Finance Bill 2021-22 Public Bill Committee (Parts 1 and 2) preview

Public Bill Committee - background

Public bill committee is the stage where the bill is debated and agreed clause by clause by a committee of MPs. Amendments and new clauses can be tabled by any MP on the committee but, in the absence of an amendment of the law resolution, the scope for amendments is strictly limited to what is authorized by the specific resolutions on which the bill is founded. (More detail on this in this House of Commons Library paper if you are interested.)

The committee hearings are scheduled as follows:

• Tuesday 14 December – sessions 1 and 2 (morning and afternoon session)
• Wednesday 5 January – sessions 3 and 4 (morning and afternoon session)
• Tuesday 11 January - sessions 5 and 6 (morning and afternoon session)
• Thursday 13 January - sessions 7 and 8 (morning and afternoon session)

Not all sessions may be needed.

The following MPs have been appointed to the committee (backbenchers unless indicated):

Conservatives: Stuart Anderson, Rob Butler, Lucy Frazer (Financial Secretary), Richard Holden, Paul Howell, Andrew Jones, Cherilyn Mackrory, Alan Mak (government whip), Jerome Mayhew, Helen Whately (Exchequer Secretary)

Labour: Tonia Antoniazzi, Florence Eshalomi, James Murray (Shadow Financial Secretary), Abena Oppong-Asare (Shadow Exchequer Secretary), Liz Twist (opposition whip)

SNP: Alison Thewliss (Lead Treasury spokesperson), Richard Thomson (Treasury spokesperson)

MPs will proceed through the clauses in numerical order (unless a programming motion dictates otherwise, which is rare), excluding the clauses which have already been debated (and agreed) in Committee of Whole House. These will typically be the most controversial clauses, selected by the opposition for debate on the floor of the Commons chamber. Schedules are debated and voted on with the clauses to which they relate. Amendments are debated and voted on with the clauses to which they relate. New clauses may be debated with a clause to which they relate, or, if they do not relate closely enough to any existing clause, at the end of the committee stage. Regardless of when they are debated new clauses will be voted on at the end of the committee stage.

We don’t expect to get beyond parts one and two of the bill in the first two sessions so that is all we are covering in this preview. A further preview covering the other parts of the bill will be published in the new year.

CIOT, our Low Incomes Tax Reform Group (LITRG) and our sister body the Association of Taxation Technicians (ATT) have made a number of representations to the committee on the clauses covered in this briefing, but unfortunately we are asked by Parliament not to publish them until they have been accepted by the committee (ie on Tuesday 14 December).

Useful documents:

Finance Bill publications main page - UK Parliament website

The Finance Bill

Finance Bill Explanatory Notes

Latest amendments

Part One – Income Tax, Corporation Tax and Capital Gains Tax

Income tax charge, rates etc     

Clause 1 - Income tax charge for tax year 2022-23

This is the annual measure allowing government to collect income tax for the next 12 months. (Yes, income tax is still a theoretically temporary measure requiring annual renewal.)       As with clauses 2 and 3 CIOT/ATT generally doesn’t offer a view on what rate taxes should be set at, regarding it as a decision for politicians.

No amendments have so far been tabled relating to clauses 1-5 for public bill committee.

Clause 2 - Main rates of income tax for tax year 2022-23

This clause sets income tax rates for non-savings, non-dividend income for 2022-23 for England and Northern Ireland at 20%, 40% and 45% (ie no change). Rates are reduced by 10% for Welsh taxpayers and Welsh Parliament adds Welsh rates on top. The Scottish Parliament sets Scottish rates of income tax.

Clause 3 - Default and savings rates of income tax for tax year 2022-23

Sets ‘savings rates’ which will apply to savings income of all UK taxpayers and the ‘default rates’ which apply to the non-savings, non-dividend income of taxpayers who are not subject to the main rates of income tax, Welsh rates of income tax or the Scottish rates of income tax. Both stay at 20%/40%/45%.

While the dividend rates (nil rate, ordinary rate, upper rate and additional rate) are fixed unless changed by an Act of Parliament and therefore don’t need to be set each year by Parliament, the basic, higher and additional rate, the default basic, higher and additional rates, and the savings basic, higher and additional rates (clauses 2 and 3) do! We don’t see an obvious reason for this.

