Finance Bill 2021 – committee stage round-up

It was a relatively uneventful committee stage. A number of government amendments were passed to the Bill reflecting concerns raised by external stakeholders (including CIOT – see below). A number of amendments suggested by ATT, CIOT and LITRG were tabled and discussed. Clarifications were sought and information requested – in some cases even getting it! Votes took place on a number of contentious measures, though as usual most opposition amendments and new clauses were not pushed to a vote, recognizing the inevitability of their defeat, absent a significant government rebellion. With their majority of 80, the government ultimately prevailed easily on all questions. There was no repeat this year of the 2019 committee stage when the Finance Bill was amended five times by opposition parties (and a further time at Report).

Briefing notes, suggested amendments and other representations provided by CIOT, ATT and LITRG once again proved helpful to MPs during the debates, assisting opposition and backbench MPs in carrying out effective scrutiny of the legislation and obtaining (sometimes) answers and clarifications from ministers where these were needed. We do this primarily to support the scrutiny process, in line with our public benefit objectives, but there is also value in putting on the record the concerns that tax professionals have about particular measures – be it their complexity, their scope or our doubts about whether they will be effective in achieving the aims set out for them. If officials know that if we have concerns with a piece of legislation the minister will get challenged about it by MPs, that encourages them to take our concerns seriously going forward, and hopefully to act on them before final legislation is published.

Part One – (i) personal taxation

25 of the 41 clauses in part one of the Bill were chosen by the Opposition to be debated in Committee of Whole House. The first set of these to be discussed were grouped together under the heading ‘Family Finances’. This included the freezing of the income tax personal allowance from next year (the only clause opposed by the opposition parties) and a number of covid-related economic support measures.

Clause 26 in this group is designed to ensure that employees who are provided with or reimbursed for the cost of a coronavirus antigen test by their employer, will not be liable to an income tax charge. SNP spokesperson Alison Thewliss proposed an amendment which resulted from a suggestion made in a CIOT briefing. She explained that this sought to extend the income tax exemption to cover antibody coronavirus tests, too. She added that there was a wider argument for broadening the provision to make it easier to provide such exemptions in case of any future pandemics or similar. The latter point was made in an ATT briefing note and while we tried to get an amendment tabled it unfortunately couldn’t be done within the scope allowed for amendments to the Bill. (The absence of a broad ‘Amendment of the Law’ resolution in recent Finance Bills tightly limits what can be proposed.)

In his response, the Financial Secretary to the Treasury (FST) Jesse Norman argued that "antigen tests… are connected to employment, whereas antibody tests are not, which is why the relief does not extend to them". He said the Scottish Government could make changes on the taxation of tests if it wishes to.

Also in the same group is clause 31, which makes changes to ensure that the one-off £500 payment to certain working households in receipt of tax credits, announced at Budget 2021, is not subject to income tax. In a briefing for MPs LITRG expressed concern that, while the payment is made automatically by HMRC, without requiring a claim from the individual, if HMRC mistakenly make a payment to someone who is not entitled to it and it is not subsequently repaid, it appears that the tax credit claimant will automatically be subject to a tax charge, with potential penalties too. LITRG suggested an amendment, again tabled by the SNP, which would have ensured that the payment could only be recovered where it is obtained by fraud. Speaking to the amendment, Thewliss said she shared LITRG’s concern that the rules on clawback of the one-off payment are not yet clear enough.

Jim Shannon of the DUP also raised this point, as well as an additional LITRG one around how HMRC will define what counts as fraudulent activity. “I would like to understand whether consideration has been, or will be, given to ensuring that HMRC will set the bar high in terms of what constitutes fraud, and whether it will be limited to those people who fall under section 35 of the Tax Credits Act 2002, in relation to their underlying tax credit award.” The minister did not respond to these concerns in his response to the debate.

Shannon also raised some LITRG concerns around clause 32, which amends legislation on tax treatment of SEISS payments. These relate to the fact that taxpayers who have made amendments to their self-assessment tax returns on or after 3 March 2021 may have to pay back some or all of the grants that they have received, in some cases immediately upon receipt, and may also face substantial penalties. The MP noted with concern that some of these people may be unaware that they have to do so, but they face harsh penalties, which were originally aimed at fraudulent claims. Responding, the minister noted Shannon’s concerns, but argued the scheme is well understood, well publicised and that it is appropriate to reclaim sums overpaid.

