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The latest in an occasional series - the CIOT Q&A on a topical issue, part of our mission to explain and improve public understanding of the tax system . This one has been prepared with Gary Ashford, National Head of Tax Investigations & Dispute Resolution for RSM Tenon and a member of the CIOT's Council, and John Whiting, CIOT Tax Policy Director.

Paying cash in hand – a Q&A

Is it illegal to pay a tradesman cash in hand?

Absolutely not. But the tradesman is committing an offence if they fail to disclose their earnings to HMRC in due course in full and pay any relevant tax. Any trader with a turnover of more than £77,000 a year (excluding any exempt supplies) is required to charge VAT on their bills and pay the money to the taxman.

What about if they offer a discount for cash?

People may offer a cash discount to help with cashflow – and of course discounts get offered for other reasons too, such as bulk purchases. However, if someone offers a cash discount to hide the money from the taxman, then that is a different story. Hiding takings from the taxman is tax evasion and it is illegal. If the payer is aware this is the case they could actually be colluding in tax fraud.

I paid in cash because that suited me – if the trader is subsequently found to have omitted some takings, have I committed an offence?

Just because the trader commits an offence does not mean you have as well. If you had no idea they were going to conceal some takings, or no reason to suspect they would, you are in the clear. What draws you into the offence is if you have colluded in their fraud – if you have actively facilitated it.

Should I always expect a receipt?

No – not every trader will give you a recipt and a lack of a receipt does not mean that they are intending to hide their receipts. But receipts are a good way to control a business and as a confirmation of purchase. Some small businesses may not issue these but will still need to keep a record and fulfil their obligations to declare income to HMRC.

How much tax is lost because of undeclared cash in hand payments?

Estimates go from £2 billion a year upwards. The most recent estimate of the ‘tax gap’ (the difference between what HMRC collect and what they think should be collected) estimated that £4 billion a year is lost to tax evasion and a further £4 billion to the ‘hidden economy’. Within this, they estimate that £1.3 billion is lost to 'ghosts', those who have earnings from employment or self-employment and fail to declare any of this income, and £1.8 billion is lost to 'moonlighters', those who pay tax on their main job through PAYE but have a second job or additional income from self-employment. Of course, not all of these are tradesmen. A report from a parliamentary committee back in 2008 identified the three key ‘areas of risk’ in the hidden economy (ie where HMRC are most at risk of tax being lost) as self-employed people, such as builders and decorators, who often receive cash payments; individuals who trade on the internet; and buy-to-let landlords.

What are the Government doing about it?

Getting tougher. The Government have set a high profile target of bringing in an extra £7 billion through initiatives to tackle tax avoidance, evasion and fraud by the end of the Parliament. A key part of this are their ‘campaigns’ targeting particular trades, such as plumbers, roofers and electricians. Usually these have two stages. In the first those in the trade are targeted with publicity – articles in the trade press and personal letters – encouraging them to get their tax affairs in order if they are not already, with a reduced penalty rate, in addition to the tax itself. Hanging over this is the warning that those who do not come forward could ultimately face criminal charges. Then the second stage sees HMRC act on that threat, often using data obtained from suppliers as well as other sophisticated techniques. There have been a number of arrests of plumbers recently following that campaign and only last week a plumber from Surrey was given a 12 month prison sentence for evading income tax.

Isn’t this targeting the ‘little man’ to distract from the bigger sums lost to tax avoidance?

The other way of looking at it is that the Government are highlighting that not all tax losses are down to contrived avoidance schemes used by the wealthy. They would no doubt point out that they have strategies to tackle most if not all areas of the tax gap. Just this week they published a consultation paper with proposals to strengthen the rules on Disclosure of Tax Avoidance Schemes. They also have a consultation going on on a ‘general anti-abuse rule’ aimed at tackling artificial and abusive tax avoidance schemes.

That said, according to HMRC’s most recent ‘tax gap’ estimate, tax evasion and other illegal activity are costing the Exchequer three times as much as tax avoidance. So HMRC are right to be putting more effort into investigating and prosecuting those who seek to evade tax.

Are the government simply raising extra money without regard to how difficult things are?

Remember these are taxes that are due: the rules are there.

In all of this there is a fairness point as well. Although many people undoubtedly see a bit of ‘cash in hand’ as normal, it does mean that tax burdens fall more heavily on those who do pay all their taxes. There is a particular impact on the trader who never suppresses takings and always charges VAT: they find themselves undercut by others who flout the rules. All of that said, undoubtedly people will always be tempted by offers of getting things done more cheaply – especially in these straitened times. But this is not a new problem and there will always be a need to take action against those who seek to evade tax.

(Note to media/websites: please feel free to link to this Q&A or to quote from it provided attribution is given and it is not quoted out of context.)

George Crozier
CIOT External Relations Manager
Friday 27 July 2012

If you live or work in Scotland you may well be interested in the proposals of the Scottish Parliament to replace stamp duty land tax (SDLT) with a simpler land and buildings transaction tax (LBTT) from April 2015.

