Finance Bill Committee of whole House debate

A list of the clauses, schedules, amendments and new clauses that were considered during the session can be read in our Finance Bill preview blog here.

Not all of the amendments and new clauses tabled for consideration were debated or voted on. Only those that where a vote took place are included in this write-up. The others can be found in the preview blog.

Documents related to the Finance Bill are available to view on the House of Commons website. The debate can also be watched on the Parliament website and a transcript can be found via Hansard.

Briefings provided by CIOT and ATT can be found by clicking on the respective links.

The debate was structured around three groups of clauses and schedules.

Group 1

Clause 1: Permanent full expensing etc for expenditure on plant or machinery.

Clause 2 and Schedule 1: New regime for research and development carried out by companies.

New Clause 1 (Labour): would require the government to publish a review of the costs of all changes to R&D reliefs in the current parliament.

Clauses 1 & 2 and Schedule 1 were agreed without division. Labour’s New Clause 1 was defeated by 294 votes to 224.

The debate

Financial Secretary to the Treasury (FST) Nigel Huddleston opened the debate for the government, describing the Bill as the ‘next step in making the UK one of the most competitive tax systems among major economies’. He argued that making full expensing permanent responded to the needs of business groups and leaders, would ‘give companies the certainty they need to make long-term investments’ and, citing figures from the Office for Budget Responsibility, generate £14 billion in additional business investment over the next five years.

The FST also said the measure would provide businesses with greater certainty to make investment decisions. Matt Rodda (Labour) was sceptical of the government’s attempts to provide certainty, but Richard Fuller (Conservative) suggested that it was the opposition responsible for creating uncertainty through its refusal to commit to the policy if elected to government. In later remarks, Shadow FST James Murray told Fuller: “if (he) wants to know what a Labour government would do if we got into office, there is one way to see that eventuality come about: we could have a general election sooner rather than later”.

Huddleston then said that the decision to merge R&D reliefs would ‘simplify and improve’ the system, ‘providing greater support for UK companies to drive innovation’, providing better help for SMEs and enhancing the support offered to loss-making businesses. He argued that the decision to restrict nominations and assignments for R&D relief payments would ensure ‘genuine businesses get payment…directly’, benefitting ‘genuine claimants and reducing non-compliance’.

James Murray welcomed the announcements on full expensing and changes to R&D but questioned the government’s commitment to giving businesses greater certainty. Murray accused the government of ‘chopping and changing business taxes and reliefs year after year, with no evidence of anything resembling a long-term strategy’. Citing the Institute of Chartered Accountants in England and Wales, he argued that persistent changes in policy had been ‘undermining prospects for investment, innovation and growth’ and driving up costs for HMRC.

The Shadow FST praised the ‘excellent team’ at the CIOT and ATT for their representations on the Finance Bill. Citing these, Murray asked the government to clarify when it would publish a planned consultation on leased assets, whether it could clarify the definition of plant and machinery, and what proportion of businesses ineligible for full expensing ‘because they are partnerships’. The FST said in closing remarks that the consultation would be launched ‘shortly – in early 2024’ and that further guidance would provided on the definition of plant and machinery ‘such as computers, printers, office equipment, vehicles, vans, lorries, tractors, forklift trucks, tools, ladders and drills, and equipment such as excavators, compactors, bulldozers and so on’.

Murray then spoke to Labour’s New Clause 1, arguing that it would provide clarity and transparency on the costs of government changes to R&D tax credits. He called on the government to clarify the start date of the schemes and to confirm when HMRC would publish guidance on compliance. The FST urged MPs to reject the clause, deeming it unnecessary ‘because the information has already been published’.

Murray also suggested HMRC had a role to play in ensuring small businesses are able to navigate the scheme ‘to help give them the certainty they need to thrive’. Huddleston confirmed the schemes would take effect from 1 April and would apply to accounting periods starting on or after this date.

The FST would later say HMRC had ‘significantly increased the number of people working on R&D compliance’ and that ‘a more detailed compliance action plan…will be released in due course’.

The Shadow FST also questioned the government’s argument that these changes represented a merger of existing schemes, citing CIOT evidence that the policy was ‘less a merger than the shifting of most SMEs into a revised scheme based on an ‘RDEC’ approach, with the SME scheme remaining for a smaller group of R&D intensive SMEs.’ He added that the ATT had said this would ‘arguably result in an overall increase in the complexity of the (scheme), rather than simplification’.

