Finance Bill passes first hurdle but MPs have their eyes on the crisis, and the future
The Finance Bill had its second reading in the House of Commons on Monday 27 April. The Bill includes measures such as a Digital Services Tax, changes to the controversial Loan Charge and retaining corporation tax at 19 per cent (rather than implementing a previously legislated cut to 17 per cent). It makes some business reliefs more generous to encourage investment but introduces restrictions on the availability of two capital gains tax reliefs - entrepreneurs’ relief and private residence relief.
However the debate was dominated by broader economic questions, in particular those around the effectiveness of the Government’s measures to support business through the COVID-19 shutdown and how government should revive the economy once the immediate health crisis has passed.
Conservative MPs were mainly supportive of the measures in in the Bill and in response to COVID-19, while Labour members were unimpressed, suggesting the Bill was merely a continuation of the past ten years’ fiscal policy. Labour and other opposition parties broadly support the Government’s schemes to help the economy through the pandemic, though the effectiveness of the loans scheme is questioned. Events and announcements continue to overtake March’s UK Budget.
This was the first House of Commons debate ever on a piece of legislation to include speakers participating via video link.
The Bill passed its second reading without a vote and was sent straight to a Public Bill Committee at the end of the debate. This is significant as it indicates that, unusually, there will be no Committee of Whole House this year. This is undoubtedly due to the exceptional working arrangements currently in place in Parliament, which limit the number of MPs who can be present in the Commons chamber to 50. MPs have approved a motion to bring in remote voting and work is ongoing to devise a workable, effective and secure process for this, but the Leader of the House has undertaken that remote voting will not be introduced until the Procedure Committee has examined the proposed scheme, which means that only unopposed business is currently being debated. Remote voting is expected to be in place by the time the Finance Bill returns to the floor of the House for its report stage in late June or early July.
This summary of the debate concentrates on comments on tax measures, giving just a brief flavour of the broader economic points raised.
Opening speeches – the Minister
Financial Secretary to the Treasury Jesse Norman opened the session. Norman argued that the UK’s response to COVID-19 is the most comprehensive and far-reaching economic response in the developed world to the virus. He praised the job retention scheme and the support for the self-employed. Businesses can also benefit from more than £300 billion-worth of Government-backed loans, numerous tax cuts and grants, with a business rates holiday for the worst-affected sectors of the economy, he explained. He went on to talk up the Government’s decision to raise by £1,000 the universal credit standard allowance and working tax credit basic element for a year. He said these were: “Unprecedented measures for unprecedented times.”
Norman said this Bill goes beyond the immediate response to COVID-19 by ‘delivering the Government’s manifesto commitment to make the tax system fairer and more proportionate’. For example, care leavers who start apprenticeships will pay no income tax on bursary payments that they receive. Recipients of payments under the Windrush compensation scheme and the troubles permanent disablement payment scheme will find that those payments will be exempt from income, inheritance and capital gains taxes, and inheritance tax will not be collected on Kindertransport fund payments.
Norman said the Government remains fully committed to reforms of the off-payroll working rules and will introduce an amendment to the Bill to legislate for a new commencement date of 6 April 2021. The Government will use the additional time to commission further external research into the long-term effects of the reforms in the public sector, with the intention that that research will be available before the reforms come into effect in the private sector in April 2021.
On the Loan Charge, Norman said the Finance Bill means that the loan charge no longer applies to loans entered into before 9 December 2010, ‘which is the point at which Sir Amyas [Morse] found that the law put beyond doubt the fact that disguised remuneration schemes were a form of tax avoidance’. The Bill also brings forward legislation to repay taxpayers who voluntarily settled for years that are no longer in scope, while those still able to pay will be able to spread their loan balance over three tax years to suit their finances, he said.
The increase to the R&D expenditure credit rate from 12 per cent to 13 per cent will drive growth and productivity across the UK, and the raising of the structures and buildings allowance rate from two per cent to three per cent should help to stimulate long-term capital investment, he claimed.
The extra benefits of lowering the corporation tax rate still further must be balanced against other objectives, such as funding the NHS and the public services, the minister said, explaining the Government’s decision to maintain the current 19 per cent rate.
Entrepreneurs’ relief in its current form is neither effective in stimulating new business growth nor good value for money, said Norman. “By reducing the lifetime limit from £10 million to £1 million, we are returning the relief to its original purpose while continuing to promote and reward enterprise.”