The power to do this is contained in the Scotland Act 2012.

One of the most significant reforms proposed is a move away from the 'slab' system to a band system similar to that applied in determining income tax. Thus, one alternative (Scenario 1 below) suggested is that the first £180,000 of a residential property transaction is not subject to LBTT but anything in excess of that up to £1.5 million would be subject to a tax at 7.5%. That would mean that the tax on a property worth £300,000 would be 7.5% of (£300,000 – 180,000) ie £9,000. SDLT would be 3% of £300,000, ie also £9,000. Properties sold for more than £300,000 would tend to incur more tax under this scenario. Below £300,000 and the tax would generally be the same or less.

Scenario 2 suggested a lower starting point but a lower rate for the first band. Overall this would, as with Scenario 1, be revenue neutral based on historical data, but the distribution of the cost would be slightly different, with purchases under £325,000 paying less than under the current system, but the top 5% of the market would pay more.

There are host of other provisions and questions about any need for provisions such as anti-avoidance, which can be found in the consultation at: http://www.scotland.gov.uk/Resource/0039/00394544.pdf.

Please feel free to participate in our survey which can be found at http://freeonlinesurveys.com/v1/rendersurvey.asp?sid=w76km55ex271z4e1041912. However, you are also welcome to contribute by adding your comments below.

Kate Willis
Technical Officer
Wednesday 25 July 2012

[Update: The condoc and speech referred to in this article have now been published and are available at the following links: condoc (PDF) and speech (HTML page)]

In a speech today, Exchequer Secretary David Gauke will announce a series of new government proposals to strengthen their efforts to stop aggressive tax avoidance.

According to an article by David Gauke in The Times today, a consultation document will contain proposals to:

• Make it easier for members of the public to recognise a scheme that is in fact too good to be true;
• Strengthen HMRC’s powers further under the Disclosure of Tax Avoidance Schemes rules, so that it is better able to identify and take action against cowboy advisers and to close the net around the few schemes not already captured;
• Publish warnings about tax avoidance schemes that are effectively being missold, making it easier for taxpayers to identify a hard sell by a dodgy promoter;
• Give HMRC stronger powers to force promoters to tell them about avoidance schemes and who is using them.

According to an extract quoted in The Times, the condoc will say:

"The information that promoters are required to provide on client lists is not sufficient. At present it is inherently difficult for HMRC to identify the end users of such schemes. The Government wants to cut through the chain of introducers and intermediaries in such cases and identify who the end users are."

John Whiting, the CIOT's Tax Policy Director, has appeared on various media outlets this morning discussing the proposals and giving an initial CIOT response (ahead of actually seeing the condoc). A CIOT press statement will also be posted on this website shortly.

Anyone interested in finding out more about the proposals should look at:

Front page article in The Times(behind paywall)
David Gauke's article in The Times (behind paywall)
Guardian article(free to view)
HM Treasury press release(free to view)
Politics Home summary of John Whiting's comments(behind paywall)

George Crozier
CIOT External Relations Manager
Monday 23 July 2012

Congratulations to all those successful in the May 2012 CTA and ATT exams, the results of which were announced this week.

The Institute President, Patrick Stevens, commenting on the CTA results said:

"I would like to offer my congratulations to all 889 of the candidates who have made progress towards becoming a Chartered Tax Adviser as a result of passing one or more papers at the May 2012 examination. 253 candidates have now successfully completed all of the CTA examination and we very much look forward to them becoming members of the Institute in the very near future."

Full details of prizes and results can be viewed via this link.

The Association of Taxation Technicians (ATT) is the CIOT’s sister body and is the oldest and largest body concerned solely with tax compliance. 859 candidates took the ATT exam on 1 and 2 May 2012.

The Association President, Stuart McKinnon, commenting upon the results said:

“It gives me great pleasure to congratulate the successful candidates from the May sitting of our exams. In total 1,326 papers were sat and 1,015 passes achieved in one or more of our six papers with 73 distinctions awarded for exceptional performance.

“Our modular system allows candidates to study at their own pace. Whether they are working towards full membership by sitting the two compulsory and one optional paper together with our two E-Assessments or whether they simply wish to obtain one or more Certificates of Competency in their specialist areas the flexibility has proved very popular.

“As a result of the examinations 77 candidates have now completed the examination requirements for membership and I look forward to meeting as many as possible at our popular admission ceremonies held at the House of Lords.”

Full details of prizes and results can be viewed at the Association's website via this link.

George Crozier
CIOT External Relations Manager
Friday 20 July 2012

This is the eighth of a series of reports on the progress of this year's Finance Bill, as it goes through its various parliamentary stages.

This report covers sittings 17-18 of the standing committee on the Bill, which sat on Tuesday 26 June. As previously noted, these reports focus on the aspects of the debates most relevant to the CIOT and our members, which is primarily the technical elements of the Bill, although the reports will aim to give a flavour of the main issues debated, which will often be more political.