[Clause 4 - Increase in rates of tax on dividend income – was agreed in Committee of Whole House]

Clause 5 - Freezing starting rate limit for savings for tax year 2022-23

Starting rate limit for savings unchanged at £5,000. This is a zero rate on income from savings, but is only available to people on low incomes. If your earnings from non-savings income are over your personal allowance (usually £12,570) plus the starting rate limit (i.e. over £17,570 for most people) you can’t get this.

Remember, the previous Finance Act froze the income tax personal allowance (the amount that can be earned tax free) at £12,570 and the basic rate limit (the amount of earnings above the personal allowance on which income tax is payable at the basic rate) at £37,700 until 2026.)

This is a complicated area. On top of the normal personal allowance and the starting rate for savings there is the ‘personal savings allowance’ of £1,000 (or £500 for higher rate taxpayers). Despite Income Tax Act 2007 containing a provision that automatically increases the starting rate limit in line with inflation the starting rate limit has now been stuck at £5,000 since April 2015.

Banking surcharge

[Clause 6 - Rate of surcharge and surcharge allowance – was agreed in Committee of Whole House]

Trading and property income

[Clauses 7 and 8 (and schedule 1) - Abolition of basis periods, and Profits of property businesses: late accounting date rules – were agreed in Committee of Whole House]

Pensions

Clause 9 - Liability of scheme administrator for annual allowance charge             

The annual allowance is the maximum amount of tax relieved pension savings that an individual can build up during a tax-year. The annual allowance charge is a tax charge a taxpayer must pay if they exceed the annual allowance, refunding to the Exchequer the excess tax relief they have received.

This clause amends the period within which an individual can give notice to their pension scheme administrator to pay their annual allowance charge for previous tax years, using a system known as mandatory Scheme Pays. Also amends the period within which a scheme administrator must provide information about, and account for, an amount of annual allowance charge.

Amendment 11 (tabled by Labour) would leave out “6 years” and insert “5 years and 9 months” in this clause. This is in line with a suggestion made by CIOT in our representation to the committee. We are concerned that the legislation currently makes it possible for a scheme administrator to issue a statement with a change to the pension input amount (PIA) after, say, 5 years, 11 months and 30 days – meaning that the member would then have just one day to make a Scheme Pays election and give notice to the scheme administrator that they want to do so. We suggested that the legislation be amended to make the scheme administrator hard deadline for notifying a change to the PIA 3 months before the end of that period to give the member time to respond.

In our representation to the committee CIOT also recommended that the government review pensions tax legislation more generally to (among other things) rectify anomalies in the pensions tax regime for taxing lump sums from pension schemes.

Clause 10 - Increase of normal minimum pension age

The normal minimum pension age (NMPA, introduced April 2006) is the age below which a registered pension scheme must not normally pay any benefits to members (unless they are retiring due to ill health). In April 2010 it was increased from 50 to 55. This clause increases it to 57 from April 2028. (NB. There are exemptions for some uniformed service pension schemes and special rules for pension schemes being transferred.)

In our representation to the committee CIOT say that we are not convinced that an increase to the NMPA is necessary or desirable. This said, if the NMPA is increased to 57 we suggest also increasing the upper age at which an individual can make tax relievable contributions from 75 to 77. We also raise some issues with the provisions for ‘block transfers’ where someone has both Defined Contribution and Defined Benefits pension rights and suggest consideration is given to addressing these to remove barriers to consolidation.

In a separate representation to the committee LITRG express concern about the transitional arrangements for the change. The explanatory notes to the clause say the government will provide further advice on transitional arrangements and provisions ‘in due course’. LITRG are concerned this should happen sooner rather than later (noting that when the NMPA increased from 50 to 55 a frequently asked questions document was published just four months before the change took effect, not giving people long enough to plan.

Clause 11 Public service pension schemes: rectification of unlawful discrimination

In 2014-15 the Government reformed public service pension schemes and put in place transitional arrangements allowing those close to retirement to remain in the existing schemes rather than having to move to new ones. In 2018 the Court of Appeal ruled (in ‘the McCloud judgment’) that this was unlawful discrimination against younger members of the schemes (and indirectly sex and race discrimination). The Public Service Pensions and Judicial Offices Bill aims to remedy this discrimination. This clause provides the Treasury with the power to make regulations to address the tax impacts that arise in connection with this remedy.