Maggie Throup (Conservative) argued the measures emphasised ‘Conservative principles of encouraging entrepreneurs, free enterprise and innovation’, arguing that full expensing would provide businesses with ‘the biggest tax cuts in modern history’ and that the merger of R&D schemes would simplify the tax system and reduce bureaucracy. Throup also spoke of the benefits the measures would provide to a number of businesses within her constituency.

Drew Hendry (SNP) argued that the clauses and schedule were designed to ‘fix an economic mess of their (the government’s) own making’ and would do little to repair the economic impact of the UK’s departure from the European Union.

Nigel Mills (Conservative) spoke in favour of the proposals around full expensing, calling them ‘radical and expensive’. He asked the government to clarify the intentions of the scheme – was it to drive investment ‘that never would have been viable before’, to bring forward investment, or to provide ‘an earlier tax relief than they otherwise would have had’. He argued the latter was unlikely to change businesses’ behaviours but that the former may help ‘modernise businesses, protect jobs and give them a chance to grow’.

Mills also suggested the OBR was ‘cautious’ in its estimations of the economic impact of the scheme and asked the government to provide details on how it would assess the impact of the scheme.

The FST assured MPs that the government would publish further information on the operation of the schemes ‘over a period of time’, saying: “we do not want all the schemes just to exist; we want them to be used so that they have a real-world impact”.

Group 2

Clause 21 and Schedule 12: Ensuring consistency of Parts 3 and 4 of F(No.2)A 2023 with OECD rules etc.

Clause 31: Increase in maximum terms of imprisonment for tax offences.

Clause 32 and Schedule 13: Disqualification of directors etc promoting tax avoidance schemes.

Clause 33: Promoters of tax avoidance: failure to comply with stop notice etc.

Clause 34: Construction industry scheme: gross payment status.

New Clause 2 (Labour): would require the Chancellor to publish details of the sentences given and stop notices issued in each of the last five years to tackle evasion and avoidance, as well as the revenue expected to be generated from the measures to tackle evasion and avoidance in this Act in each of the next five years.

New Clause 5 (Lib Dem): would require the government to produce an assessment of the impact of the Bill’s tax evasion and avoidance measures, examining whether the capacity and ability of HMRC was sufficient to properly enforce the measures.

New Clause 7 (Labour): would require the Chancellor to review the effectiveness of measures to prevent fraud involving taxpayers’ money and to compare them with other measures and those taken in other countries.

The clauses and schedules in the Bill were agreed without division. New Clause 2 (Labour) was defeated by 298 votes to 228, New Clause 5 by 300 votes to 18 and New Clause 7 by 301 votes to 222.

Exchequer Secretary (EST) to the Treasury Gareth Davies opened the debate for the government, stressing the measures would ‘protect vital tax revenues… deter taxpayers from knowingly defrauding the Government and encourage them to act against the promotion of tax avoidance’.

Shadow FST James Murray said his party agreed with ‘tough prison terms and powerful deterrents’ for those who commit serious tax evasion but warned that other countries currently have stronger laws, with the average prison sentence for tax fraud in the UK two years. He said: “We want to see fraudsters and organised crime gangs met with the full force of the law.” The EST replied: “If the maximum sentence increases, we expect all sentences to rise, as sentences are judged relative to the maximum sentence.”

The Shadow FST cited evidence from the Chartered Institute of Taxation and Low Incomes Tax Reform Group, who questioned how the power to disqualify promoters of tax avoidance schemes would be targeted and used correctly. “The true promoters of tax avoidance schemes recruit others, often vulnerable or naive individuals, to be directors of the company involved, thereby shielding themselves from any action.” Murray said that LITRG provided ‘powerful examples’ of where young or vulnerable people can be recruited “without understanding what they are getting into’.

Murray highlighted further evidence from the CIOT, raising concerns over HMRC’s ability to issue stop notices, and therefore determine criminal activity ‘with no external oversight’. The Institute has recommended a requirement for judicial approval for notices, or at least a robust internal governance system but Murray said: “I understand that HMRC has said that it does not support any of the range of safeguards proposed by these representative bodies, but has said that it will be sharing a clear picture of its governance process.” Gareth Davies assured Murray that there are ‘robust governance processes and safeguards in place’, including reviews and appeals, while any criminal sentences will be decided by the courts.

