD agreement on reforming international transactions and taxation, which the clause refers to—a major achievement that aims to ensure that multinational groups pay a fair share of tax where they generate profits. Pillar two delivers a minimum global effective tax rate of 15% for large multinational groups in every country they operate in, and the UK has been one of the first jurisdictions to legislate for the changes.

New clause 5 would require the Chancellor to review the changes on a six-monthly basis and lay before Parliament a report assessing three key issues: whether other major economies are implementing pillar two on comparable timelines and with comparable scope, whether any competitive disadvantage is arising for UK-based multinationals, and the impact of differentiated treatment for the United States. Crucially, if that review identified a material competitive disadvantage to the UK and UK businesses, the Treasury would be obliged to provide remedial measures within three months.

In rejecting new clause 5—another new clause that asks for a review—the Minister says that the Treasury is always conducting regular reviews of measures. If it is conducting this work anyway, why not share it with Parliament, and accept that it is a proportionate step to ensure ongoing parliamentary scrutiny in a very important area—a level playing field for British firms? The Minister referred to the length of the schedule. The sheer volume of amendments, coming less than two years after pillar two was first introduced, highlights the extreme technical complexity of the global minimum tax and the challenges for businesses that have to comply with it to keep up to date.

The Government’s aim is to ensure that UK rules remain consistent with the OECD model legislation, and schedule 8 is therefore aligned with the guidance and technical fixes. Those are sensible to maintain international consistency, but throughout last year there was growing international uncertainty about pillar two, the subject of the clause, as political divergence emerged over how it should operate, particularly regarding the treatment of US-parented companies.

The Minister referred to the side-by-side agreement made between G7 Governments last summer—and formalised, I think, this month—allowing certain UK and US multinationals to be exempt from parts of the rules while retaining access to the newly defined safe harbours. The agreement might bring some short-term stability, but it raises questions, and clearly we will be scrutinising it when, as the Minister said, it comes forward in future legislation. The US Treasury Secretary has described the side-by-side deal as

“a historic victory in preserving US sovereignty and protecting American workers and businesses from extraterritorial overreach.”

Will the Minister comment on what pillar two means in that context and on the UK’s position?

The impacts that might flow from that are precisely why new clause 5 is needed. The Government say that the UK is aligned with international developments, but the international landscape is shifting. Other major economies have delayed implementation or have adopted narrower regimes; meanwhile, the US has its own agreement and has not legislated for this framework at all. Without scrutiny, the risk is that UK-headquartered multinationals will find themselves complying with complex and burdensome rules, while their competitors operating elsewhere face a lighter regime. I simply note that the Chartered Institute of Taxation pointed out that it thinks the burdens of pillar two

“continue to appear disproportionate to the amount of tax that will be raised”.

If the Government truly believe that the regime provides a balanced and proportionate approach to a level playing field and that we can be assured that the competitive advantage does not go to other countries, let us have that report, see it set out to Parliament and have the matter resolved. To conclude, international co-operation on tax is essential, but we need to ensure not only that the UK is honouring its commitments, but that other countries are meeting theirs, so that UK companies are not losing out as a result.

[Lucy Rigby]

I am grateful to the shadow Minister for his comments. International co-operation on such matters, as he said, is extremely important. The side-by-side agreement, as I have made clear, will be the subject of future legislation, which will be the opportunity for scrutiny. However, as I also made clear, that agreement ensures that all large multinationals will pay their fair share of tax through the application of pillar two and pre-existing minimum tax rules, while offering welcome simplification and stability to UK businesses.

We have to be clear that US multinationals, like every other multinational company, are still subject to the UK’s 25% corporation tax on the profits that they make in the UK. They are also still subject to the UK’s domestic minimum tax rate of 15%. We recognise that a degree of complexity is inherent in pillar two, but we must not forget that it applies only to large multinational businesses and that it is needed to stop businesses shifting their profits to low-tax jurisdictions and not paying their fair share of tax in the UK. I think the shadow Minister acknowledges that that is exactly why we need it.

That being said, in relation to the complexity, the UK continues to be a strong proponent of work to develop simplification of the system, including the recently agreed permanent safe harbour. As stated in our “Corporate Tax Roadmap”, the Government will also consider

“opportunities for simplification or rationalisation of the UK’s rules for taxing cross-border activities”

following the introduction of pillar two.