The international corporate tax rules mean that value derived from UK users is not reflected in the level of UK tax some companies pay, the minister told MPs. Although the UK has a Digital Services Tax (DST), the Government’s ultimate goal is to secure a long-term global solution. We are working with international partners through the OECD to agree a way forward, he said.
This Bill introduces legislation for both a charging power to create a UK emissions trading system, and a carbon emissions tax. In the Budget, the Chancellor also revealed key elements of the plastic packaging tax, which should significantly increase the use of recycled materials in packaging. This Bill allows preparatory spending ahead of its introduction. The Bill will also encourage the uptake of zero-emission vehicles by removing them from the vehicle excise duty expensive car supplement.
Opening speeches – Shadow Chancellor
Labour’s new Shadow Chancellor Anneliese Dodds said many of the clauses in this Finance Bill were written many months ago, with a large number of them involving relatively minor fixes to existing tax legislation. She lamented that the Bill ‘presents a picture of continuing the business as usual of the last 10 years’ when what is needed are new approaches to taxation generally, the social contract with business, funding public services, the climate crisis and tax reliefs. As of 2019, for example, due to changes in tax and social security, the poorest 10 per cent of households have seen losses of 11 per cent of their income, on average, as a direct result of reforms. Among those with children, the losses amount to 20 per cent, she added. In contrast, the best off 10 per cent of people have seen losses of only two per cent in their incomes due to tax and social security changes since 2010.
Dodds said we should institute a more progressive tax system, with those with the broadest shoulders contributing to services that benefit us all, and she called for a new social contract with business. In light of COVID-19, the Shadow Chancellor called for a ban on public funds being passed into tax havens or doled out immediately in dividends, as well as no share buy-backs on bailed out companies, and a commitment to improvements in environmental performance in future.
Dodds called for a renewed focus on dealing with the enablers of tax avoidance and evasion. She said: “I regret that we still do not see that when it comes to those who facilitated disguised remuneration loan arrangements, while those who received such arrangements continue to be affected by the loan charge.”
Despite welcoming the DST, Dodds is concerned about its scope. “It means, for example, that Amazon will continue to pay a lower rate of tax in relation to revenue than many high street bookstores and other retailers. In addition, it fails to fill the gulf in unpaid corporation tax from many of the largest technology firms.” The Government need to be more explicit about their discussions with international partners about the move to a formula-based corporation tax system, she added.
Dodds was not impressed with ‘another restricted review of business rates’, instead of a deeper review.
The incidence of tax reliefs has increased over recent years, yet there is little thorough oversight of their impact, said Dodds. Labour has called repeatedly for a thorough review of tax reliefs. She said: “The NAO’s recent report on tax expenditure showed that the Government are not reporting costs of over two thirds of reliefs; that must change.”
Opening speeches - SNP frontbench
Clause 12 gives Ministers the power by regulation to exempt certain social security benefits from income tax, but far more extensive measures are required to address the flaws in the social security system, said the SNP’s economy spokesperson Alison Thewliss. She urged the Chancellor to bring forward measures to remove the two-child limit, for instance.
Separately, she said: “The cut to employers’ national insurance goes only a third of the way that we demanded towards the £2,500 in the Tories’ own manifesto commitment. Younger workers will continue to suffer state-sanctioned age discrimination, and this is really a missed opportunity to introduce a real living wage for all.”
Thewliss said she supported “the calls from the Low Incomes Tax Reform Group, Age UK and the TUC for action on the net pay pensions issue. Due to a flaw in the tax system, around 1.7 million lower-income workers, mostly women, are being unfairly charged 25% more for their pensions as a result of the way in which their employer pension scheme operates. I ask the Government to look at this.”
She questioned Part 4 of the Finance Bill that lays out plans to grant HMRC preferential status in insolvency procedures from December this year, and measures to make directors personally liable for a company’s tax liabilities where HMRC considers avoidance is taking place or where there is evidence of phoenixism or tax abuse via insolvency.
The UK Government must urgently introduce a robust and transparent system of company registration in order to combat money launderers’ attempts to register entities for illicit and avoidance purposes, said Thewliss. The UK Government must act to tackle the ongoing improper use of Scottish limited partnerships through a proper reform of Companies House.
Thewliss said it was regrettable that the UK has failed to implement the DST measure alongside international partners, despite countries such as France, Spain and Italy seeking to introduce similar measures.
