Finance Bill in Lords - pensions, service levels and non-doms in spotlight

In accordance with precedent no amendments were tabled to the Bill in the Lords and no votes were held. Having completed its parliamentary stages the Bill received Royal Assent yesterday (Thursday 22 February) and is now Finance Act 2024.

Minister’s opening speech

Baroness Vere of Norbiton, the Treasury minister in the Lords, highlighted the measures in the Bill and argued that it will “improve and simplify our tax system”.

The minister noted that changes to R&D tax relief will apply from 2024 onwards. She noted that peers on the Economic Affairs Finance Bill Sub-Committee want to simplify R&D relief further by bringing the separate scheme for loss-making R&D-intensive SMEs within the merged scheme at a higher rate of relief. She told them that while there is an option to ‘simplify’ further in the future, “further work is needed to establish how that would operate while still targeting the scheme effectively”.

To align with the government's ‘simpler and modernised tax system’ objective, the government has decided to remove three main restrictions on using the cash basis, the minister told peers. In other words, they are completely removing limits on the size of businesses able to use the basis, interest deductions and the loss relief available.

Backbench speeches

Lord Davies of Brixton (Lab) expressed concern about the impact of freezing the personal allowance while increasing state pensions. He argued that this will put more and more pensioners over the personal allowance, especially when the basic state pension exceeds the personal allowance, which is expected to happen in 2028. This will lead to pensioners receiving a lump sum tax bill. He suggested integrating state pensions into the PAYE system to avoid this.

Lord Davies also raised a number of other issues around pension taxation. He argued that notwithstanding the abolition of the lifetime allowance the continued existence of the annual allowance left ‘highly paid, sorely needed professionals’ vulnerable to a tax charge, He warned that the taper which withdraws relief available on the annual allowance leads to “very high marginal rates” which potentially could be driving some professionals out of employment. And he criticised the inability to carry forward a loss in pension value from one year to offset it against an increase in the next for tax purposes.

Lord Desai (Cross Bench) advised the government to “not get mixed up in the idea that tax cuts somehow bring growth”. Instead, he argued that the government should reduce its borrowing and “enhance other taxes that are not efficiently imposed”.

The peer saw a ‘major defect’ in the tax system and that is taxing ‘capital gains at a much lower rate than tax income’. He considers this approach ‘not healthy’.

Lord Leigh of Hurley (Con), Chairman of the House of Lords Economic Affairs Finance Bill Sub-Committee, referred to the sub-committee’s recent report on measures in the Bill. He emphasised the importance of simplifying R&D tax relief. He suggested that the government need to carefully monitor the new R&D intensive scheme threshold and recommended having ‘a transitional period’ before implementing the changes.

Lord Leigh also raised HMRC data gathering powers on issues such as hours worked which appear in the Bill, wondering why HMRC needs that data and what will be the true cost to business in supplying it. He welcomed further attempts to punish promoters of tax avoidance schemes but called for safeguards, particularly in respect of ‘stooge directors’.

On the level of resources that HMRC deploys for customer service, the Conservative peer recognised that some improvements have been made, however, he thought the situation was not helped by “civil servants working from home”.

Finally, Lord Leigh welcomed the progress made on pillar 2, saying it was good to see the transitional undertaxed profits rule safe harbour regimes. He also welcomed the recent National Insurance cut and called for a ‘lower tax’ approach more generally as well as a ‘smarter tax system’ that encourages investment and increases growth and productivity.

Labour peer Lord Sikka said that, in handing out generous tax reliefs, "the government should also ensure that the resulting profits are taxed in the UK”. He singled out oil and gas companies, whose profits are not “necessarily taxed in the UK”, and the discrepancy between the subsidies received by E.ON, the company behind James Bond films, and the amount of corporation tax they pay in the UK.

“Despite receiving £120 million of subsidy, E.ON has been paying less than £500,000 a year in UK corporation tax,” said Lord Sikka. “Can the minister explain why there is no comprehensive programme of tracking benefits of tax reliefs, or for ensuring that the resulting profits are taxed in the UK?”

The peer accused the government of being ‘soft’ on enablers and asked the minister how many big accounting firms have been investigated and prosecuted for selling unlawful tax avoidance schemes.

