Concerns about MTD and sugar tax heard in Finance Bill debate
The second reading was a chance for a debate on the principles in, and broad content of, the Finance Bill, but it was a thin exchange on this occasion because of uncertainty about how it will progress and which clauses will be ditched because of the announcement of a general election on June 8. Much of the debate was about the sugar tax. The SNP put forward an amendment to scupper the Bill, which was voted down by 54- 314. The SNP complained that the Bill failed to provide the necessary stimulus to compensate for the economic impact of Brexit, it failed to address the inequity of VAT being charged on the Scottish Police Authority and the Scottish Fire and Rescue Service and failed to provide concrete measures to support the oil and gas industry, among other failings. The Bill will now go to its committee stage, which will take place on the floor of the House of Commons in a single day on April 25th (tomorrow).
Minister‚ s introduction
The Financial Secretary to the Treasury (FST) Jane Ellison said the threat of a new soft drinks industry (Clause 71) is working already: there have been reformulation announcements by Tesco, by the makers of Lucozade and Ribena and by A. G. Barr relatively recently. Public Health England will work on a very ambitious wider push on improving children‚ s eating habits, she added.
Ellison said the Bill will take the next steps in helping to deliver a fairer and more sustainable tax system. She said the Tories‚ new manifesto will address the gap in finances as a result of Chancellor Philip Hammond‚ s U-turn on national insurance increases for the self-employed. The FST warned the OBR estimates that the faster growth of new incorporations compared with the growth of employment will reduce tax receipts by an additional £3.5 billion in 2021-22.
The minister said off-payroll working rules and dividend allowance will be amended to raise much needed revenue to invest in public services, including adult social care. She said changes in the Bill mean 80 per cent of all general investors will still pay no dividend tax on their investments. The Government has brought large swathes of government services into the digital age, including within the tax system, and we need to go on to complete that journey. She said making tax digital (clause 120) is needed because ‚ we cannot sustain the current level of error and the size of the SME tax gap in the long term‚ . She added that the Treasury ‚ do not recognise‚ some of the figures that have been put in the public domain by some representative bodies about MTD and that at least 90 per cent of people have access to the right broadband speed to comply.
The Government is committed to their fiscal mandate of reducing the deficit. Ellison said the increase in the standard rate of insurance premium tax from 10 per cent to 12 per cent in the autumn statement would raise vital revenues that were required to support public services.
The Bill will introduce more than 10 measures on tax avoidance and tax evasion that are forecast to raise over £5.5 billion by 2021-22. These include curbs on tax deductions for interest expenses (Clause 31) and losses and artificial disguised remuneration schemes. On the new rules regarding enabling of tax avoidance, she claimed: ‚ We have worked closely with representative bodies to ensure that all people working within the spirit of their professional guidelines have nothing to fear from the new rules. The Bill will mean that enablers of abusive arrangements can be held accountable for their activities, while ensuring, as I say, that the vast majority of professionals who provide advice on genuine commercial arrangements will not be impacted.‚
She closed her opening speech by stating: ‚ The Bill will help to deliver a fairer and more sustainable tax system, one fit for the digital age and responsive to the different ways in which people choose to work.‚
She later said HMRC‚ s performance has been ‚ excellent in recent years‚ in many areas, as shown by the £140 billion extra raised since 2010 from avoidance and evasion.
Shadow Chief Secretary to the Treasury Peter Dowd said the Budget ‚ continued the Government‚ s programme of tax cuts for multinational corporations and the super-rich: by the end of 2021 they would have received £70 billion-worth of tax breaks, paid for by those on middle and low incomes and of course the self-employed‚ . The Government have presided over the slowest recovery since the 1920s, he said. This mammoth Bill will be supplemented by an unprecedented number of statutory instruments, he complained.
