Finance (No.2) Bill

Stewart Hosie Excerpts

Monday 8th November 2010 Commons Chamber

[Mr Hanson]

Indeed, and TIGA—my hon. Friend says “tiger”; I say “teega”, but we both mean the same thing—has estimated that we can make savings to the Treasury by investing in a tax relief up front and keeping jobs in this country. That is the crucial point.

[Stewart Hosie (Dundee East) (SNP)]

rose—

[Mr Hanson]

I know that the industry is important to Scotland, so following my hon. Friend the Member for Dundee West, I give way to the hon. Member for Dundee East (Stewart Hosie).

[Stewart Hosie]

The right hon. Gentleman was right to mention the Chancellor’s argument that the proposed tax break was poorly targeted, but he will be aware of the evidence given to the Scottish Affairs Committee by Edward Troup of the Revenue. He said:

“I am not sure I would say it was poorly targeted. It was targeted at the video games industry…it was perfectly designable if we had continued with it”,

and so on and so forth. Does not that experience from the coal face, from inside the Revenue, directly contradict the argument that the Government used to do away with the plan?

[Mr Hanson]

The hon. Gentleman has effectively read out the next section of my speech. I have indeed examined what was said in the Scottish Affairs Committee. The Under-Secretary said at the same meeting on 20 October:

“It may be that we can revisit a video games tax break in the future.”

Was he speaking for the Department of Culture, Media and Sport or for the Treasury? I presume that the Chancellor was speaking for the Treasury in ruling out the idea, but three months later his Minister in the DCMS said that we should consider it in future.

I do not necessarily wish to press the new clause to a Division, but I have tabled it so that the Exchequer Secretary can clarify whether, in the next 12 months or two years, he can meet the objectives that my hon. Friends the Members for Dundee West, for West Bromwich East and for Liverpool, Wavertree, and the hon. Member for Dundee East, have championed so strongly.

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[Mr Field]

They are the spiritual home of so many things, as I am sure the Opposition Whip would agree.

I have spoken on many occasions to leading lights in the video games industry, and they outlined many of the concerns that have been expressed by the hon. Members for Dundee West (Jim McGovern), for Dundee East (Stewart Hosie) and for West Bromwich East (Mr Watson). There is a risk that a significant amount of business is leaving these shores because of a perception, and indeed the reality, that there is unfair tax and regulatory competition from further afield.

One of my concerns, which I expressed before the election to leading lights in the video games industry, is that trying to emulate the film tax credit is not necessarily the right route down which to go. Back-Bench and Front-Bench veterans of Finance Bills going back a decade or more—you are one, Madam Deputy Speaker, from your time as a Minister, as am I from my time in opposition—will know of the concern that the film tax credit has had to be updated almost annually, because of the clear abuses and unintended consequences resulting from it. There was a sense that although the film business in this country benefited from it, there was a significant through-flow of cash that was not in the interests of either the Exchequer or the high-quality products of which our film industry has been rightly proud in decades gone by.

[Stewart Hosie]

Notwithstanding the hon. Gentleman’s points about the film tax credit, I am sure that he will understand the business model around which the video games industry operates. A large amount of cash is spent in the development of games, but revenue drops off in the run-up to a new hardware offering or console being developed. The difficulties that the sector faces are exacerbated by the regular new hardware offerings. Does that not make a stronger case for some sort of assistance?

[Mr Field]

I accept that. There is also little doubt that we have some tremendously high-quality people working in this business. I must say, in parenthesis, that one difficulty is that hitherto we have had to import far too many such people from beyond these shores. I know that our university media studies industry is much discredited, but those media studies courses that are linked to the video games industry in particular often ensure that we get some of the brightest and best of the home-grown talent in our universities entering the industry.

I take on board the concerns of the right hon. Member for Delyn (Mr Hanson), given that the issue before us has been in the ether for years. I would prefer not to rush into anything, although I hope that my hon. Friend the Minister will take on board the deep concerns expressed today so that we can come back, perhaps during next year’s Finance Bill, with a workable model based on the proposals before us.

I would like to put in a word not just for the video games industry, unique though its interests are in the minds of those who run and work in those businesses, but for the animation industry. It is a related industry within the media sphere, and faces many of the problems expressed by the hon. Member for Dundee East and businesses in the industry. The animation industry is deeply concerned that it is losing some of its brightest talent, and feels that—this is felt not just in the animation sector—it is facing unfair competition not only from the Canadian and French models, but from Ireland and, dare I say it, Scotland. It feels that it is losing out to a large degree. I would therefore like to see a clause that brings the video games industry, the animation industry and all these other industries under a single protocol. Such a protocol could operate well and effectively, so I hope that the Treasury will consider one in next year’s Finance Bill.