Shannon had earlier intervened on the minister to ask whether he had had any discussion with LITRG, which had indicated to him some of the group’s concerns about these clauses. The minister replied that he maintains "a strong dialogue, through officials, and from time to time in person, with the LITRG and I have no doubt that the input it has given has been carefully considered in this regard. If he would care to write to me with his specific concern, I would be happy to pick that up as well."  Shannon indicated his intention to write to the minister on the points in question.

The SNP also tabled a number of amendments responding to concerns from CIOT and others about changes to the Construction Industry Scheme. These included seeking to remove paragraphs 3 and 4 from Schedule 6, putting in place a de minimis amount of minor works to be disregarded in the operation of the scheme and delaying the changes by a year. Spokesperson Peter Grant said: “we have seen no convincing argument that this change is necessary just now”.

Part One – (ii) business taxation

Part one of the Bill also includes changes to corporation tax rates and the super-deduction. Amendments tabled and considered in this group included a number drafted by the ATT. One related to the interaction between the small profits rate and the super-deduction, seeking to ensure that companies subject to the small profits rate from 1 April 2023 received the same effective rate of tax relief on qualifying expenditure incurred throughout the two-year period to 31 March 2023 as companies with greater profits.

Further ATT amendments in relation to the super-deduction would have avoided the additional complexity of a new definition of ‘associated companies’, when an existing definition could have been used instead. Regrettably the minister misunderstood what was being proposed and claimed the amendments proposed the removal of the associated companies rules altogether, which would have allowed businesses to avoid tax by fragmenting. This was, of course, not the case.

The first amendment to be considered in public bill committee was another one drafted by the ATT, which would have amended the transitional provisions for the reversion of the annual investment allowance to £200,000 on 1 January 2022. Speaking in support of the amendment, Alison Thewliss (SNP) explained it was designed to ensure smaller businesses are not disadvantaged by the transition which contains traps which can restrict the AIA limit to significantly less than £200,000 for a period. In response the FST claimed that existing arrangements are familiar and well understood, and that any changes would bring additional costs for businesses. The amendment, like the earlier ones, was not pressed to a vote.

There was more positive news on hybrid mismatches, where schedule 7 of the Bill amends the legislation put in place in 2017, to respond to concerns that in some circumstances the rules do not work as expected.  CIOT had raised with HMRC our concerns, particularly with regard to situations involving the rules in relation to double deductions, which operate in a manner which is disproportionate.  Therefore we welcomed the changes in the Finance Bill, which reflect the constructive approach taken by HMRC during the consultations on the rules last year. These changes will, in our view, ensure that the hybrids rules better reflect the policy objectives of the regime, ensuring that it operates proportionately and as intended for the most common situations and circumstances, and will provide greater certainty, so businesses can plan ahead with confidence.

Some of the changes are retrospective. While we welcome this, prior to this change, and since the introduction of the rules, companies have had to take action based on the existing legislation. In our responses to the consultations on the changes last year, we said that it would be important to introduce a simple mechanism for earlier years’ computations and corporation tax returns to be amended.  We are pleased that this has been dealt with by the introduction of a provision allowing a taxpayer to make an election to make the changes retrospective, and for the necessary administrative changes to reflect that position in relation to corporation tax returns etc to flow from that election.  This should provide an effective mechanism to deal with the prior year returns.

During committee stage, no fewer than 26 technical government amendments were passed to schedule 7, reflecting representations made by stakeholders, “to ensure that the changes work and reflect the underlying policy intent.”

Extension of trading loss carry back is something CIOT had suggested a number of times over the past year, with the Institute’s now President making the case for it while on a panel with the FST in October. The Institute argued that allowing businesses to benefit from a three-year carry back of trading losses arising during the pandemic would give those with a track record of making profits and paying tax – a good proxy for long-term viability – but which have suffered during the pandemic, a much-needed cash injection. We were delighted when this move was announced in the Budget.