Dowd was upset that the Bill ‚ fails to introduce any meaningful measures to tackle tax avoidance and evasion‚ . ‚ [I]t is a charter for tax avoiders‚ , he claimed. He was particularly critical of the measures around non-dom status which he regarded as inadequate. ‚ [T]he Government‚ s headline ‚ deeming‚ measure is undermined because they have chosen to preserve the non-dom status of offshore trusts, he argued, adding, ‚ How on earth is this going to get more taxes paid if non-doms are being forewarned that they can simply hide their money away in a trust and still keep it beyond the Revenue‚ s grasp?‚
Rising business rates and rising inflation are creating a perfect storm for SMEs, Labour‚ s spokesman argued, noting that SMEs‚ costs are predicted to go up by £6.8 billion by the end of this year. Dowd said there is no reason businesses should have to submit quarterly digital tax returns, particularly when they lack the time, resources and capacity to convert records into digital standards on a frequent basis. On HMRC, he asked ‚ [h]ow will we ever close the tax gap when there are no tax inspectors left to help taxpayers get their returns right and when HMRC has been filched of the resources it needs to run a service? It is a total false economy.‚
Dowd was challenged by Conservative MP Tom Tugendhat who claimed ‚ that his pledge further to increase taxes runs directly contrary to his hope for better employment‚ . Dowd responded that he had not referred to raising taxes, but added: ‚ I was asked earlier how I would pay for the changes, and I indicated that I would start with corporations. In effect, corporations receive £70 billion in relief over a five-year to six-year period through banking levy reductions and so on. That is the starting point for us.‚ He argued that ‚ A series of failures has led [the Conservatives] to borrow more than any other Government in history, and far more than every Labour Government combined.‚
Winding up the debate Jonathan Reynolds, Shadow Economic Secretary, said IR35 shifts the entire burden of taxation on to contractors, rather than looking at the underlying issue of why the public sector has become so dependent on people working through personal service companies. ‚ As is argued by the Low Incomes Tax Reform Group, the rules on errors in taxpayer documents seem to ignore the fact that low-income groups could now be caught in punitive anti-avoidance measures simply because they have no choice but to operate through an agency, or because they cannot afford accountancy advice to help them to fill out their tax returns.‚ He also pointed out that the House of Lords Economic Affairs Finance Bill Sub-Committee has said that it does not share HMRC‚ s confidence in its estimates of how far the tax gap will be reduced by Making Tax Digital, which it has described as fragile and little more than guesswork.
Nigel Mills (a chartered accountant) pushed for the very smallest businesses to opt into the Making Tax Digital system, rather than making it compulsory for those with very low levels of turnover. On interest deductibility Mills said multinational corporations have been ‚ gaming the global tax system to a ridiculous degree‚ , so we cannot allow our system to be exploited by excessive interest deduction. It makes sense for us to get in line with the global consensus that the interest limit should be 30 per cent of EBITDA, he added. On the sugar tax, he was a ‚ little nervous‚ about hypothecating taxes for individual spending, because there is a real risk that it would lead to a complicated tax system. He supports the change to VAT collection from fulfilment businesses (Clause 108) because it is very hard for UK businesses resident here that are trying to comply with the rules to compete. He suggested that the clause in the Bill on Northern Ireland corporation tax should not be rushed through before the election because it is not controversial in Northern Ireland. He wondered whether it is possible to produce a scheme in which we have either lower rates of air passenger duty on routes into regional airports or lower APD for a new route for a certain time period‚ perhaps three or five years‚ to enable such a route to become viable.
Alan Mak said that although the British and German governments spend a similar amount on research and development‚ around 28 per cent, the big deficit is actually in private sector investment.
On the soft drinks industry levy, Jacob Rees-Mogg argued that the tax system is not there to tell us how to live our lives. He was struck by a comment from a Labour MP that that a lot of obesity is in fact genetic. ‚ If that is the case, we are penalising people who have a genetic propensity to obesity while it is fine for people like me [who is thin].‚ He said hypothecated tax does not work because it produces the wrong amount of money for what it is seeking. On the Bill, he said we should be ‚ very careful‚ not to deter people from coming to the UK by having too many anti-avoidance rules for non-doms: ‚ who knows where the tipping point will come‚ ? To achieve tax simplification, it will be necessary to ensure that avoidance is removed at source, rather than by anti-avoidance measures. ‚ A lot of what was done with regard to non-doms was much more about politics and perception than the contribution non-doms make to this country‚ , he said
Dr James Davies also focused on the soft drinks industry levy. He said that it was a startling fact that obese children are five times more likely to become obese adults. A concern raised by the Health Committee was that low or zero-sugar drinks might end up picking up some of the extra costs levied on manufacturers by their sugary alternatives. If that were to take place, it would be a missed opportunity to maximise the positive impact of the levy, he added. He argued that we use the tax system to influence behaviour and always have done, that the tax can be avoided if products are reformulated or if existing sugar-free options are promoted and is not a regressive measure either. The health gains are the biggest for those on low incomes, he said.
Tom Tugendhat said increasing taxes and increasing the burden of the state on companies around our country would lead to employment falling, not rising. Welfare cases would then rise, not fall.
Kit Malthouse, a member of the Treasury Committee, welcomed the introduction of additional flexibility to investment vehicles (EIS, SEIS and VCTs) because they have gone out of ‚ fashion‚ . He said that given the changing nature of our economy and the removal of a lot of cash from the business cycle, it may be time to start to look at things other than direct taxation. Corporation tax is difficult, complex and hard to collect, he said, while VAT is relatively easy to collect and compliance is high. He also pleaded, noting the abolition of the employee shareholder scheme, for government to continue to think about how to facilitate the idea that it is in the interests of employers and business owners to involve their employees in the business in a capital sense. Finally he praised the change to the allowance for investment in grassroots sport, making it deductible for businesses.