A note on the stages the Finance Bill goes through appears here.
Links to the various debates are available here.

Latest developments

These reports are running behind the Bill's progress. As of Tuesday the Bill has gained Royal Assent and is the Finance Act 2012. Reports on the Bill's report stage and Lords stages will be posted in the next week or so, as time allows.

Finance Bill Standing Committee – Sitting 17 – Tue 26 June (am)

The penultimate committee sitting covered inheritance tax and stamp duty (clauses 206-211) and lasted just short of two and a half hours. No clauses or schedules were opposed and no amendments had been tabled, but it was still a fairly lively session.

There was 50 minutes of debate on clause 206, which will limit the IHT threshold by changing the automatic index-linking of the nil rate band - the amount that can be inherited before inheritance tax is payable - to the consumer prices index inflation measure, instead of to the retail prices index. From the Conservative benches, Jacob Rees-Mogg made an impassioned argument for abolishing IHT: “We believe that this is a monstrous tax, one of the cruellest taxes that falls on people at the worst time when they are facing the loss of a member of their family, somebody to whom they were probably devoted.” He also made the economic argument that taxing capital ties it up in inefficient ways: “They may invest in or hold goods that are exempt, buy trading farms or put the money into land - raising the price of land, already currently high - and not necessarily into other productive investments.”

Other speakers were less hyperbolic. For Labour, Catherine McKinnell (Shadow Exchequer Secretary) said the party did not oppose that change, though her colleague Julie Hilling did say she thought it was “a little odd” not to raise the threshold according to RPI. John Mann (also Labour) took the debate onto tax avoidance more generally, talking about Jimmy Carr and the Chancellor’s comments about moral repugnance. For the Government, David Gauke (Exchequer Secretary) said the move would raise additional revenue (about £20m a year) but there was unlikely to be a dramatic impact on avoidance.

Clause 207 provides for a lower rate of IHT of 36% to be charged on an estate where 10% or more of the net estate has been left to charity. Catherine McKinnell accused the Government of mixed messages on charitable donations (ref. inclusion of charities in the tax reliefs cap originally) and suggested the provision was more complex than necessary (a point also made vocally by the CIOT in consultation responses and press statements. Chloe Smith (Economic Secretary) defended the proposals, saying the incentive would encourage charitable legacies from a broad range of estates.

Clauses 208 and 210 are both designed to close avoidance schemes and both were approved with about 20 minutes of debate between them. Clause 208 closes a scheme involving the acquisition of interests in offshore trusts to avoid inheritance tax charges. Clause 210 amends the stamp duty land tax rules on a transfer of rights or sub-sale, and the change puts beyond doubt that a particular SDLT avoidance scheme does not work. Clause 209 (the bank levy) had been debated earlier in committee of the whole House so was not debated in standing committee.

Clause 211 introduces a new 7% rate of stamp duty land tax for residential properties worth over £2 million from 22 March 2012. Chloe Smith, the minister, explained that the new rate was one of a package of measures targeted at the wealthy. But Labour MPs were unconvinced that it would balance out the cut in the top rate of income tax from 50p. Catherine McKinnell said the idea that new taxes on the rich will raise five times more than the 50p rate has been “thoroughly debunked”. There was a fair amount of back and forth over the effectiveness of the 50p rate, why Labour waited so long before introducing it, etc. before the chairman brought the committee back to the clause under discussion. Sheila Gilmore provided various reasons why the amount generated by the tax may well be less than anticipated. John Mann supported the clause but took the opportunity to criticise the community infrastructure levy which he called “a tax on the aspiration of Britain.” For the Conservatives Jacob Rees-Mogg said that if the Government had been bolder and cut the 50p rate to 40p then, “bang!—it would have raised more revenue.”

Finance Bill Standing Committee – Sitting 18 – Tue 26 June (pm)

The 18th and final sitting of the Finance Bill committee was a marathon, running from 4.30pm until 9.11pm with a 45 minute break for votes (and to allow the minister to attend the CIOT’s annual parliamentary reception) from 7pm. Proceedings were somewhat rushed due to the need to conclude debate on the Bill by 9pm, but pretty much everything got some debate. (Of course they would not have been so rushed if they hadn’t spent the first nine sittings approving just 18 clauses, leaving more than 200 for the final nine sittings...) Issues debated included the new SDLT rate for non-natural persons, the UK-Swiss Agreement, incapacitated persons, dishonest tax agents and the OTS relief abolition. All clauses were approved. The only change to the Bill was two government amendments relating to the Swiss agreement.

Clause 212 introduces a new 15% stamp duty land tax that applies to the acquisition of UK residential property by certain “non-natural persons” where the consideration exceeds £2 million. Labour were critical. Catherine McKinnell, Shadow Exchequer Secretary, said there were “myriad problems with the plan” and warned that its scope would be too wide, catching not only owner-occupiers but institutional investors and commercial landlords. McKinnell suggested the alternative of a transfer tax on the sale of a company that would generate the same SDLT as if there had been an asset sale. She also doubted that the measure would make the contribution the Government claim to plugging “the huge gap in wealth taxation that abolition of the 50p tax has left.” Nevertheless, Labour supported the principle of the measure and did not oppose it. Exchequer Secretary David Gauke said the Government understood the concerns of property investment companies and the Treasury is talking to affected parties. The measure is broad, he said, because we want to prevent avoidance; too narrow a definition could leave loopholes.