Question put and agreed to.

Clause 50 accordingly ordered to stand part of the Bill.

Schedule 8

Pillar Two

Amendments made: 21, in schedule 8, page 358, line 9, leave out “50” and insert “50A”.

This amendment is consequential on Amendment 22.

Amendment 22, in schedule 8, page 379, line 26, at end insert—

“50A In Schedule 16 (multinational top-up tax: transitional provision), after paragraph 2 insert—

‘Transitional extension to deadline for elections

2A (1) Schedule 15 (multinational top-up tax: elections) has effect in its application to a pre-2026 election as if in paragraphs 1(2)(b) and 2(2)(b) of that Schedule for “no later than” there were substituted “before the end of the period of 12 months beginning with the day after”.

(2) In sub-paragraph (1), a “pre-2026 election” means an election which specifies an accounting period ending before 31 December 2025 as—

(a) in the case of an election to which paragraph 1 of Schedule 15 applies, the first accounting period for which the election is to have effect, or

(b) in the case of an election to which paragraph 2 of Schedule 15 applies, the accounting period for which the election is to have effect.’”

This amendment extends the deadline for making an election to which Schedule 15 of the Finance (No. 2) Act 2023 applies in cases where the election specifies an accounting period ending before 31 December 2025.

Amendment 23, in schedule 8, page 379, line 27, leave out paragraph 51 and insert—

“51 (1) In FA 1989, in section 178 (setting of rates of interest), subsection (2) is amended as follows.

(2) In paragraph (x)—

(a) for ‘51’ substitute ‘33A’;

(b) after ‘Finance’ insert ‘(No.2)’;

(3) In paragraph (y), for ‘51’ substitute ‘33A’.”

This amendment deals with a consequential amendment that was missed when paragraph 33A was inserted in Schedule 14 to the Finance (No.2) Act 2023 by the Finance Act 2024.

Amendment 24, in schedule 8, page 379, line 38, at end insert—

“(3A) The amendment made by paragraph 50A has effect in relation to accounting periods beginning on or after 31 December 2023.”—(Lucy Rigby.)

This amendment provides for the amendment inserted by Amendment 22 to have effect in relation to accounting periods beginning on or after 31 December 2023.

Schedule 8, as amended, agreed to.

Clause 51

Controlled foreign companies: interest on reversal of state aid recovery

Question proposed, That the clause stand part of the Bill.

[Lucy Rigby]

The clause makes changes to ensure sufficient repayment interest is paid to affected companies following a successful challenge of a European Commission decision. It provides that interest is also paid on the amounts of late-payment interest that were recovered and are now repayable. It will affect a small number of UK companies that had amounts collected and later repaid following the successful challenge of the Commission decision. The changes are expected to have a negligible impact on the Exchequer.

[James Wild]

As the Minister said, this is a fairly straightforward measure allowing HMRC to pay interest to companies that have had to hand over money under a now overturned EU state aid ruling relating to the controlled foreign company rules. The 2019 ruling was subsequently annulled. My only question for the Minister is: does the clause mark the final chapter in the UK’s compliance with the EU state aid rules relating to the controlled foreign companies regime, or could other outstanding matters give rise to further issues or payments?

[Lucy Rigby]

The shadow Minister will appreciate that it is a requirement of UK domestic legislation to put companies in the position that they would have been in had the recovery legislation not been introduced, and it is that principle on which the clause is based.

Question put and agreed to.

Clause 51 accordingly ordered to stand part of the Bill.

Clause 52

Legacies to charities to be within scope of tax

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss new clause 6—Report on legacies to charities—

“The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 52 on—

(a) charitable giving through estates, and

(b) charity sector income.”

[Lucy Rigby]

Clause 52, in combination with the other clauses in the Bill, will support the Government’s aims of closing the tax gap by strengthening compliance powers to challenge abusive arrangements by which donors or trustees of charities can enrich themselves. The clauses also simplify the tax rules by equalising the tax treatment of investment types and tax reliefs used by charities. The changes made in clause 52 will bring legacies into the definition of “attributable income”.