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[Mr Gauke]

The circumstances facing us in the run-up to the June Budget were such that we wanted to introduce a more fundamental reform of corporation tax. In that Budget on 22 June, we announced a reduction in the main corporation tax rate from 28% to 24% over the next four years. In doing that, we wanted to show a sense of direction, to ensure that Britain was open for business, and that we were providing lower rates. Our approach is to have a broader base but lower rates rather than targeted intervention, unless there is clear evidence that intervention is the right approach.

[Stewart Hosie]

The Minister is being generous. He is paraphrasing the Green Book, which says that the Government will

“prioritise spending which supports private sector growth and investment”.

Various forms of those words have been used since his party and the Liberal Democrats took office. Surely tax breaks that would cost perhaps £195 million and would deliver £415 million in tax receipts are precisely the sort of investment in precisely the sort of industry that would meet the Government’s objectives.

[Mr Gauke]

We have heard the figures quoted by TIGA, but we do not accept the validity of that analysis because we feel that some of the assumptions underpinning those estimates are erroneous. The research commissioned by the industry implicitly assumes that the investment incentivised by the subsidy is entirely additional to the UK economy. In reality, it is likely that the relief will displace investment from elsewhere in the economy, so the net impact on total UK investment could be limited. For example, it is possible that such a tax subsidy would divert investment from more productive sectors to the detriment of the productivity of the UK economy as a whole.

If Opposition Members are making the case that lower taxes always result in growth in the economy, I would listen with great interest and it would—my right hon. Friend the Member for Wokingham (Mr Redwood) made this point—be an interesting conversion to supply-side economics. I do believe, however, that the strongest economic case can be made for lower tax rates as a whole, across a broader base, as opposed to targeting some sectors, unless there is a strong case that there is some kind of market failure. We have not yet heard such a case being expressed in a way that we find persuasive, and that is why we decided not to proceed with video games tax relief.

That is not to say that we do not wish to support British businesses—far from it; we do. It is vital that we have a strong private sector to drive the recovery, but we must support that growth in the right way. In the emergency Budget, the Government announced a major package of reforms to the business tax regime with the aim of creating the most competitive corporate tax system in the G20.

[Mr Gauke]

The TIGA analysis makes the assumption that everything achieved as a consequence of the relief would be additional to the economy. It does not appear to recognise that there would also be displacement, and that highly skilled graduates would not remain unemployed if they did not find work in the video games industry. We are therefore sceptical about the TIGA analysis. My hon. Friend makes his point well, however, and the nature and profile of the video games business clearly have some significance for his constituency, but we are as yet unconvinced of the necessity for the tax relief that was proposed by the previous Government, and that is proposed in the new clause.

The Government’s focus must be on providing a strong business environment for sectors across the board, including video games. Our reforms will reduce rates of corporation tax by four percentage points over the next four years, which means that the UK will continue to have the lowest main rate in the G7. This will improve our relative position significantly, compared with that of our competitors, after the years in which we have fallen behind. This will benefit companies across the economy, including those in the video games industry.

[Stewart Hosie]

My party welcomes the reduction in corporation tax; we believe that it is a good thing. However, some of the businesses that are creating video games are not big enough to pay corporation tax. Many of them are dependent on the annual allowances, but some of those have now gone, and one has been halved. So although I welcome the reduced corporation tax, the overall package will not necessarily help the start-up studios and small studios as they develop their games.

[Mr Gauke]

We have also reduced the small profits rate of corporation tax from 21% to 20%, when it was set to go up to 22%, and we have effectively reversed the jobs tax—the increase in national insurance contributions that would have hurt start-ups. We are also offering start-ups, including those in the hon. Gentleman’s constituency, a national insurance contributions holiday for the first 10 employees, so there were plenty of positive policies for start-ups announced at the time of the Budget. Indeed, given the state of the public finances, it was a very pro-business, pro-growth Budget in the way that it set up proposals for lower taxes.

On tax simplification, the Office of Tax Simplification earlier today announced the list of reliefs and exemptions within the tax system. When its work began in the summer, the general expectation was that there would be about 400 reliefs and exemptions; the total reached is 1,042 such reliefs and exemptions. Many play an important role within our tax system—I do not wish to decry that—but we have to think carefully about introducing new areas of complexity and new reliefs and exemptions, unless there is a strong case for doing so. Members have already made the case for video games, but the Government remain unconvinced.

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“We’d expect most domestically-orientated banks, for example Lloyds, to be better off after four years than they were pre-budget”.