In our representation to the committee CIOT welcome this move but stress the importance of the government consulting before laying the proposed regulations. We also call on the government to urgently address a related issue where, we understand, thousands of pension schemes are currently unable to pay millions of pension scheme members the benefits they are due because their legal advisers are advising that the law is unclear where a pension scheme undertakes a Guaranteed Minimum Pension (GMP) conversion to equalise pension benefits.

Capital allowances

[Clause 12 - Extension of temporary increase in annual investment allowance – was agreed in Committee of Whole House]

Clause 13 - Structures and buildings allowances: allowance statements

Structures and Buildings Allowances are a capital allowance available for the cost of constructing, renovating or converting structures or buildings for non-residential use. This clause introduces a new requirement for SBA allowance statements to include the date qualifying expenditure is incurred, or treated as incurred, where that is later than the date on which the building or structure was first brought into non-residential use.

Reliefs for investments

Clause 14 (and schedule 2) - Qualifying asset holding companies

Introduces a regime for the taxation of qualifying asset holding companies (QAHCs). This came out of a review of the UK funds regime, designed to enhance the UK’s competitiveness as a location for asset management and investment funds. The new regime includes: robust eligibility criteria to limit access to the intended users; tax rules to limit the QAHC’s tax liability to an amount that is commensurate with its role; and rules for UK investors to ensure that they are taxed so far as possible as if they had invested in the underlying assets directly.

The government has tabled six amendments to schedule 2:

• Amendments 1 and 2 are designed to secure that the definition of investment management profit-sharing arrangements is capable of encompassing arrangements where an entitlement to profits arising in connection with the provision of investment management services by an investment manager arises to another person (such as a company or a trust).
• Amendments 3 and 6 provide that a fund that is 70% controlled by category A investors meets the diversity of ownership condition.
• Amendment 4 will allow existing funds marketed before the commencement of the QAHC.
• Amendment 5 modifies the way in which the interests of creditors are accounted for in determining whether a fund is “close”.

The SNP’s new clause 1 may be debated with clause 14 or clause 15. If passed, this would require the government to publish within 12 months of this Act coming into force an assessment of the impact on the tax gap of the reliefs on investments contained in this Act, and of whether those reliefs have increased opportunities for tax evasion and avoidance.

Clause 15 (and schedule 3) - Real Estate Investment Trusts

A Real Estate Investment Trust (REIT) is a company through which investors can invest in real estate indirectly. REIT profits are exempt from corporation tax provided 90% of exempt profits are distributed as property income distribution (and these are then taxed as property rental income in investors’ hands).

This clause and schedule change rules on REITs to remove certain constraints and administrative burdens which the Government believes are no longer necessary. These include removal of the requirement for REIT shares to be admitted to trading in certain cases, amendment of the definition of an overseas equivalent of a UK REIT, amendment of the ‘holder of excessive rights’ charge to corporation tax, and changes to the rules which ensure a REIT’s business is primarily focused on its property rental business.

Creative reliefs

Clauses 16 to 22 deal with reliefs for the ‘creative sector’. They temporarily increase the rate of three tax credits, clarify ‘legislative ambiguities’, extend eligibility for film tax relief and extend the life of museums and galleries exhibition relief.

Clause 16 - Film tax relief: films produced to be television programmes

Allows films to remain eligible for film tax relief even if they are no longer intended for theatrical release, providing they are intended for broadcast and meet the four conditions required for high-end television tax relief.

Labour’s new clause 14 would require a review of the effectiveness of the provisions in this clause. This review would include assessing actual and potential misuse of the relief, drawing on experience of the present film tax relief regime

Clause 17 - Temporary increase in theatre tax credit

Temporarily increases the rate of theatre tax relief for theatrical productions. From 27/10/21 to 31/3/23, companies will benefit from relief at a rate of 50 or 45% (touring/non-touring productions). From 1/4/23 to 31/3/24 relief will be 35/30%. From 1/4/24, rates will return to 25/20%. Clauses 19 and 21 introduce similar temporary rate rises for orchestra tax relief and museums and galleries tax relief to support the industries as they try to recover from the pandemic.