New clause 6 would require the Government to report on the impact of clause 52 on charitable giving through estates and on the income of the charity sector. The changes are aimed at those charities and donors who seek to make a financial gain. They will not penalise charities when legitimate donations are received and investments are made. The Government have published a tax information and impact note that sets out the impact of the changes, and it showed that the measures will have a negligible impact on businesses and civil society organisations such as charities. Once the measures have been implemented, HMRC will assess the impact by monitoring tax reliefs claimed by UK charities, so a formal evaluation is not required. I therefore propose that clause 52 should stand part of the Bill, and that new clause 6 should be rejected.

[James Wild]

Charities are a very important topic. We need to ensure that we give it appropriate scrutiny, given the importance of charities in our society and communities. Clause 52 and new clause 6—which I will speak to—relate to extending the definition of attributable income to include legacies left to charities. In practice, that means that when a charity receives a gift left in a person’s will, it could face a tax charge if that money is not spent on its charitable activities.

How charities use their funds is a topical subject in the context of the Church of England, which is planning to spend £100 million on its fund for healing, repair and justice—effectively a reparation fund for slavery, which many consider not to be an appropriate use of the funds, or what people gave funds to the Church for.

I now turn to the clause. The change will apply to gifts made on or after 6 April this year. New clause 6, in my name—it bears repetition—would require the Chancellor, within six months of the Act becoming law, to publish a report on the impact of the measure on charitable giving through estates and on the wider impact on the charity sector.

Concerns have been raised that expanding rules to cover legacies could have unwelcome implications if charities do not apply inherited funds quickly enough to their charitable purposes, leading to them being taxed. The Institute of Chartered Accountants in England and Wales warns that that uncertainty, particularly around the timing, may discourage potential donors from including charities in their wills. Clearly, none of us would wish to see that.

HMRC has said that it will not set a deadline for how soon money must be used, although that ambiguity creates issues in itself. If the rules are unclear, HMRC could later decide that a gift has not been applied appropriately and withdraw the tax relief, undermining confidence that legacy gifts to charities will remain tax-free. Perhaps the Minister could give the Committee some clarity on that point, and on how HMRC will determine what counts as timely or appropriate application of funds.

There is also a concern about the administrative burden it may place, particularly on smaller charities, which will have to prove that each legacy received has been properly applied to charitable purposes, even when the money is placed in long-term endowments or reserves. The Charity Finance Group warns that the changes could mean more record keeping, compliance checks and bureaucracy, taking money away from frontline charitable activities and towards administration. I do not think that anyone would wish to see that. I do not know whether the Minister has anything more to add on that complexity.

Adding complexity could also make life harder for executors and delay the administration of estates, which could affect the timing of cash flows to charities at a time when finances in the sector are under considerable pressure, and income is critical for them to do their job. There is also a risk that wealthier donors might think twice about leaving legacies to smaller charities, if they think that the charity might struggle to comply with HMRC rules.

I am really asking for the Minister’s assurance that HMRC will take a sensible and proportionate approach, particularly with smaller charities that are seeking to do the right thing in applying these rules. We all want to avoid the potential risk that this measure could deter charitable giving, when that is clearly not the intention. It is important that the concerns raised by the sector are aired in the Committee, and it is our role to do so.

[Lucy Rigby]

I will start with the principle that, because legacies have received tax relief, it is important that they are spent on charitable purposes, otherwise they will be subject to a tax charge. More broadly, the Government are very much committed to supporting charities and their donors through tax relief, which was worth over £6.7 billion in 2024.

The changes in the clause are aimed at those charities and donors that seek to make financial gain. They will not penalise charities where legitimate donations are received and investments are made. The measures are intended to protect the integrity of the charitable sector by ensuring that donations, investments and charity expenditure are deployed for charitable purposes, not the avoidance of tax.

The shadow Minister fairly referred to any burden that may fall on smaller charities. The Government of course recognise that many small charities are run by unpaid volunteers, and for that reason we have sought to design the new rules in a fair and proportionate way. HMRC will help the sector to understand and prepare for the changes by providing clear communications and guidance.

I also want to be clear, in response to the shadow Minister, that the changes to the attributable income rules mean that legacies received by a charity will become chargeable to tax if they are not spent charitably. The changes reflect the fact that this income may have already received considerable tax relief. We have no plans to stop charities accumulating donations, so there will be no deadline for the spending of legacy funds.