Proposing clause 18 of the Finance Bill, which implements the extension, the FST noted approvingly the CIOT’s support for the measure. Both Alison Thewliss for the SNP and James Murray for Labour, while supporting the measure overall, highlighted LITRG concerns about the potential interaction of any tax refund under this provision with Universal Credit. The FST promised to listen to their concerns and respond accordingly. Murray also noted that CIOT had pointed out that in many cases this measure will represent a cash flow rather than an absolute cost to government - cost will reverse as the business, having used up its losses by carrying them back, makes profits and pays taxes sooner in the future.

Also on this clause, the government passed an amendment clarifying – in the face of some confusion over the matter – that trading loss carry back does not apply to furnished holiday lets.

On clause 20 (Extension of social investment tax relief for further two years) Labour spokesperson James Murray drew attention to CIOT concerns around complexity and SITR being less well-suited to investments by way of loans. In relation to the latter he asked what proportion of the total funds raised through SITR since 2014 was in the form of loans. The minister did not have the figures to hand but later wrote to Murray and other committee members informing them that, between 2014-15 and 2018-19, of the £11.2 million total investment raised through SITR, around £5.5 million was in the form of loans.

Murray also noted that CIOT had raised concerns that extension of SITR for just two years might put off some long-term investors. He said Labour had therefore tabled an amendment to encourage the government to set out their view on a longer extension to the relief. In his response, the FST acknowledged that there had been a much lower level of engagement with the relief than hoped for. He said HMT believes all reliefs must achieve their objectives and that is why the extension is limited to two years. The amendment was not pressed to a vote.

Part Two – Plastic Packaging Tax

All 44 clauses and seven schedules in part two of the Bill are there to implement the Plastic Packaging Tax, a new environmentally-minded levy designed to encourage the use of recycled plastic instead of new plastic within packaging. The tax commands cross-party support but the opposition parties took the opportunity to probe some of the details of the measure.

In particular, Shadow Exchequer Secretary Abena Oppong-Asare raised a number of points made by the CIOT in its briefing for MPs on this area. These included concerns around administrative and financial burdens that businesses may incur as a result of joint liability, issues around the position of non-resident taxpayers, and a call for greater clarity around what constitutes an established place of business in future regulations. Exchequer Secretary Kemi Badenoch replied that the government doesn’t believe that there will be a large number of businesses liable for the tax that do not already have a UK presence. But, she said, HMRC will take on board points raised and will address this in future consultations. Oppong-Asare also raised a CIOT point around updated rules for VAT not applying to this tax. Badenoch said she would ask officials to look into the matter.

Part Three – Other Taxes

One of the measures in this part of the Bill extends the duration of the reduced rate of VAT for the hospitality and tourism sectors, and puts in place a 12.5% rate for a period. ATT noticed that the legislation gives the Treasury the power to either increase or decrease the period for which the 12.5% rate applies with potentially little notice, reducing certainty and presenting potential practical issues. Amendment 64, drafted by ATT and tabled by the SNP, proposed that the clause be amended to remove the ability for the Treasury to reduce the period for which the 12.5% rate applies. Proposing it, SNP spokesperson Peter Grant said that the amendment represented a 'minor, but important' change. The proposals in the amendment would help to give businesses more time to benefit from a lower rate of VAT if the tourism and hospitality industry is still struggling to recover, he argued.

The minister argued against the proposals in amendment 64, saying that it would remove the government’s flexibility to respond to a ‘rapidly changing’ covid environment.

Part Four – (i) Penalties

In public bill committee MPs debated the new points-based penalty regime for late submission of tax returns, and a new two-penalty model for individuals and businesses that fail to pay their tax liability on time. The FST promised a light touch approach in the new regime’s first year: "As long as taxpayers make a reasonable effort to fulfil their obligations the first late payment penalty of two per cent will not be applied after 15 days."

Two ATT-drafted amendments were tabled in relation to these provisions. Amendment 24 would have reduced the time limit for assessment of a penalty for failure to make a return in the more common situations from two years to three months. The FST disagreed with the proposal, arguing that the two year time limit is longstanding and strikes a careful balance. "In the vast majority of cases penalties will be levied quickly and automatically close to the date of any missed obligation," he asserted, but a two year time limit is required because there will be times when HMRC need longer to conduct their investigations. Peter Grant (SNP) countered that while a two year limit has been there for a long time, that does not mean that it is right. “While there may be specific circumstances in which much longer is needed, why cannot those circumstances be identified in the Bill rather than giving carte blanche to HMRC to take two years in every instance?” he wondered.