Clauses 213 (providing for a power to modify the application of one section of the SDLT DOTAS legislation) and 214 (updating an SDLT relief for property acquisitions by bodies providing NHS services) got a few minutes debate each before the committee turned to the controversial tax agreement between the UK and Switzerland. This was the longest debate of the sitting, with seven speakers taking just over 100 minutes between them. David Gauke opened, explaining that amendments 201 and 202 were needed to ensure the effective implementation of the tax agreement. A number of Labour MPs were then critical of the agreement. Grahame M. Morris said that, by colluding in such a scheme, the Government were giving implicit support for the continuation of tax havens. Ian Lavery criticised the retention of anonymity under the arrangement and asked what the Government would do if individuals take the opportunity to move to a different tax haven. John Mann suggested the UK Government had pursued the Swiss agreement in an effort to block the EU savings tax directive (an accusation strongly denied by David Gauke) as this would threaten Crown dependencies such as Jersey and the Isle of Man. The party’s spokesperson, Catherine McKinnell, said the principles behind the deal were welcome, but the plan was “riddled with loopholes and exemptions that will severely undermine its potential to make anything like the sums the Treasury claims.” The view from the government benches was more positive. Conservative Robert Syms described the agreement as sensible. Lib Dem John Pugh described it as “a step forward”, while asking for a full report on the outcome (number of individuals reported, amount of tax regained, etc.)

Responding to the debate, David Gauke said that while anyone who takes their money out of Switzerland before January 2013 would escape the agreement, they will face the risk of criminal investigation, and the UK “remains determined to close the net on those individuals”. Responding to concerns about a limit of 500 information exchange requests he pointed out this was in addition to, rather than instead of, existing information exchange provisions, and if requests are generally successful, more requests may be made in the following year. Responding to claims that trusts and foundations would not be covered by the agreement, Gauke said that trusts would be within the scope if they are controlled by a UK taxpayer. The proposals were passed, with the two government amendments.

The CIOT and LITRG were quoted in debate on the clause 220, the removal of special provision for incapacitated persons and minors, subject of a longstanding LITRG campaign. “The proposals developed through consultation mean that the clause will go further than simply amending an archaic piece of law; it will remove it. That allows everybody to be treated the same way under tax law, while those needing extra help will still be able to rely on representatives when it comes to the administration of their tax affairs,” said David Gauke.

Debate on clause 221 (Tax agents: dishonest conduct) straddled the 7pm break. For Labour, Cathy Jamieson (Shadow Economic Secretary) said that, if someone is ‘named and shamed’, there must be adequate safeguards in place to ensure that the procedures have been properly followed. She quoted the ICAEW and sought clarification on how the Bill’s provisions would interact with the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2003. Responding, David Gauke said, “Tax agents play a vital role in the delivery of the tax system, which could not function effectively without them.” He described the consultation process with agents and their representative bodies as “productive and constructive”, with HMRC adding new safeguards (eg. right of appeal to tribunal) as a result of robust points put to them by the professional bodies. Intriguingly, Gauke revealed that HMRC’s “working assumption is that the number of agents involved in dishonest behaviour at any time is about 40.” He also promised that HMRC would publish guidance in draft for comment before implementation.

Clause 222, on information powers, applies if HMRC possesses some information about a person but not enough to make their identity clear. A third party who knows basic details about that person, such as their name and address, would be required to provide them to HMRC. David Gauke said this was in response to a peer review by the global forum on transparency and exchange of information for tax purposes, which found that existing UK provisions do not meet international standards. For Labour, Catherine McKinnell asked why the minister had removed the need to obtain a tribunal notice to get this information, and also urged the Government to address the weakness of the appeal system. In response, Gauke emphasised the safeguards in the proposals and promised that they ensured that the power could not be used for ‘fishing expeditions’.

There was a brief 15 minutes of debate on RTI under clause 223 (PAYE regulations: information). Catherine McKinnell warned that, for many employers, the increase in reporting burdens could be considerable. She cited those who pay their staff weekly or daily, those who do not use computers in their businesses, who do not have broadband access or who pay workers before the payroll is computerised. David Gauke said that this was wrong: “The net effect is that RTI will reduce the burdens on business - HMRC estimates by about £300 million a year from 2014-15.” The pilot is working well, he said.