[Stewart Hosie]

This is interesting. I have seen many of these quotes before, and I am certainly minded to support the new clause, if the hon. Gentleman pushes it to a vote. An examination of the level of tax on banking is sensible, but I would like to know what the Labour party proposes for the level of taxation, given that every billion out of the banks is about £10 million to £15 million less to lend in the real economy. I am curious, therefore, to find out how punitive the Labour party would be.

[Chris Leslie]

I accept the hon. Gentleman’s point. We have to be prudent in how we address these questions, and I hope to come to some of the matters he raises as we explore corporation tax and so on. If he bears with me, I will—hopefully—elaborate.

UBS analysts said that they expected Lloyds and HSBC to benefit by 2012 because of the cut in corporation tax bills, which in their case was larger than the hit they expected to be sustained through the banking levy. It seems, therefore, that the banking levy is playing quite a small part, perhaps a walk-on character—

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[Chris Leslie]

The TUC says that the effective rate of corporation tax for the banks will fall from 25% in 2000 to below 20% this year, which means that, in reality, they are already paying a rate that is below the headline rate that small firms pay. Those findings are certainly eye-catching. All I am saying in new clause 3 is that they merit further review and consideration, which would be a reasonable step to take. Indeed, those findings suggest that we could even be heading towards a regressive corporation tax system in the UK. Small businesses should be paying less in corporation tax than the banks, but the evidence suggests that that might not be the case.

The third wheeze that the banks might benefit from, in their navigation of the corporation tax system, is known as deferred tax, which can be defined as the tax liability that might be payable at some point in the future because of transactions that have already taken place, albeit where there is no certainty about when it will have to be paid. Deferring the payment of tax is not something that ordinary taxpayers can indulge in with great ease, yet it appears that the banks are playing that game on a gargantuan scale, according to the findings of Richard Murphy, the director of Tax Research LLP. He suggests in his recent report that the banks’ deferral of tax reserves are absolutely phenomenal. He calculates that a sum totalling nearly £19 billion, which is nearly half what this country spends on capital projects annually, might not be paid by the banks in corporation tax as a result. He describes that as

“an extraordinary double subsidy going on for these banks.”

Not only were the banks underpinned by the taxpayer in 2008—they are still underpinned in the form of the guarantees offered by the Treasury—but they may receive another fillip, he argues, from that deferred corporation tax gain.

[Stewart Hosie]

Unless my memory is playing tricks on me, at least one of the nationalised banks used those unused or deferred tax assets to pay for the asset protection scheme, which was set up—rightly—by the Labour Government in the previous Parliament. Without those unused tax assets or that deferred tax, the asset protection scheme would not have been possible, thereby imposing an even bigger burden on the banks, so I am not quite sure where the hon. Gentleman is going with this.

[Chris Leslie]

I am not making any particular proposals at this point; I am simply saying in new clause 3 that we should review the level of tax that banks are paying. There may be perfectly good and justified reasons for it, but we are talking about enormous sums of money. If, as some allege, the banks are playing a canny game, with sums of money that might have prevented many of the swingeing cuts that we are seeing to public services, it is incumbent on us, on behalf of our constituents, to ask those questions. If we are indeed “all in it together”, as we are constantly told, we should ensure that the banks pay their fair share and do not leave the rest of us picking up all the bills.

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[Stewart Hosie]

On that point, I entirely agree with the Minister. A fundamental part of this is the new capital requirements under Basel III—some 7% higher for at-risk banks. Does she not agree, however, that a review of bank taxation, along with the Bank commission and the new Basel III regulations, would be sensible to ensure that we have the balance in the round between taxation and capitalisation, risk and regulation, and supervision both at the UK level and with respect to this rather complicated European structure?

[Justine Greening]

The hon. Gentleman is right that the bank levy itself needs to be viewed in the context of overall policy. He is right that it is not just about the bank levy; we have to look at it in the light of the broader changes around regulatory reform and the work of the Independent Commission on Banking. I will shortly come on to explain what that means for new clause 3.

We know that we have to tackle the regulatory failures of the past. We also know that it is right that banks make a contribution in respect of the risks they pose to the UK economy, but there is no benefit in taking action that would simply drive banks abroad. As the hon. Member for Islwyn (Chris Evans) pointed out, hundreds of thousands of jobs across the UK depend on Britain being competitive in this industry. For the financial services sector as a whole, as of June 2009, it had 1 million employees. The jobs are not just in London and the south-east, as there are nearly 100,000 people employed within the financial services industry in the north-west, while there are between 69,000 and 70,000 people employed by that industry in the east of England and about 90,000 in Scotland. Although there have been serious failures in the past, we also have to remember that many of the jobs that are part of this overall sector do not bring in high incomes, as the hon. Gentleman pointed out.