Rishi Sunak also raised investment vehicles, commenting that ‚ [m]any lawyers, accountants, investors and entrepreneurs say that the EIS process is often too complicated and takes too long.‚
He said he could see the logic for introducing some form of fee for advance assurance. ‚ This would help to raise the resources necessary for HMRC to provide a smoother service with greater transparency around processing times and specific dates for document review. Secondly, we could look at the use of standardised documentation, which would save time and money for all participants, enabling HMRC to speed up its approvals. Thirdly, we must look at how to simplify the EIS rules and their interpretation.‚ He noted that it was the view of the EIS Association ‚ that a large part of the reason for this complexity is the need for our laws to comply with EU state aid rules. I hope that when we leave the European Union, the Government will have the opportunity to look at simplifying the EIS rules and ensure that our SMEs get the capital they need to flourish,‚ he concluded.
Victoria Atkins looked forward to helping the Government not just in the Finance Bill, but in the Criminal Finances Bill, to ‚ ensure that tax fraudsters feel the full force of the law‚ . She also praised the Government‚ s cuts to the rate of corporation tax.
Suella Fernandes focused her comments on clauses 1 and 2, relating to income tax. ‚ [B]y raising the tax-free personal allowance threshold to £11,500 this year, we are supporting families, workers and those on lower and middle incomes,‚ she said. Referring MPs to the Laffer curve she said that ‚ [w]hen Gordon Brown increased the higher rate of tax, tax revenue fell. When [George Osborne] dropped it again, tax revenues increased‚ .
Rebecca Pow also praised the increase in the income tax threshold to £11,500. Additionally she argued that keeping corporation tax low generates more tax revenue.
SNP economy spokesman Stewart Hosie said the Bill treats the Scotch whisky industry and the insurance sector as cash cows for the Treasury. Hosie said alongside this Finance Bill are a set of welfare proposals that do not support inclusive growth, such as the cut of £30 a week to the employment and support allowance for claimants placed in the work-related activity group; a 55 per cent cut in the rate of ESA for disabled people. He said the increase in ISA allowance is juxtaposed with a change to the dividend nil rate from a modest £5,000 down to £2,000.
George Kerevan, a member of the Treasury Committee, said the current Chancellor, in the autumn statement, clearly borrowed sufficient money to give himself some fire power should the economy slow. The trouble is that in the Autumn Statement all that spending power was delayed until post-2019, which is when we will see what the Brexit deal actually is. FST Ellison replied that the Government borrowed to invest in greater productivity and ‚ some of that is happening now‚ . In Germany, the headline rate of corporation tax is higher than in the UK, at 30 per cent to 33 per cent, and has much better productivity and higher industrial investment, said Kerevan. ‚ It comes back to the issue of consumption and relying on debt-fuelled consumption to power growth [in the UK]. Germany has focused on driving its economy through industrial investment and exports. Once you have that, you take the pressure off taxation on the consumer.‚ He gave an example which showed how cutting inheritance tax and replacing it with a probate levy ‚ gets us back to where we started‚ . We can see that once we start down that road, we will go on increasing the levy on probate simply as a revenue earner, he said. In terms of the insurance premium tax, Kerevan said a whole series of insurance forms are not yet covered by the tax, so one can quickly see a future Chancellor saying, ‚ Well, let‚ s put the insurance premium tax on reinsurance, or on buying shipping and aircraft. Why shouldn‚ t an airline pay insurance premium tax on buying an aircraft?‚
Kirsty Blackman said she has written to the Select Committee on Procedure asking it to look at the procedural matters that could be changed to meet the recommendations in the Better Budgets report which the Chartered Institute of Taxation wrote with the Institute for Fiscal Studies and the Institute for Government. She is especially keen for the Government to consider taking evidence in the Finance Bill Committee. She said the Government had to slow down the roll-out of Making Tax Digital and change its position on national insurance for the self-employed. Partly because the consultation done in advance is not good enough. On other matters in the Bill, she said people are losing more as a result of the changes to tax credits, for example, than they are gaining from the changes to the personal allowance and the minimum wage.
Joanna Cherry wants to protect children from junk food advertising and steps taken to tackle high-sugar milk-based drinks, which are at present excluded from the soft drinks industry levy in the Bill.
Steve McCabe (Labour) is worried that the soft drinks industry levy is an isolated policy and that it will fail to bring about the lasting change we hope for in the consumption habits of the public. He said the Bill does not address the funding crisis in our schools and our NHS; the impact of cuts in policing,
Sammy Wilson (DUP) said in many parts of the country, small businesses do not have good enough access to the internet to make four digital returns a year. Wilson promoted a policy that has been introduced in Northern Ireland whereby larger stores pay a 15 per cent premium on their rates to finance some relief for smaller businesses in town centres.
Summary by Hamant Verma, External Relations Officer, CIOT
The full debate can be read here.