OTS proposals for reliefs to be abolished also got quarter of an hour of debate. There was a brief debate about what angostura bitters are used for, and Cathy Jamieson reported concerns over the withdrawal of relief relating to mineral leases and agreements (broadly that the proposals might discourage owners from allowing mineral extraction on their land). Conservative MP Nigel Mills thought this would be a good thing. He said he would wholeheartedly welcome any measure that discourages open-cast mines - “these awful blights on the countryside”. David Gauke defended the proposals. “As far as mineral royalties are concerned, the relief is redundant, and abolition would not discourage landowners from making land available for mineral extraction,” he said. Lib Dem Ian Swales intervened to observe that he did not detect the work of the OTS in the first 224 clauses of the Bill and to ask the Minister if he held out any hope “that in future Finance Bills the OTS will get deeper into our very complex system?” Yes, said the minister: “The OTS has made a good start. It has identified a number of areas where there is further work to be done.”

The existing clauses having been approved, the committee briefly debated two proposed new clauses. The first, tabled by Lib Dem Stephen Williams, proposed reintroducing the fuel duty differential for biodiesel, which ceased on 31 March 2012 as a result of a sunset clause. Responding, Chloe Smith (Economic Secretary) said the differential had proved more expensive than expected as international producers took advantage of the UK’s tax relief. Analysis suggested that, if the rebate were continued, it could cost around £200 million in 2012-13 and continue to increase in future, she said. Williams welcomed minister’s statement that she intended to continue to have dialogue with the biofuels industry and did not press the clause to the vote.

Conservative Nigel Mills raised the plight of those affected by section 58 of the Finance Act 2008, which ended a particularly awful tax avoidance scheme. “I am sure we would all agree that that scheme should have been properly closed down many years earlier, and that the Revenue should have properly litigated at the time against those who implemented it rather than letting it run on and give its users the impression that they were acting lawfully and within the tax code. People involved in the scheme have suffered distress and real financial hardship because the measure taken to close it down was deemed to apply for ever.” His new clause asked the Government to consider whether what was done was consistent with how the Government now think we should use retrospection, if at all. “Would we not be better off changing the law to close the scheme down from the date of the announcement in 2007, then litigating under the old rules to find out whether the scheme was legal?” he asked. A number of other MPs were supportive. Two (Labour’s Fabian Hamilton and Conservative Jacob Rees-Mogg said all retrospection was wrong. Responding, David Gauke said users should have been aware that HMRC was challenging the scheme, and should have ensure they would have funds to meet their liabilities. Mills withdrew his “probing clause”.

Finally came the words of thanks (light and humorous, as is the tradition), on the motion that the Bill, as amended, be reported to the House. David Gauke noted that Labour had requested 28 reports during committee stage. He suggested that Owen Smith had been moved from the Labour Treasury team because of his refusal to wear a red jacket and black blouse (apparently all three members of the Labour Treasury team present were wearing this). Catherine McKinnell, who had replaced Smith on the committee and as Shadow Exchequer Secretary, noted (tongue firmly in cheek) that there had been “much disappointment in Committee when he left because he dealt with matters succinctly, and I know that my arrival slowed progress somewhat.” (With Smith as Labour’s spokesman the committee was proceeding at a rate of roughly one clause a sitting.) She thanked the representative bodies for their “enormous help and assistance to the Opposition team in ensuring that the Bill is scrutinised”. Stephen Williams then invited committee members to what was left of the CIOT’s parliamentary reception on the Terrace, adding that “the really good news is that no one will have listen to the speeches, because the Exchequer Secretary and myself made our speeches during the vote on the Opposition business earlier this evening. The invitation is to pop downstairs and have a free drink - we all deserve it.” Proceedings were concluded by the observations of the chair, Peter Bone, who said it was “the best Finance Bill Committee that I have ever served on?” His statement that “every member has taken part” was not strictly true, though a quick analysis indicates that all but two of the 36 committee members did contribute at least an intervention during the proceedings.

The question was put and agreed to. At 9.11 pm the Committee rose.

Amendments debated during the two sittings

UK-Swiss Agreement

Amendment 201 (Government)
Clause 216, page 124, line 8, after ‘2012’, insert
‘and by a mutual agreement signed by them on 18 April 2012 implementing article XVIII of that protocol’.
Amendment passed (no vote)

Amendment 202 (Government)
Schedule 35, page 624, line 16, after ‘2012’, insert
‘and by a mutual agreement signed by them on 18 April 2012 implementing article XVIII of that protocol’.
Amendment passed (no vote)

New clauses

New Clause 3 (Stephen Williams (Lib Dem))
Fuel duty differential for biodiesel
‘(1) The Biodiesel Duty (Biodiesel produced from waste cooking oil) (Relief) Regulations 2010 (S.I. 2010/984) shall be deemed not to have ceased to have effect on 31 March 2012 and shall continue in force.
(2) No further Regulations may be made under the Hydrocarbon Oil Duties Act 1979 which would have the effect of removing or reducing the relief provided for by the Regulations mentioned in subsection (1) until a full impact assessment of the impact of the removal of a fuel duty differential for biodiesel has been laid before Parliament.’.
New clause withdrawn

New clause 4 (Nigel Mills (Con))
UK residents and foreign partnerships (review)
‘The Chancellor of the Exchequer shall review the implementation of section 58 of the Finance Act 2008, and the impact of its retrospective nature on the taxpayers involved, and place a copy of the review in the House of Commons Library.’.
New clause withdrawn

George Crozier
CIOT External Relations Manager
Thursday 19 July 2012

This is the seventh of a series of reports on the progress of this year's Finance Bill, as it goes through its various parliamentary stages.