Turning to Brexit, Thewliss said the UK Government should ask the EU today for the maximum two-year extension to the transition period. She said: “The Scottish economy just cannot afford the double hit of COVID-19 and the growing likelihood of no deal, or at the very best a hard Brexit deal, in eight months’ time.”
Liberal Democrat leader
Acting Lib Dem Leader Sir Edward Davey said economic policy to help the recovery must be guided by three key objectives: “producing a fairer society; building a more sustainable economy; and restoring our reputation as a country that is outward-looking and internationalist.” On the first of these he included problems with the universal credit system and the low levels of statutory sick pay. He also called on government to look more seriously at proposals for a universal basic income. He said there was a need to move beyond targets to debate ‘specific policy proposals to make sure that the new economy that we must build is genuinely low carbon’.
Davey criticised the Government’s business loan scheme for being too slow. He said that when the furlough scheme is wound down we must make sure that we protect jobs: “We must prevent staff who are furloughed today from becoming staff who are laid off tomorrow.” He also warned about the challenge facing local authorities ‘on the frontline of this crisis’, urging the Treasury to commit to the principle that for councils across the country it will not just fund extra crisis-related spending in full but provide grant funding to cover dramatic losses in revenue.
Treasury Committee chair
Treasury Committee Chair Mel Stride said entrepreneurs’ relief was ‘not fit for purpose’. He called on the Treasury to examine all £24 billion-worth of business reliefs and make sure that they are all fit for purpose.
On Digital Services Tax, Stride’s view is that it is not right that search engines, online marketplaces and social media platforms are not paying a fair level of tax in our country. “It is not a case of evading tax; it is a case of the taxation system not being adequate for the 21st century. We cannot assess national taxation rights on property, on where people are, on where the management are or on where the intellectual property resides; we must do it on where value is created. These measures are a big step in the right direction”, he concluded. Stride, who was Financial Secretary himself until last year, told his successor to ‘stick to his guns’, adding that he would “face great pressure from the United States in particular, but in the absence of an international approach to this matter, it is vital that we take action.”
Conservative backbench speakers
Conservative MPs praised the Government’s business support measures introduced in response to COVID-19, but a number sought greater flexibility in eligibility for them. Mark Harper and Andrew Griffith both suggested a taper instead of the ‘hard edge’ £51,000 cut-off for the business rates holiday. Sir Charles Walker argued for more flexibility in furloughing because it would be ‘really useful’ for many businesses to be able to have a member of staff in for one or two days a week.
Griffith also suggested the Government should be looking at radical tax reform. “This Bill will be the last from the pre-covid era. The Chancellor has the chance to be one of the great reformers, to rebuild our tax system to be fit for the 21st century, and in so doing, to unleash Britain’s potential. As those of us who have lived the reality in business know, the burden of tax is much more than the rate; it is about complexity, certainty and the approach to compliance. The World Bank ranks us eighth in the world for ease of doing business, but only 27th for ease of paying taxes. Our tax system is simply not simple enough. It is time to unify the income tax and national insurance regimes, to move much faster to a digital only tax system, and to simplify radically the tax code.”
A number of Conservative MPs raised the reforms to off-payroll working, also known as IR35. Proposals for changes, which would have taken effect this month, were dropped from the bill, but the minister had said (see above) that they would be reintroduced via an amendment at a later stage, with a later start date of April 2021.
Sir John Redwood called for a re-think about changing the rules on IR35. “There are about five million self-employed people in this country who have been doing a magnificent job for us. They provide flexibility, service and products that we need and they are very competitive”, he added. Sir Graham Brady called for Treasury Minsters to look at whether more could be done to achieve ‘proper clarity’ of definition between contractors and employees, and at the ‘ill-defined status of worker, which causes considerable confusion’.
Dr Liam Fox, also on IR35, remarked: “Some of our most flexible and resilient workers in our economy are in that grouping, and what we must not do in trying to right a wrong is put them in a position where they are disadvantaged, without sick pay in line with other workers in the economy, for example.” Saqib Bhatti is pleased to see the delay in the implementation of IR35 reforms to 2021. Our flexible workforce has seen serious strains in recent weeks and continue to experience significant difficulties, he said.
