Finance Bill 2017-19 Committee - 2nd sitting

Documents on the Bill can be read here. These include explanatory notes on the clauses and the text of amendments and new clauses tabled for debate.

Proceedings can be listened to here.

Clauses 5, 15 and 25 were dealt with in Committee of the Whole House, a report of which can be read here. That report also includes a background note on this Finance Bill, its history and its contents.

FINANCE BILL 2017-19 PART 1 - DIRECT TAXES (continued)

Income tax: investments (continued)

10 Personal portfolio bonds - PASSED

The Financial Secretary to the Treasury (FST), Mel Stride, spoke to the clause, explaining that this would amend property categories that may be selected without triggering the personal portfolio bonds (PPB) anti-avoidance rules contained in sections 515 to 526 of the Income Tax (Trading and Other Income) Act 2005.

Anneliese Dodds (Labour) asked if there was evidence of awareness among fund managers of these new rules, especially when secondary legislation is used.  The FST said there had been extensive consultation on the issue which had been welcomed.

11 EIS and SEIS: the no pre-arranged exits requirement - PASSED

12 VCTs: follow-on funding - PASSED

13 VCTs: exchange of non-qualifying shares and securities - PASSED

The FST explained that clauses 11,12 and 13 (grouped together for debate) make changes to the tax advantages of EIS, SEIS and VCTs.  He said these would provide "small but useful" easing of the rules and went on to explain these in greater detail.  These clauses had been removed from the Finance Act 2017 following the calling of the general election and retrospective legislation was being introduced to ensure taxpayers benefit from the reliefs with effect from the original commencement date.

VCTs exist to provide a range of tax reliefs allowing individuals to invest in smaller, higher-risk early stage companues that would otherwise struggle to access capital.  The FST explained that clause 11 made changes to an anti-abuse rule which prevents tax relief being provided in situations that may result in shares being disposed of which could put their future at risk.  This action will be retrospective for transactions taking place on or after 5 December 2016.

Clause 12, the FST explained, makes technical changes to clarify the law and ensure VCTs can provide follow-on funding to certain groups of companies.  Changes ensure VCT rules work in the same way to those for EIS.  These rules were changed in 2015 to target schemes more closely on early start-ups, however older companies can receive tax advantages in some situations (which the FST went on to outline).

Where certain conditions are met, VCTs will be able to continue providing follow-on funding for companies taken over by new holding companies after initial funding was received.

The FST said that Clause 13 would make changes to extend power for HM Treasury to make regulations on the exchange of certain investments held by a VCT.  Regulations under current powers ensure that VCTs are not at immediate risk of losing approved status when obliged to exchange a qualified investment for a non-qualified investment but these are limited in scope.  Without these new regulations, the FST said that VCTs would have to continue to rely on HMRC to exercise discretion to avoid immediate loss of approval.

The FST said that draft regulations would be published for public consultation later in the year.

Responding for Labour on clauses 11 and 12, Annelisse Dodds sought assurances that HMRC would not be overburdened with requests for certification, while noting that the reforms proposed would simplify administration for businesses.  She further asked the FST if he could provide guarantees that clause 11 would be focused on supporting new businesses rather than existing ones, citing EU state aid rules in her rationale.

The FST said the proposals contained in clauses 11,12 and 13 would reduce administrative burdens and lessen the requirement of HMRC to "opine" on the status of the investment vehicles used.  He reiterated comments made earlier that the proposals were highly technical and aimed at easing administratrive burdens.

14 & sch1 Social investment tax relief (This relief encourages investment in social enterprises with risky trading activities This makes some fairly minor changes to the rules) - PASSED (amendment 20 - DEFEATED)

The FST explained that the aim of clause 14 was to increase the amount of investment that newer social enterprises can raise through Social Investment Tax Relief (SITR).  He said that the proposals would make use of SITRs more attractive to a wider range of social enterprises and investors and that by exclusing lower risk activities, would ensure the scheme was well targeted and deliver value for money.

Introducing amendment 20, Anneliese Dodds (Labour) said Labour had concerns over a number of the changes proposed to SITR and called for a review of their effectiveness and impact.  She warned that the generous inventives offered by SITRs had led to concerns over abuse of the system and in anecdotal cases, displaced the public sector from providing certain services.  Particular attention was drawn to concerns over the process of qualifying for SITR, treatment of leasing, the treatment of social enterprises dependent on their age (those more than 7 years old lost support) and the effectiveness of anti-avoidance measures.

Kirsty Blackman (SNP) welcomed the Labour amendments and said that her party would support these if put to a vote.

Responding for the government, the FST said that SITR provided a valuable tool for people to invest in organisations promoting social and community benefits.  He said that the government was acting on a 2014 commitment to expand the scheme.  He said the chages would increase the investment limit to £1.5 million over the lifetime of all social enterprises using SITRs, with more effective targeting of those which struggle to attract investment.  He also stressed the need for "tight, sensible and effective" anti-avoidance measures. 

Returning to amendment 20, the FST said  the government had already committed to a full review of SITRs within 2 years of their expansion, adding that an earlier review would be unable to properly evaluate the effectiveness of the measures being proposed.

With this commitment in place, the FST pressed for the amendement to be withdrawn.  Anneliese Dodds (Labour) said that her party would press ahead with its call for a vote, citing again the party's concerns over the age limits on relief and anti-avoidance.  Mr Stride continued to emphasise the effectiveness of the measures proposed.

The amendement was defeated by 10 votes to 9.

(Clause 15 on Business investment relief was debated and passed in Committee of the Whole House. See report here.)