In the CIOT’s representation to the committee on clauses 16-22 we note that while the rate increases have been broadly welcomed by the sector, advisers working with them have brought a number of concerns relating to the timing and scope of the changes to our attention. These include that for productions straddling the commencement date of the higher rates there is a harsh cut off where even if 99% of the production takes place after the increase takes effect it does not benefit from it (while when rates go down there is a time apportionment). We note that this is perceived as arbitrary and unfair by those affected.

Clause 18 - Theatrical productions tax relief

Clarifies several areas of legislative ambiguity within theatre tax relief, including that the intended audience must be at least five people, and that productions produced for training purposes do not qualify for the relief. Presumably this is a response to abuse of this relief or at least to recognition of the potential for abuse.

Clause 19 - Temporary increase in orchestra tax credit

Temporarily increases the rate of orchestra tax relief for concerts or concert series. From 27/10/21 to 31/3/23, companies will benefit from relief at a rate of 50%. From 1/4/23 to 31/3/24, the rate of relief will be 35%. From 1/4/24, the rate of relief will return to 25%.

In the CIOT’s representation to the committee we note that orchestras that made a series election before the Budget (eg one made a series election in September for their whole annual season) appear to lose out on the higher rate of relief for their entire season, which again is perceived to be unfair. We ask for clarity as to whether this is the government’s intention.

Clause 20 - Orchestra tax relief

Clarifies several areas of legislative ambiguity within orchestra tax relief, including that concerts that are produced for training purposes do not qualify for relief. Again, this is presumably to deal with abuse or potential abuse of the relief.

Clause 21 - Temporary increase in museums and galleries exhibition tax credit

Temporarily increases the rate of museums and galleries exhibition tax relief (MGETR). From 27/10/21 to 31/3/23, companies will benefit from relief at a rate of 50 or 45% (touring/non-touring productions). From 1/4/23 to 31/3/24 relief will be 35/30%. From 1/4/24, rates will return to 25/20%.

In the CIOT’s representation to the committee we note that while the rate of MGRETR is being raised the government are not proposing to raise the cap for the relief from the current £80,000-100,000 per exhibition. As a consequence larger exhibitions will not gain any benefit from the rate increase.

Clause 22 - Museums and galleries exhibition tax relief

This relief was introduced with a sunset clause and was originally due to expire on 1/4/22. This clause extends it by two years to 1/4/24. It also clarifies several areas of legislative ambiguity within the relief (including that a public display of an object is not an exhibition if it is subordinate to the use of that object for another purpose) and amends the criteria for a primary production company.

Capital gains tax: disposals of UK land etc

Clause 23 - Returns for disposals of UK land etc

Extends the deadline for reporting and payment of CGT on the disposal of UK land and property from 30 days to 60 days from completion. Also ends the anomaly for UK resident taxpayers involving gains from properties used for residential and commercial (mixed) use. This was a quirk in legislation that meant taxpayers had to declare capital gains on both portions of a property, despite only being legally required to pay tax owed on the residential portion of the property.

In the CIOT’s representation to the committee on this clause we welcome the change but note that the main problem with the (now) 60-day reporting and payment process is still a lack of awareness. Individuals selling UK property often do not know about their 60-day reporting and payment obligations.  When they do become aware of their obligations, many individuals struggle with accessing the stand-alone digital system for reporting these transactions.

International matters   

Clause 24 (and schedule 4) - Cross-border group relief

Following Brexit, the government is bringing the group relief rules relating to EEA-resident companies into line with those for non-UK companies resident elsewhere in the world. Claims involving EEA-resident companies will no longer be subject to more favourable rules in the UK relating to relief for non-UK losses and losses incurred by a UK permanent establishment of a foreign company.

The SNP’s new clause 2 may be debated with clause 24, 25 or 26. This would require a government assessment of the effect on GDP of the international provisions of the Act, and of the Act as a whole, in different Brexit-related scenarios (staying in the EU and leaving without a deal).

