Lords agree Finance Bill amid debate over marginal tax rates

Government spokesperson Lord Bates opened the debate, stating the only sustainable way to improve real wages and living standards is through boosting long-term productivity. Lord Bates said debt remains too high, at around £65,000 for each household. The peer said, as a result of the Budget, a typical basic-rate taxpayer will pay £130 less in income tax in 2019-20 than during this tax year, living wage will increase by 4.9 per cent from this April, freezing of fuel duty for the ninth year in a row and a real-terms freeze on air passenger duty for short-haul flights.

“The Government continue to champion home ownership and are committed to making housing more affordable for first-time buyers through direct spending and changes to the tax system,” he said.

Since 2010, the Government has secured and protected over £200 billion by clamping down on tax avoidance and evasion, and have reduced the UK’s tax gap to less than six per cent, one of the lowest in the world, said the Lord. Specifically, the Bill enacts provisions to ensure that non-residents pay tax on capital gains they make on UK commercial property and targets more contrived avoidance and evasion by clamping down on those who artificially lower their tax bill through profit fragmentation, whereby companies reduce their tax burden by artificially shifting their revenues around. The Bill also strengthens the diverted profits tax, which has already brought in and protected £700 million since 2015, he said.

For Labour Lord Tunnicliffe complained that the Bill provides no evidence that Ministers will honour their commitment to introduce a full public register of beneficial owners ahead of the 2020 deadline. Lord Tunniclife welcomed the Government’s decision to accept a cross-party amendment to review the effects of the Loan Charge.

The peer cited what he says is an abuse of power; the Government opted to use a rare parliamentary procedure—used just six times in the past century—to restrict the right of MPs to table amendments on Budget announcements that are not covered by specific tax changes. The Government’s timetable for the Bill required amendments to be tabled before the legislation had even been published. Printed copies of the Explanatory Notes were provided to MPs only on the day of the debate.

Viscount Chandos (Labour) said there are an estimated 1,200 different tax reliefs, costing the Exchequer up to £400 billion per annum ‘including the indefensible reliefs in the area of inheritance tax’ (which the OTS is looking into). He wants the Government to take a much more concerted and focused approach to examining the effectiveness of these tax reliefs and the scope for a substantial increase in revenue for the Exchequer. Lord Davies of Oldham (also Labour) said the Government has not done enough about the appalling levels of British productivity.

DUP spokesperson Lord Morrow talked about an amendment tabled by some 20 MPs on Report in the Commons that asked the Chancellor to review the effective marginal tax rate placed on low-income families in the UK, but was not selected or debated. Lord Morrow said low-income families in receipt of tax credits face a marginal effective tax rate of some 73 per cent and a low-income family in receipt of tax credits, housing benefit and council tax benefit faces a staggering effective marginal rate of 96 per cent, according to a CARE and Tax and the Family report. If other developed countries can have an average effective marginal tax rate of 33 per cent, rather than 73 per cent, so can the UK, he said.

What is really required is to look at distributing the current money allocated to help those families in a different way, so that it comes partly through the tax system rather than wholly through the benefits system, he suggested. This would create two mutually reinforcing downward movements on the effective marginal tax rate, he said. First, the income tax element of the effective marginal tax rate would fall as a result of households with family responsibilities being taxed less. Secondly, the benefits element of the effective marginal tax rate would fall as a result of there no longer being a need to inflate benefits, because of the prior change in the tax rate on those families. This would mean that when benefits were withdrawn, they would not create the confiscatory effective marginal rates experienced at present.

On Making Tax Digital, Lord Turnbull (crossbencher, former Cabinet Secretary) suggested HMRC needs to look again at whether all the information it is seeking—not just total revenue and total spending but the invoices behind them—is really needed and needs to be submitted quarterly, even by very small businesses. If HMRC is to be equipped with greater powers and to take a more robust approach, it should logically follow that governance and safeguards should keep pace, but this is not happening. He said the justification for the extension of powers in the current Bill is to require records to be held for up to 12 years where offshore issues are involved, is weak and poorly targeted.

On the Loan Charge retrospective v retroactive argument, the peer said if the tax was payable, why did HMRC make no effort to collect it at the time? And he is concerned that there is resentment that HMRC seems to be targeting individual taxpayers rather than the employers and promoters of such schemes. On the latter, he wants hope the Government will use the opportunity created by the Sir Ed Davey amendment to take up the Economic Affairs Committee’s recommendation to exclude from the charge loans in years when a taxpayer disclosed their participation in a scheme to HMRC, and for years that otherwise would have been closed. To reduce the likelihood of retrospection, the committee recommended that HMRC should make a clear public statement as soon as it begins an investigation into a potential tax avoidance scheme.

Lib Dem spokesperson Baroness Kramer spoke on MTD for VAT, to say that it is beyond her why HMRC has not understood the plight of SMEs facing the changes that are coming upon them with pretty much no warning, no testing and relatively limited opportunity to even be able to cope.

On the Loan Charge, Kramer said people do not entirely understand that the massive impact of the Loan Charge action by HMRC stems from the move in the UK towards outsourcing. It is absolutely outrageous that the Government are now turning on these individuals, who basically had no option but to follow the pattern offered to them in order to continue to work, she argued. She added: “In 2017, with almost no scrutiny or discussion and with pretty much nobody in the other place realising what they were doing, the change in the language effectively allowed the Government, or HMRC, to behave retrospectively. I know it says this is not retrospective, but I think it is, by any definition. To discourage appeals, if you appeal and lose, you pay HMRC a penalty for having brought the appeal in the first place. This is absolutely outrageous and needs to be fixed.”

Summing up the debate for the Government, Lord Bates said that income inequality is now lower than it was in 2010. On Lord Chandos’ comments about the reclassification of student loans and its impact, he said the independent ONS has decided that some of the spending on student loans will be included in the deficit when the money is first lent to students.

On MTD, he reminded peers that only businesses with a taxable turnover above the VAT threshold, which is currently £85,000, will be in the scope of MTD. There will be no further Making Tax Digital mandation until the system has been shown to work well, he said.

Responding to criticism of the amount of tax reliefs, he pointed to the annual investment allowance to £1 million for two years, thus significantly increasing the amount of relief given to businesses that do the’ right thing’ by investing in their own businesses and therefore increase our productivity and increase our tax revenues and growth.

On the Loan Charge, there is no requirement on an individual who is not an employee to use a disguised remuneration loan scheme, he said, adding: “The tax system expects people to take responsibility for their own tax affairs and if an arrangement looks too good to be true, then it probably is.” The Government report successful asked for by Sir Ed Davey will include a comparison with the time limits for the recovery of lost tax relating to disguised remuneration loans, said Lord Bates. As for why taxpayers do not have the right to appeal against advance payment notices and follower notices, Parliament granted HMRC these powers to discourage tax avoidance. Advance payment notices prevent tax avoiders gaining an economic advantage by holding money during the time it takes to complete lengthy tax litigation. Importantly, these rules in no way affect a taxpayer’s right to appeal their tax liability.

On marginal rates, the minister said he will reflect on the DUP spokespersons comment but was keen to say universal credit shows the Government’s commitment to make work pay.

The Bill now awaits Royal Assent.

The full debate can be read here.

By Hamant Verma.