This report primarily covers sittings 14-16 of the standing committee on the Bill, which sat on Tuesday 19 and Thursday 21 June. As previously noted, these reports focus on the aspects of the debates most relevant to the CIOT and our members, which is primarily the technical elements of the Bill, although the reports will aim to give a flavour of the main issues debated, which will often be more political.

A note on the stages the Finance Bill goes through appears here.
Links to the various debates are available here.

Latest developments

These reports are running a little behind the Bill's progress. The Bill has now cleared its Commons stages and goes to the Lords, which will debate all stages a week on Monday (July 16th). Reports on the final two committee sittings and report stage will be posted next week, but a brief summary of report stage appears at the bottom of this report.

Finance Bill Standing Committee – Sitting 14 – Tue 19 June (pm)

Good progress with the committee rattling thoughts parts 4 (controlled foreign companies), 5 (oil) and 6 (excise duties) of the Bill.

The three hour sitting kicked off with half an hour spent concluding the discussion on controlled foreign companies (CFCs). Conservative Nigel Mills praised the reforms as “a testament to how it should be done” with long consultation and several drafts. Lib Dem Stephen Williams explained that he had tabled his amendment after meeting ActionAid and Christian Aid to test how joined up policy making was between the Treasury and the Department for International Development. He pressed the minister for reassurance on the Government’s intention to get departments working together to build up capacity among overseas tax authorities so that they can collect the taxes that their Governments decide are due but that are often avoided. The minister, David Gauke, confirmed that the Treasury, HMRC and DFID would continue to work closely on this issue. Reassured, Williams withdrew his amendment. In response to requests to keep the CFC regime under review, Gauke said the Government met business and professional tax advisers in a number of forums, such as the corporate tax liaison committee, the Business Forum on Tax and Competitiveness and the Business Tax Forum, and interested parties had the opportunity to raise their concerns about any matter in those forums, including CFC reforms. For Labour, Catherine McKinnell made clear that they did not oppose reform of CFC rules. The clause and a large number of government amendments were then approved. A Labour amendment requiring publication of a government assessment of the implementation and impact of the changes for each of the first three years of their operation, was voted down. The clause and schedule were approved without a vote.

The second half an hour of the sitting was spent discussing oil and gas taxation. The only speakers were the Economic Secretary, Chloe Smith, and her Labour shadow, Cathy Jamieson. Jamieson asked a number of probing questions, but no amendments were tabled and none of the clauses was contested.

30 minutes of debate on tobacco duty took the committee to the mid-point of the session. Clause 185 increases tobacco duty by 5% above inflation. The impact of higher tobacco prices on the sale of illegal and cheap imports coming into the country was raised by Cathy Jamieson, and Conservative Jacob Rees-Mogg pointed out the measure was regressive, but the clause passed without objection.

The remaining hour and a half was split evenly between debates on alcohol duties and gambling duties. On alcohol, Labour backbenchers Graeme Morrice and Grahame M Morris (yes, really) proposed an amendment calling for a review of the impact of the proposed duty increases. Morris is vice-chair of the all-party save the pub group and both are concerned about the impact of duty increases on the pub industry. For the Labour frontbench, Cathy Jamieson asked whether HMRC were considering ‘duty marks’ as “a simple and easily identifiable way for HMRC to identify whether the duty on beer has been correctly paid”. For the government, Chloe Smith said the Government had reviewed alcohol taxation already and were proposing a minimum unit price which would “not only reduce alcohol consumption and curb pre-loading before a night out but should help to reduce the demand for cheap alcohol on the off-trade side, then help the on-trade by extension.” In view of the assurances received from the minister, the amendment was withdrawn. This was followed by a brief debate on a clause on the repeal of drawback (repayment) of excise duty on spirits manufactured by licensed rectifiers and compounders that are exported from a producer’s premises or placed in a warehouse for approved purposes. The minister said the legislation was being repealed because it was redundant.

Finally, the committee debated the introduction of machine games duty (MGD), which will replace both amusement machine licence duty and VAT for dutiable machine games. Graeme Morrice highlighted concerns of industry representatives that the change would result in an increased tax burden on small businesses in the amusement sector, which has already been struggling in recent years. He proposed two amendments. One would allow businesses to net off irrecoverable VAT against MGD, and the other would reduce the rate of MGD from 20% to 15%. The Government’s proposals were challenged on two grounds – their claims to simplification and their claims to be revenue neutral. An Ernst & Young study was widely quoted as suggesting the changes would lead to an increased burden on business. Ian Swales (Lib Dem), Grahame M Morris (Lab) and Cathy Jamieson (Lab spokesperson) all weighed in. Chloe Smith stuck to her argument that the changes would be revenue neutral and the clauses went through unamended.