Amendment 25 would have ensured that taxpayers who pay one instalment late under a Time to Pay arrangement with HMRC are not subject to excessively high penalties by being treated as if the TTP agreement had never existed.  Proposing this, Peter Grant observed that, “on our reading of the Bill, someone who has tried to do the right thing and come to an arrangement to pay, but has then missed a payment by a short period, is in danger of being treated exactly the same as somebody who made no attempt at all to make an arrangement. That just does not seem correct.”  The FST, arguing against the amendment, claimed erroneously that it would remove any penalty for a taxpayer who fails to fulfil the terms of a TTP arrangement. Neither of the amendments was pressed to a vote.

Labour’s shadow minister, James Murray, highlighted a number of LITRG concerns about the new regime. He noted that LITRG had said that, “whilst HMRC have taken on board comments on the structure of a new penalty regime, LITRG consider the legislation in the Bill to be far more complex than originally envisaged. As LITRG point out, taxpayers coming within Making Tax Digital for VAT for the first time in April 2022 and within Making Tax Digital for income tax self-assessment for the first time in April 2023 face a complex and unfamiliar penalty regime at the same time as having to get to grips with their obligations under Making Tax Digital.” These might include six separate filing obligations over the course of a year at which penalties could potentially be incurred. Murray invited the minister to respond to LITRG’s suggestions that the new regime should be delayed to allow taxpayers time to familiarise themselves with the new obligations before they begin to accrue penalty points for non-compliance, and that the legislation should include an obligation on HMRC to keep taxpayers regularly informed of their penalty points total. Murray also drew attention to LITRG’s concerns (similar to those of ATT which had prompted amendment 25) around the interaction of Time to Pay arrangements with the new late payment penalty regime.

Responding, the FST sought to allay concerns about complexity, saying the reforms have been widely welcomed, including by CIOT, and he noted the Institute’s praise for the initial light touch being given to the new regime. LITRG, he said, had welcomed the extent of consultation on the new regime and a number of LITRG concerns have been taken on board during that process.

Part Four – (ii) Other Measures

Clause 116 of the Bill harmonises interest charges on repayment interest to bring VAT into line with other taxes, scrapping the repayment supplement in the process. Here there was some positive news as the government responded to CIOT representations that the legislation would have denied businesses interest from HMRC for the period that the tax authority undertakes an enquiry. A government amendment allowing for repayment interest to be paid in these circumstances was passed. The FST told the committee: "We have consulted extensively and listened carefully to stakeholder feedback, including on this detail."

On clause 122 (Financial institution notices) shadow minister James Murray noted LITRG concerns that this represented the removal of important taxpayer safeguards. “HMRC are introducing powers which will be used in a domestic context, even though there is no domestic justification for them," he argued. The FST in his response claimed the measure ‘has important safeguards built into it’ and promised it would be possible to chart the use of the powers and to make an assessment about whether they are in danger of being abused.

Clause 123 (Collection of tax debts) allows HMRC to obtain documents or information for debt collection purposes. James Murray noted that CIOT had raised a concern that the new notices are not restricted to cases involving tax years after the date this measure becomes law, making it a very wide-ranging power. The FST replied, emphasising that this measure is an information power. He stressed that the Government takes the input of stakeholders such as CIOT very seriously.

The most politically contentious provisions in part four relate to the introduction of freeports. During debate on the floor of the Commons, shadow minister Abena Oppong-Asare, for Labour, drew heavily on questions posed in the CIOT briefing on these provisions. She noted, among other things, the Institute’s concerns about how freeport tax sites will be designated, the treatment of joint ventures where there is both commercial and residential development, and the issue of relief for subsequent non-qualifying activity.

There were, sadly, no answers at this point on these questions, all of which had come from members of CIOT’s Property Taxes Committee. But the minister was able to address another issue raised by a member of that committee, introducing government amendments to enable those using sharia compliant finance to benefit from a freeport SDLT tax break in the same way as those using conventional finance.

At the end of the committee stage MPs thanked officials and support staff. SNP spokesperson Peter Grant also thanked the external stakeholders who, he said, have worked in a constructive way. He said the Bill was much better for their input.

By George Crozier