Clause 25 - Tonnage tax

Tonnage tax is a special corporation tax regime which enables operators of qualifying ships to pay (generally lower) tax calculated based on the tonnage of the ship. This measure reforms the regime to boost the competitiveness of the British shipping industry following Brexit, encouraging companies to register ships in the UK by simplifying the regime and making it more flexible.

Clause 26 - Amendments of section 259GB of TIOPA 2010

The hybrids and other mismatches regime (introduced 2017) addresses arrangements that generate a tax mismatch, and in doing so implemented OECD BEPS Action 2 recommendations. Mismatches can involve either double deductions for the same expense, or deductions for an expense without any corresponding receipt being taxable. The main purpose of this clause is to put a new category of “relevant transparent entities” (such as US Limited Liability Companies) on the same footing as partnerships when they are payees.  The clause also amends existing rules relating to partnerships to make sure they work as intended.

[Clauses 27 and 28 - Application of section 124 of TIOPA 2010 in relation to diverted profits tax and Diverted profits tax: closure notices etc   - were agreed in Committee of Whole House]

Changes in accounting standards etc

Clause 29 (and schedule 5) - Insurance contracts: change in accounting standards

The Corporation Tax liabilities of insurers are based on their accounting profit. Many insurers prepare their accounts under International Accounting Standards (IAS). This measure enables the government to make provisions in secondary legislation in connection with the introduction of International Financial Reporting Standard (IFRS) 17 in Jan 2023, including revoking the requirement for all life insurance companies to spread acquisition costs over seven years for tax purposes (a simplification).

Clause 30 - Deductions allowance in connection with onerous or impaired leases  

Finance (No 2) Act 2017 amended loss relief rules to (among other things) limit the amount of profit against which carried-forward losses can be set. There is an exemption from the loss restriction in certain circumstances where there has been a reversal of an ‘onerous lease provision’ required for accounting purposes. This clause ensures companies will continue to benefit from this exemption.

Expanded dormant assets

Clause 31 (and schedule 6) - Provision in connection with the Dormant Assets Act 2022

The Dormant Assets Scheme enables banks and building societies to channel funds from dormant accounts (unused for 15 years and the owner cannot be contacted) towards good causes. The Dormant Assets Bill currently going through Parliament will expand the scheme to include a wider range of dormant assets, such as pensions, investment products and securities. This clause and schedule ensure that when these assets are transferred into the scheme a disposal for capital gains tax purposes does not immediately arise.

In the CIOT’s representation to the committee we are broadly positive but say that as those making a dormant accounts claim (ie a previously untraceable owner who appears and wants to claim the value of their asset back) are unlikely to be familiar with the tax consequences, it is essential that adequate and accessible guidance be issued.

Part Two – Residential Property Developer Tax

Clauses 32-52 (and schedules 7-9) - Residential Property Developer Tax

From April 2022 a Residential Property Developer Tax (RPDT) will be charged on the profits that companies and corporate groups derive from UK residential property development, at 4% on profits exceeding an annual allowance of £25 million. The money raised will fund measures to address unsafe cladding.

The SNP’s new clause 3 would require a Government assessment of the impact of the Residential Property Developer Tax introduced in this Bill, and of its effect on opportunities for tax evasion and avoidance.

In our representation to the committee, CIOT note that the consultation process for this measure, although curtailed, has been constructive. In particular we are pleased the government has listened to our call for aligning the new tax with Corporation Tax mechanisms and using existing statutory tax definitions as far as possible. However, we continue to have concerns, principally:

• Short timescale: will HMRC systems, guidance and industry software be ready in time?
• Getting rid of the tax: RPDT is time limited but its closure depends on active repeal. There is a case for a legislative ‘sunset’ clause or mandatory re-authorisation.
• Build-to-rent: uncertainty on whether build-to-rent profits will be brought into RPDT scope in the future.
• Pre-commencement profits: companies with accounting periods that straddle the 1 April 2022 commencement date for the tax may pay RPDT on profits earned before that date.

Rest of the Bill

Part Three of the Bill – Economic Crime (Anti-Money Laundering) Levy – was agreed in Committee of Whole House

Parts Four and Five of the Bill are not expected to be considered by the Committee until the new year and will be the subject of a separate preview then.