Finance Bill Standing Committee – Sitting 15 – Thur 21 June (am)

The committee got through most of the VAT section of the Bill (Part 7) in the two hour sitting. Debate started with some mockery from the opposition of the Government’s U-turns (or sensible responses to consultation, according to ministers) on the VAT changes announced in the Budget but soon settled into more technical discussion of the (mostly fairly technical) proposal in this part of the Bill.

Clause 195 and schedule 26 provide for an anti-forestalling charge in respect of supplies of self-storage facilities and approved alterations to listed buildings. For Labour, Shadow Chief Secretary Rachel Reeves welcomed the change on alterations to listed churches, but noted that a huge number of listed buildings are not places of worship. Labour did not vote against the clause and schedule but she did criticise the Government for “making policy on the hoof [which] has caused chaos and consternation”. Two other Labour MPs, Graeme Morrice and Sheile Gilmore, also called for the introduction of VAT on alterations to listed buildings to be reconsidered. There was also some debate about the full rate of VAT should apply to building repairs (Labour are proposing it be reduced to five per cent). A Labour amendment calling for a review of the full impact of the VAT changes on jobs, living standards and businesses was not pushed to the vote. The clause and schedule were passed unopposed.

Clauses 196 to 201 and schedule 27 were also passed unopposed, with less than an hour of debate between them. Clause 196 introduces the cost-sharing exemption, and will allow qualifying organisations, such as charities and housing associations, to form cost-sharing groups allowing the recharge of participants to be exempt from VAT. Clause 197 confirms that public bodies, such as Departments and local authorities, that engage in activities as public authorities are not taxed unless that would distort competition with businesses. Labour’s spokeswoman, Cathy Jamieson, focused her remarks on the treatment for VAT purposes of the new Scottish police force. Responding, Exchequer Secretary David Gauke said that the Scottish Government had taken the decision to fund the Scottish police force from central taxation in the knowledge that VAT relief would be lost, but that they believed the savings would more than outweigh the additional VAT costs. The matter was not, he said, directly relevant to the clause anyway.

Clause 198 repeals low value consignment relief for goods imported from the Channel Islands. Catherine McKinnell, for Labour, supported the move but noted that LVCR will still apply to other non-EU countries such as Switzerland, Andorra and Gibraltar. She asked if the Government had considered withdrawing LVCR from all non-EU countries and, if so, what their conclusion was. For the Government, David Gauke said the Government had considered withdrawing the relief from selected other countries too but they had decided not to do this for the time being as the exploitation of the relief primarily involves imports from the Channel Islands. That might change in future if a problem on a large scale developed elsewhere.

Clause 199 legislates for an extra-statutory concession “ensuring that taxpayers and UK VAT groups pay VAT on services brought into their UK business via overseas establishments on a fair basis.” Clause 200 provides for the introduction of a new notification system for vehicles brought into the UK, and paying any VAT due. Clause 201 and schedule 27 respond to a ruling of the Court of Justice of the European Union, in which it ruled that businesses without an establishment in a member state are prohibited from benefiting from that state’s domestic VAT threshold. Conservative MP Nigel Mills criticised the Court’s verdict for creating “a perverse situation where a window cleaner from Ireland who pops over to clean the windows of a few friends in Northern Ireland and gets paid for that will in theory be committing an offence by not registering for VAT.” Could this realistically be enforced, he asked. The minister did not respond directly to this point, but did say that tax receipts as a consequence of the changes are expected to be small, with implementation costs also negligible.

Finance Bill Standing Committee – Sitting 16 – Thur 21 June (pm)

The afternoon session of the committee was kept to just one hour to enable MPs to hear Aung San Suu Kyi speak in Westminster Hall. There was still enough time to debate and approve clauses on landfill tax and the climate change levy as well as the final clause of the part of the Bill on VAT.

On landfill tax, Cathy Jamieson, shadow economic secretary, talked about the concerns expressed by the skip hire industry, who felt that the rules under which they operated were being changed without any consultation, and that some small companies would be particularly disadvantaged. She asked the minister for an assurance “that the fears, concerns and points raised by the industry have all been dealt with, and that any future changes will be subject to the appropriate consultation”. Nigel Mills (Conservative) highlighted a company in his constituency who had been affected and pressed the minister to make the regime flexible and commercial. The minister, David Gauke, said the main purpose of the clause was to increase the standard rate of landfill tax from £64 per tonne to £72 per tonne. With regard to skip operators, there had, he said, been no change to the landfill tax legislation, who do not pay landfill tax directly in any case. What had happened is that HMRC had issued guidance that clarified the existing law around disposal of specific types of waste. A second clause corrected the legislative definition of a landfill site in Scotland, with retrospective effect from March 2000!