Like Lord Desai, Lord Sikka thought it unfair that levels of capital gains tax enable people such as the Prime Minister to pay a lower rate of tax on income from this source. He also argued that the benefits of CGT are “unevenly spread” , with most payers concentrated in London and the south-east of England.

Opposition spokespeople

Lib Dem spokesperson Baroness Kramer encouraged the minister to pay particular attention to Lord Davies's comment’ on the pension allowance. “A straightforward reform would be far more effective than this constant chipping away at the edges and getting it wrong, which is the pattern of the last few years,” she argued.

Baroness Kramer supported the full expensing measure in the Finance Bill, however she echoed other peers' concerns that: “Low taxes have not generated investment”. She suggested that reforming business rates and a ‘proper industrial strategy’ would instead attract investment.

Labour spokesperson Lord Livermore was disappointed non-dom tax status has not been ‘tackled’ in the Bill. He argued that if this ‘loophole’ was closed a significant fund could be raised to bring NHS waiting lists down.

Lord Livermore further highlighted that the government's decision to freeze national insurance and income tax thresholds for six years is estimated to cost taxpayers £45 billion and will result in three million more individuals being subject to the higher rate of income tax.

On corporation tax, he asked if the minister would follow Labour's lead and pledge to cap corporation tax at its current rate for the next Parliament.

Lord Leigh intervened on Lord Livermore to ask what Labour’s current estimate was of how much Labour’s changes to the tax status of non-doms would raise. He asked him to confirm that Labour officials “have asked the Treasury for its figures on the Labour Party’s proposals on non-doms, which, as I understand it, show a net loss to HMRC in respect of those proposals”. Lord Livermore said he could not divulge “the exact nature of those discussions, but I can certainly say that that is not correct.” On Labour’s estimate he said he did not have the exact number to hand.

Government response

Baroness Vere of Norbiton, the Treasury minister in the Lords, responded to the debate for the government.

In response to Lord Davies, the minister said that “the issue around pensions catching up with the personal allowance is not something that I can comment on now, but it is something that people are aware of and it will be addressed over a period of time”. She explained that, in situations where individuals have tax obligations that cannot be collected through PAYE, HMRC may issue them with a ‘simple assessment’ detailing the tax owed and payment instructions. This process ensures advance notice before any payment is due.

On the tax threshold freeze, Baroness Vere acknowledged concerns but argued that: “We do not tax our employees as highly as other people do, and that is to our credit”. She believed that the government has taken the ‘fair’ approach to repairing the public finances and asking everybody to “contribute a little through keeping tax thresholds fixed”.

Regarding the R&D measures, the minister praised the report produced by Lord Leigh and his colleagues on the sub-committee. She said that while the government does not intend to make any further changes, “there are a few small areas where we will continue to engage, and any changes will be done cautiously”. On stooge directors, “Nobody wants to put anybody in jail because they did something under the duress of somebody else.”

She said that HMRC acknowledges that its customer service levels are “simply not as good as they should be”. However, she mentioned that HMRC has been “working very hard” to improve services for those people who need to call. Meanwhile, HMRC also encourages people to use digital services as much as possible, as they can be very ‘efficient’.

Responding to another point made by Lord Leigh, the minister said that, for the EIS and the VCT scheme, “we are engaging with the EU on approval for extension, due to Northern Ireland’s unique access to the EU single market. We are working to meet all relevant obligations. We believe that the systems are consistent with subsidy control principles and address evidence of market failure, and therefore we think those conversations will go well.”

In relation to tackling tax avoidance, the minister highlighted that HMRC already prosecutes promoters. Since 2016, more than 20 individuals have been convicted of offences relating to arrangements which have been ‘promoted and marketed as tax avoidance’. The minister emphasised that the government do not ‘tolerate’ tax avoidance and will do ‘whatever’ is required to stop it.

Baroness Vere concluded her remarks by arguing that non-UK domiciled individuals play an important role in funding public services through their tax contributions. She suggested that the UK should be a destination that will “attract talented people to work and do business”, and that includes people from overseas.

You can read the full debate here.