Question put and agreed to.

Clause 52 accordingly ordered to stand part of the Bill.

Clause 53

Approved charitable investments: purpose test

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss new clause 7—Report on charitable investments purpose test—

“The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 53 on charity investment strategies.”

This new clause would require the Chancellor of the Exchequer to report on the impact of section 53 on charity investment strategies.

--- Later in debate ---

[Lucy Rigby]

Clause 53 changes the definition of “approved charitable investments”. The Government recognise 12 types of investments for charitable tax relief, but presently only one type of investment is required to be for the benefit of the charity and not the avoidance of tax. The Government are extending this rule to all 12 types of investment, making the rules both simpler and tighter.

New clause 7 would once again require the Government to report on the impact of clause 53 on charity investment strategies. As with clause 52, these changes are aimed at those charities and donors that seek to make financial gain. They will not penalise charities where legitimate donations are received and investments are made. As the shadow Minister may expect, we have published a TIIN setting out the impact of these changes, which showed that these measures will have a negligible impact on businesses and civil society organisations such as charities. I commend clause 53 to the Committee, and I ask that new clause 7 be rejected.

[James Wild]

I rise to speak clause 53 and new clause 7, which was tabled in my name. My comments will reflect submissions from people involved in the charitable sector and my discussions with them. The clause extends the allowable purpose to all categories of recognisable charitable investment—at present, it applies to only one, but it will cover all 12. The Institute of Chartered Accountants in England and Wales has raised a suggestion that the test be reframed from

“for the sole purpose of”

to “wholly or mainly” to the benefit of the charity. The concern is that there could be increased obligations for compliance on trustees who have to demonstrate that their every investment in, for example, their portfolio was made for the benefit of the charity rather than an ancillary purpose therein. Was that more flexible approach something that the Government have considered, and if so why did they chose to reject it?

[Mr Reynolds]

As the Minister has outlined, clause 53 extends the purpose test from one category to all 12 categories. What guidance will HMRC provide for charity trustees to determine where the line is to be drawn between a legitimate investment strategy and those that are seen as having an ulterior purpose, because anti-avoidance should not penalise prudent charitable investment strategies?

Can the Minister also confirm exactly which charity sector bodies were consulted on these provisions and how they responded to that consultation, because many charity trustees are volunteers and this seems to place a significantly larger burden on those charity trustee volunteers to determine where to draw the line? It would be interesting to see what the consultation came back with as to where they would see that line and how they would attribute it.

[Lucy Rigby]

In answer to the comments of the Liberal Democrat spokesperson, the hon. Member for Maidenhead, as in relation to the previous clauses, I can confirm that HMRC will be coming forward with guidance that will make clear the exact scope of the changes and what needs to happen on behalf of charities in order to ensure compliance. The compliance changes apply equally to all charities regardless of size.

I come back to the statement that I recognise I have made repeatedly: these changes, along with those in the previous clause, are designed to protect the integrity of charitable tax reliefs. Although some smaller charities may need to review processes, the measures are proportionate and targeted at preventing abuse—not burdening charities, which in the main do incredibly good work.

The shadow Minister, the hon. Member for North West Norfolk, questioned whether some specific wording had been considered as part of the Bill. I am afraid I cannot confirm that now, and will have to get back to him in writing.

Question put and agreed to.

Clause 53 accordingly ordered to stand part of the Bill.

Clause 54

Tainted charity donations: replacement of purpose test with outcome test

Question proposed, That the clause stand part of the Bill.

[The Chair]

With this it will be convenient to discuss the following:

Schedule 9.

New clause 8—Report on tainted charity donations—

“The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 54 and Schedule 9 on—

(a) legitimate charitable giving, and

(b) prevention of tax avoidance.”

This new clause would require the Chancellor of the Exchequer to report on the impact of section 54 and Schedule 9 on legitimate charitable giving and the prevention of tax avoidance.

New clause 9—Review of outcome test—

“(1) The Chancellor of the Exchequer must within two years of the passing of this Act, review implementation of the outcome test under section 54.

(2) The review must assess whether the outcome test is clearer and more effective than the purpose test.”