On the climate change levy, 18 pages of changes contained in three separate schedules were passed. The Exchequer Secretary said they struck “a sensible balance between helping business and meeting our environmental objectives.” One of the proposals was to remove the exemption from the CCL for electricity generated by combined heat and power (CHP) plants and exported to the national grid. Labour’s Seema Malhotra proposed amendments calling for the exemption to be extended a further four years, to April 2017, and requiring a review of the impact of the removal of the exemption on carbon emissions, security of supply and industrial competitiveness. She said the short notice for the removal of the exemption and the lack of clarity on what would replace it “runs the risk of creating confusion in the marketplace, a slowdown in the momentum of the development of such new technologies and of carbon reduction and could undermine investor confidence in general.” From the Labour frontbench, Cathy Jamieson said that if the present scheme was not to be taken forward, an alternative scheme should be put in place to deal with the industry’s concerns. Responding, the minister said extending the relief was expensive to the taxpayer and administratively complex.

Amendments debated in the three sessions

Due to the large number of amendments tabled only contentious amendments are included here. A large number of uncontested government amendments were also passed.

Amendment 2 (Stephen Williams (Lib Dem))
Clause 180, page 105, line 19, at end add—
‘(2) Notwithstanding the provisions of Part 4 of Schedule 20, the Schedule will not come into force until a full impact assessment has been prepared in conjunction with the Department for International Development reviewing the effect on developing countries’ tax revenue, and details of aid and technical assistance being provided to developing countries in order to increase the capability and technical expertise in their tax regimes to collect the taxes that are due in their countries, has been laid before and approved by the House of Commons.’.
Amendment withdrawn and not put to the vote

Amendment 191 (Grahame M Morris (Lab))
Clause 186, page 107, line 9, at end insert—
‘(3A) The Chancellor of the Exchequer shall review the wider economic impact of the duty increases imposed by subsection 3 on the beer and pub industry, and consumers, and shall lay a report of his review in the House of Commons Library.’.
Amendment not pressed to the vote

Amendment 193 (Graeme Morrice (Lab))
Schedule 24, page 542, line 11, leave out ‘20%’ and insert ‘15%’.
Amendment not pressed to the vote

Amendment 192 (Graeme Morrice (Lab))
Schedule 24, page 542, line 34, at end insert—
‘Allowable deductions from duty payable
[Fairly lengthy amendment]
Amendment not pressed to the vote

Amendment 200 (Labour Treasury team)
Clause 195, page 112, line 25, at end add—
‘(2) No new Order shall be made under section 30(4) or 31(2) of the Value Added Tax Act 1994 unless the Chancellor of the Exchequer has reviewed the full impact of those changes on jobs, living standards and businesses, and placed the review in the Library of the House of Commons.’.
Amendment withdrawn

Amendment 197 (Seema Malhotra (Lab))
Schedule 31, page 605, line 2, after ‘April’, leave out ‘2013’ and insert ‘2017’.
Amendment withdrawn

Amendment 198 (Seema Malhotra (Lab))
Schedule 31, page 605, line 4, after ‘April’, leave out ‘2013’ and insert ‘2017’.
Amendment withdrawn

Amendment 199 (Seema Malhotra (Lab))
Schedule 31, page 605, line 4, at end add—
‘(4) The Chancellor of the Exchequer shall conduct a review of the expected impact on carbon emissions, security of supply and industrial competitiveness of the removal, in 2017, from combined heat and power plants of the Climate Change Levy exemption for indirect supplies of electricity and shall, by 31 December 2012, lay a report of his review in the House of Commons Library.’.
Amendment withdrawn

Quick note on report stage

Monday 2 July
Started late (c6pm). One hour of debate on fuel duty. Followed by 3 hour debate on income tax rates best summed up as shadow minister saying “It simply cannot be right to ask millions of pensioners on modest incomes to pay more while finding a way for a few thousand millionaires to pay less” and the minister responding “The 50p rate is not sustainable. The introduction of the triple lock on state pensions means pensioners continue to be better off”. Debate on child benefit started about 10.30pm and ran for an hour, including debate on two CIOT amendments. CIOT and ICAEW criticisms of the legislation were central to the shadow minister’s speech. On our amendments David Gauke said: “Amendments 21 and 22 would allow those on the taper who have opted out of child benefit retrospectively to receive the payment. I am pleased to confirm that HMRC will apply the legislation as it is to enable such a claim to be made. I can therefore reassure the hon. Member for Kilmarnock and Loudoun that the amendments are not necessary.” They were consequently not pressed to the vote.

Tuesday 3 July
VAT debate around hot food, caravans, etc. took up most of the time. Single use vouchers got a paragraph in the minister’s speech but a cursory scan suggests no-one else mentioned it. Remaining time was taken up debating bank bonuses. There was no time to debate Stephen Williams’ new clause on CFC reform and consultation on its effect on developing countries, though he did get to raise it in the one hour third reading debate.

Plenty of votes (both days). All votes went as you might expect (ie the government won).

George Crozier
CIOT External Relations Manager
Friday 6 July 2012