Sally-Ann Hart said the all-party group on the loan charge formally disputes the review’s finding that the law on the use of loan schemes became clear from December 2010. Hart is concerned that some promoters and professional advisers are still selling schemes, in spite of the law becoming clear from November 2017. She said: “Retrospective legislation can right a wrong when law is an ass, but when it is used to penalise retrospectively, it undermines public confidence in the rule of law.” The MP is calling for a ‘just decision’ to be made that the loan charge takes effect from the date of Royal Assent of the 2017 Finance Act. That would avoid the retrospective element, and would give certainty from that point onwards regarding loan arrangements, she said. Andrew Griffith also raised the loan charge, calling for ‘an amnesty for all but the most egregious cases of abuse’.
David Mundell commented on the Roadchef employee benefits trust issue, complaining that the funds cannot currently be distributed on a tax-free basis.
Suzanne Webb claimed that this is a Finance Bill by a Government taking decisive action towards long-term opportunities using the ‘great evangelism’ of entrepreneurialism. But she suggested the Government should consult on widening the definition of R&D tax credits, qualifying expenditure to include data cloud computing. Miriam Cates said the increase in R&D tax credits in the Bill is an enormous boost to businesses.
Lee Rowley looked forward to the alcohol duty review, because he is very keen to promote the importance of fairness and equity in alcohol duty laws.
A number of Conservative MPs expressed concern about current levels of taxation and potential future levels. According to the OBR’s recent Budget forecast, taxation is already heading to its highest level for 50 years. We know from decades of economic evidence that the risk of raising it further is that that slows economic growth, and that will make the national debt less affordable, said Treasury Committee member Anthony Browne. He added: “There is another solution: go for growth. That means pursuing supply-side reforms, supporting free enterprise, taking advantage of some of the opportunities we have from leaving the EU, and pursuing trade and innovation.” Fellow Treasury Committee member Steve Baker believes that the economy is already at or near its taxable capacity.
John Penrose was concerned about the marginal tax rate. “Those less well-off key workers are paying a much higher overall tax rate—the marginal effective tax rate, or METR—than the safer, better-off white-collar professionals, because tax rates on investment income are lower than on wages and salaries, and because benefits withdrawal rates only apply to low-income households. The combined effect often means that low-income key workers pay an effective marginal tax rate of up to 75 per cent, while better-off people pay dramatically lower rates. The haves are being subsidised by the have-nots [in the COVID-19 crisis].” If we can go back to taxing all income the same, whether from benefits, work or wealth, it will be transformational, he argued.
Labour backbench speakers
Most Labour speakers focused on the COVID-19 economic response and the measures needed to deliver a strong and fair recovery, rather than the particular measures in the Finance Bill.
Kate Osborne warned that many workers were ‘falling through the cracks’ of the Government’s support. “Although the extension from 28 February to 19 March will allow more employees to be furloughed, a lot more new workers will still miss out because they are paid towards the end of each month. Some have contacted their previous employer and asked to be re-employed on furlough, but I am informed that some companies are either unwilling or unable to help. The Government must consider further extending the cut-off date for the coronavirus job retention scheme to include the large proportion of workers who are paid monthly and giving the opportunity for other new employees also to be furloughed.”
Tonia Antoniazzi called for the Bill to be amended so that, if vulnerable key workers cannot be furloughed, the Government have a duty to increase the level of statutory sick pay to ensure that no key worker is left behind as a result of this Bill.
Richard Burgon said we urgently need to see action over the ‘shockingly’ low level of sick pay. It should be increased to real living wage levels, and we must ensure that millions of low-paid—mainly women—workers can access it too.
Disabled people are disproportionately represented in the self-employed workforce. This led Debbie Abrahams to say, while pleased the minimum income floor has been lifted for universal credit, why has disability social security support not been uprated, given the additional costs that disabled people are facing on top of the average pre-pandemic costs of over £530 a month?
Barry Sheerman said he wanted to see a windfall profit tax ‘on those who have done rather well [during the COVID-19 crisis], even though they did not plot or plan it. I am thinking of Amazon, Google, Netflix and the gambling sector, all of which are ripe for a windfall tax that could be distributed to look after young people’.
Shabana Mahmood said the Digital Services Tax will not deal with the differential tax treatment between brick businesses and click business, and it will certainly not deal with Amazon, which continues to grow exponentially, but ‘it is a step in the right direction’. The status quo needs breaking apart, and that can happen only through governments taking unilateral action, she charged.
There have been emerging discussions about the need for new forms of progressive taxation as opposed to spending cuts, yet the Bill does not include an immediate windfall tax on the banks and finance sector, combined with a wealth tax on the richest in our society, bemoaned Apsana Begum.