This new clause would require the Chancellor of the Exchequer to review the implementation of the outcome test in section 54 and to assess whether it is clearer and more effective than the existing purpose test.

[Lucy Rigby]

Clause 54 and schedule 9 will support the Government’s aims of closing the tax gap by strengthening compliance powers to challenge abusive arrangements by which donors or trustees of charities can enrich themselves. The changes made in clause 54 tighten the rules on tainted donations.

New clauses 8 and 9 would require the Government to report on the impact of clause 54 and schedule 9 on legitimate charitable giving and the prevention of tax avoidance, to review the implementation of the outcome test in clause 54, and to assess whether it is clearer and more effective that the existing purpose test.

I come back to the same justification as for the previous clauses: these changes are aimed at those charities and donors who seek to make financial gain; they will not penalise charities when legitimate donations are received and investments are made. The TIIN, which was published alongside these changes, showed that these measures would have a negligible impact on businesses and civil society organisations. I therefore commend clause 54 and schedule 9 to the Committee, and urge it to reject new clauses 8 and 9.

[James Wild]

I rise to speak to clause 54 and to new clauses 8 and 9 tabled in my name. The clause makes significant changes to how tainted donations are treated. At present the donation is considered tainted only if it was made with an improper purpose. This clause replaces the motive-based test with an outcome test. If someone connected to the donor under the new regime receives financial assistance from a charity, such as a grant, guarantee or loan, the donation will be deemed tainted regardless of the donor’s intent. I have tabled new clause 8 to require the Government to publish a report on how the change affects legitimate charitable giving, or genuinely tackles tax abuse.

New clause 9 would require a review of the implementation of the new outcome test after two years and would assess whether it proves to be clearer than the existing purpose test. The Minister and the Government said that this measure is about tightening anti-avoidance rules and the challenge of proving intent. But I have been approached by the Charity Finance Group, which represents over 1,400 organisations and manages one third of the sector’s £20 billion annual income, and it has raised concerns around the change. It warned that the outcome test could unfairly penalise both donors and charities for results outwith their control.

For example, a donor could make a genuine good faith contribution only for a charity months later to make a routine investment or financial arrangement that inadvertently benefits a linked person. That donor could then find themselves caught by the anti-avoidance rules without ever having done anything wrong. That could cause uncertainty and raise concerns about people leaving legacy gifts that the charity sector relies on.

It is not just the charity and that one body. The Institute of Chartered Accountants in England and Wales has warned that donors may have limited influence over the outcome once the donation has been made. It, too, questions the fairness and practicality of shifting from a motive to an outcome test. Indeed, it proposes that the existing rules are not altered for that precise reason. We tabled the two new clauses to introduce proper scrutiny of the measures and ensure Parliament understands the effect on the charitable sector and whether donations continue to be given.

Does the Minister consider there is a risk that shifting to such an approach could have the effect that the charitable sector has set out? If so, will she commit to perhaps providing some practical guidance, with examples that charities and their compliance teams could look at so that they can see that charitable giving is not undermined? None of us on this Committee would want to do anything that would undermine the ability of charities to raise money and disincentivise anyone from giving money for fear that they might be caught inadvertently by rules when they have done nothing wrong.

[Lucy Rigby]

It is important to recognise that the tainted donations rules ensure that the usual tax reliefs are not available where someone gives money to a charity with the intention to benefit financially from it. Previously, HMRC was only permitted to consider the intention of a donation and whether a donor had received a financial advantage from a donation, but now, with these changes, it will also be able to consider the outcome of the donation and whether a donor had received financial assistance. In that respect, considering the outcome of a tainted donation is a positive step towards challenging abusive arrangements. As I have said in relation to previous clauses, HMRC will come forward with clear guidance on the application of the clauses, and, to the shadow Minister’s point, that guidance might well contain examples.

We are taking a range of steps to ensure that the charity sector and the wider public are aware of the changes, which I hope reassures the shadow Minister. A detailed summary of consultation responses has been published. As I said, HMRC will provide clear and practical guidance in advance of implementation.

Question put and agreed to.

Clause 54 accordingly ordered to stand part of the Bill.

Schedule 9 agreed to.

Ordered, That further consideration be now adjourned. —(Mark Ferguson.)