Income tax: trading and property businesses

16 & sch2 Calculation of profits of trades and property businesses (Changes rules for the calculation of the profits of unincorporated businesses on the cash basis, and allows those with income from unincorporated property businesses to use a version of the cash basis) - PASSED

Speaking to the clause, the FST said that the measure would enable landlords to use the cash-basis when calculating profits for tax and to simplify the treatment of capital expenditure within the cash basis.  He said that this was part of a government commitment to simplify tax rules for businesses, the self-employed and landlords first announced in the 2016 Budget.  Trading businesses had been able to use the cash basis for calculating tax since 2013, minimising the need for "complicated accounting adjustments".

He added that expanding the cash basis would represent a further step in simplifying tax rules.  2.3 million property businesses would now be eligible to use the method, providing administrative savings for around 1.8 million of these.  Capital expenditure can be decuted from income unless specified in the legislation.  This measure took effect from April 2017 and is therefore retrospective.

The measure was passed without debate.

17 & sch3 Trading and property allowances (New trading and property allowance for individuals of £1,000 each - PASSED) (and amendment 21 - WITHDRAWN)
Labour's amendment 21 would require HMRC to undertake a review of the operation of the new trading and property allowances in the first two relevant tax years.

Peter Dowd (Labour) moved amendment 21 which would require HMRC to undertake a review of the operation of the new trading and property allowances in the first two relevant tax years.

He cited evidence from the Association of Taxation Technicians (ATT) which said that the provisions, as drafted, could exclude certain individuals from benefiting from the allowance. He also cited evidence provided by the Low Incomes Tax Reform Group of the Chartered Institute of Taxation which warned of increasing complexities for low earners who were less likely to engage the services of professional accountants or advisers.

Anneliese Dodds (Labour) voiced concerns over the ability of HMRC's online systems to accurately calculate liabilities.  She said that HMRC's online portal had been "found wanting" when calculating liabilities.  She cited examples of the interaction between pensions savings allowance, tax-free dividend allowances, the savings starting rate and the tax free personal allowance, whcih had resulted in individuals being found liable for more tax than they should have been when calculated online instead of offline.

Mr Dowd also highlighted further LITRG evidence on the complications that may arise for lower-income households in receipt of Universal Credit.  Kelvin Hopkins (Labour) in support of his colleague, said that the relatively small amounts of money involved may deter people from engaging the services of an accountant and exacerbate the situation.  As a result, he too backed the amendment that would see HMRC report by 2020 on the use of reliefs and resultant effects on the exchequer.

Mel Stride (FST) spoke in favour of clause 17, arguing that it was a responsible measure aimed at ensuring the tax system was able to cope with the growing demands of the digital/sharing economy while providng greater clarity to taxpayers of their own responsibilities.  In closing remarks, he described the measure as a "tax break for the digital age".

He added that the measure would benefit 700,000 taxpayers, 75% of whom are basic rate taxpayers, saving each an average of £400 per year.  He said that the review proposed by Labour in their amendment would be "unecessary" and disproportionately burden taxpayers.

Peter Dowd (Labour) said that his party would not press their amendment at this stage but called on the FST to take on board the concerns raised by ATT and LITRG in their written evidence to the committee.  As a result, the amendment was withdrawn.

Corporation tax

18 & sch4 Carried-forward losses (Significant change bringing in more flexibility in use of losses (reducing CT bills) but limiting relief to 50% of profits over £5m (increases CT bills). Revenue raising overall. £5m allowance means it will mostly hit larger companies - PASSED) (and amendments 22-23 - WITHDRAWN)

19 Losses: counteraction of avoidance arrangements - PASSED

(Both clauses 18 and 19 were considered in tandem).

Peter Dowd (Labour) spoke to his party's amendments, which would require HMRC to undertake a review of the operation of the provisions for group relief for carried-forward losses (amendment 22) and require HMRC to undertake a review of the operation of the provisions for carrying forward trade losses for insurance companies, creative industries and oil activities (amendment 23).

Mr Dowd said that clauses 18 and 19 represented some of the most complicated measures contained in the Finance Bill.  He further stated that there was some degree of merit in the government moving to relax rules around losses.

He asked the FST how the £5 million figure had been calaculated and whether consideration had been given to lowering or raising the threshold for unrestricted profits.  He also called on the government to consider international evidence on carrying forward losses in a bid to learn from best practice.

On the detail contained in clause 19, Mr Dowd said that while his party supported measures aimed at tackling avoidance and abusing the carry-forward loss mechanism, these measures needed to be considered further.  Within the sector wide opt-outs described in amendment 23, he said companies may use carry-forward losses as a way of avoiding taxation.

Continuing with his remarks, Mr Dowd said that the Chartered Institute of Taxation had voiced concerns over the complexity of the measures proposed and the timescale by which these were being implemented.  Citing the CIOT's written evidence, he said the government had failed to balance "it desire to raise some modest revenue with its duty to produce legislation that can be followed with predictability and certainty".

Responding for the government, Mel Stride called on MPs to reject amendment 22, saying mandated reviews were an inappropriate response to a series of measures that had been widely consulted upon and carefully designed.

He said that clause 18 introduced measures in response to modern business practices and helped address public concern that businesses making substantial profits pay their tax.  He stressed that the government had taking account of international best-practice and said that the £5 million figure would result in 99% of businesses being unaffected, with action focused on the top 1% of companies doing business in the UK.

The measures in clause 19, the FST said, would prevent companies from entering into avoidance schemes in a bit to exploit the rules contained in the previous clause.

Welcoming the FST's explanations, Mr Dowd said that the Labour Party would not press ahead with a vote and withdrew its amendments.  But he warned that this was an issue that was likely to be returned to in future finance bill discussions.

The committee adjourned at 3.26pm.  It will resume consideration of the Finance Bill on Thursday 19 October.

By Chris Young