Sarah Olney (Lib Dem) raised concerns over the ‘alarming’ number of HMRC staff moved between departments in recent years and questioned whether HMRC will be ‘properly equipped’ to deliver any of the above clauses. Davies said previous measures to tackle tax non-compliance had led to the UK’s tax gap reaching an ‘all-time low’ of 4.8%, but the Government is ‘not complacent’. He added that a ‘small number of promoters persist in attempting to sidestep the rules’ around tax avoidance, and clauses will ‘protect vital tax revenue’.

The Shadow FST also raised CIOT concerns about the ‘disproportionate effect on the cashflow and reputation of subcontractors’ if they were to lose gross payment status as a result of minor VAT compliance failures. The EST said the measures strengthen the tests for gross payment status by adding VAT to the taxes with which subcontractors must demonstrate compliance. “This measure is predicted to raise around £300 million over the next five years,” he added.

Lastly, on the implementation of Pillar 2 rules, Murray signalled Labour’s support for the proposals, which he described as ‘a crucial step in making the tax system fairer’. Sarah Olney added that the Liberal Democrats also support the measures, but said that ‘issues remain’, including the rate of 15%, which she warned was ‘too low’. Olney said that the Lib Dems New Clause 4 would require the government to assess the impact of the measures within six months of their introduction. Nigel Mills (Conservative) questioned the effectiveness of the proposals, arguing that because many countries would have yet to introduce the levy, it could have the effect of ‘strengthening the arguments of those who would like to repeal it’.

Richard Fuller (Con) also warned that China would not be part of the agreement, while there were doubts about the US’ participation. Gareth Davies responded that the agreements in place ensure that, by 2025, 90% of multinationals will be ‘in play’.

Group 3

Clause 25: Rebate on heavy oil and certain bioblends used for heating

Clause 27: Interpretation of VAT and excise law

Clauses 25 and 27 were agreed without division.

Nigel Huddleston opened the debate for the government, saying Clause 25 would provide clarification on how VAT and excise legislation should be interpreted in the light of changes made by the Retained EU (Revocation and Reform) Act 2023. He emphasised that businesses can no longer ‘rely on EU law where it is conflict with domestic law’. The FST said the VAT measures would provide certainty for businesses, which would be crucial for businesses to ensure their tax affairs are accurate in what he described as ‘a litigious areas’. He also said the changes would support revenue collection, with VAT and excise duty from alcohol, tobacco and hydrocarbons raising over £200 billion of revenue a year. Huddleston told MPs that Clause 25 was designed to address a discrepancy that could have resulted in increased fuel bills for households and businesses that use rebated fuels for heating.

Shadow Economic Secretary Tulip Siddiq acknowledged the intent of the government’s proposals but criticised the existing system for penalising companies using environmentally friendly fuels. She argued the change would have ‘a limited impact on businesses across the UK facing rocketing heating bills as the cold starts to bite this winter’ and suggested that more substantial investment was needed to transform the UK’s energy use and reduce reliance on heating fuels.

Labour signaled its support for Clause 27 but, citing concerns from CIOT, questioned its effectiveness in reducing complexity for businesses interpreting the VAT regime. Siddiq also expressed concern that the Retained EU Law Act had created ‘significant gaps in UK legislation where our domestic rule book did not fully transpose EU directives’ and called for detailed guidance to help address these concerns.

Sir Mike Penning (Conservative) said he was disappointed that the government had not used the flexibility of leaving the EU to make more fundamental changes to the VAT regime. Citing concerns over the 5% VAT rate charged on audiobooks, he said: “We are no longer in the EU and we can set our VAT rates as we would like.”

Drew Hendry (SNP) criticised the absence of measures in the Bill to make the ‘tax system fairer’ contrasting the UK government’s approach to tax policy with the Scottish government, which he said ‘prioritises ensuring that everyone in Scotland can have a decent standard of living’.

In closing remarks, Nigel Huddleston assured MPs that the government was making use of post-Brexit flexibilities to modify VAT law, including the revocation of customs duty regulations, the introduction of a UK tariff and domestic customs regime and VAT relief for women’s period products and for the installation of energy-saving materials. He assured MPs that the government supported the development of greener and renewable fuels and that a fundamental review of EU laws would be an undertaking that ‘would require a complete review of all that legislation, taking many years and still leaving significant tax revenue at risk’.

Consideration of the Finance Bill will continue next week in Public Bill Committee. Proceedings are due to begin on Tuesday 16 January and conclude by Thursday 18 January.