Treasury Committee member Rushanara Ali remarked that this Bill does little to strengthen our economy or make us more resilient. She said: “We need a modern-day Marshall plan, rebuilding and reconstructing our NHS, social care, police, schools and other vital public services, rather than leaving them vulnerable and fragile as we face crises like the current pandemic.”
Public Accounts Committee Chair Meg Hillier remarked: “The chickens are coming home to roost in this crisis: the economy has split in a different way, which means that people are working in different ways and that businesses are setting up in different ways. They are now being penalised because of a system that grew up like Topsy, with little thought for the consequences.”
Lib Dem Alistair Carmichael said that one chartered accountant in his Orkney and Shetland constituency recently told him that he reckoned that about 75% of his clients would get no help from the available COVID-19 economic support schemes. “That is why, when it came to the Chancellor’s statement today, I made a very unusual-for-me step—to ask him to consider the introduction of a universal basic income. Let me be quite clear: that runs against just about everything I have ever believed. I was always brought up to believe that you work hard, you get on, you contribute and you pay back. The idea of effectively giving people something for nothing would otherwise be anathema to me, but in these times if the schemes we have are just too difficult and complex to reach the people who have worked hard and taken risks, surely we are going to have to do something different. Consider, for example, the position of those who rely on dividend income; people are going to be left without the protection they need, and they will not then be there when the good times return and our businesses want to open up again.”
On the Government’s proposal to increase R&D expenditure credit from 12 per cent to 13 per cent, Ben Lake, Plaid Cymru, suggested that to increase productivity in a meaningful way, they should consider going further and increase that credit to 15 per cent.
Closing speeches – Shadow Chief Secretary to the Treasury
The new Shadow Chief Secretary to the Treasury Bridget Phillipson said the inadequacies of our tax system and of our society, and the structural weaknesses in our economy, are the ‘responsibility’ of the Conservative Party’s 10 years in power. Too many in our country have seen little improvement in living standards for a decade now, she added.
“The Budget focuses on maintaining the status quo and delivering limited reforms, rather than the ambitious reforms that we need,” Phillipson continued. She noted the criticism of the Institute for Fiscal Studies that the tax measures announced in last month’s Budget look “piecemeal…it is not clear they are part of any long term thought through strategy.””
On business taxation Phillipson said it was welcome that the Government were going to maintain corporation tax at 19%. “Perhaps that suggests that Ministers have accepted the arguments made by many Opposition Members for many years that whittling down the rate, which is already among the lowest in the G20, is not the best approach. It has not given us a productivity miracle. It has not tempted companies to set up shop here on a scale adequate to balance the flow of companies moving away as a result of Brexit.” She said that, instead, “we should be asking that profitable companies, especially those for which the current situation has provided an unexpected windfall, contribute more to help to provide our public services with the funding that they need.” Phillipson said the Digital Services Tax was ‘long-overdue’ but ‘like so much of the Bill, it does not go nearly far enough’.
Closing speeches – Economic Secretary to the Treasury
Closing the debate, Economic Secretary John Glen said tackling tax avoidance is a priority for the Government, and in the Budget the Chancellor announced further measures, including legislation to strengthen HMRC’s existing anti-avoidance powers. The Government also plan to issue a call for evidence on the next steps to reduce or end the use of disguised remuneration schemes, he added.
On entrepreneurs’ relief, Glen said most of the cost of this relief previously came from those making gains over £1 million. “With such extreme gains now ineligible for this relief, we can ensure that the support is targeted where it was intended: at small businesses.”
Responding to Andrew Griffith’s call for tax reform including a unified income tax and national insurance regime, the minister said: “The Government are indeed committed to a tax system that is simple and easy to use, which is why we created the Office of Tax Simplification in 2010 and put it on a permanent statutory basis in 2016. We have implemented more than half of the 400 recommendations that the OTS has made to date.”
He concluded: “This is a Bill that will ensure that we truly have a 21st-century tax system: one that is not only competitive but fair and sustainable—a Bill that will help to deliver our commitment to zero carbon emissions by 2050, positioning the United Kingdom at the forefront of clean and sustainable future growth; a Bill that will help Britain to bounce back, levelling up investment and opportunity and putting in place the pro-enterprise policies that will ensure that this country remains one of the best places in the world to start and grow a business”. And finally: “The United Kingdom will emerge from this crisis stronger, more resilient and more united than before. For all these reasons, I commend the Bill to the House.”
The Bill was passed without a vote and committed to a Public Bill Committee
The full debate is here.
By Hamant Verma