Finance Bill second reading debate: Conservative MPs voice opposition to corporation tax increase

Corporation tax

A number of Conservative MPs speaking in the debate expressed opposition – or at least unease – over the government’s decision to go ahead with the increase in corporation tax from 19 to 25 per cent.

Craig Mackinlay spoke of “a fairly miserable story on corporation tax: “the world potentially has an almost limitless amount of global capital looking for a home, and I want that home to be here, and having a lower headline rate of corporation tax would be a very good way of achieving that”.

Richard Drax said that the rise in corporation tax is an unnecessary complication to an already “complicated tax system”. He said, despite the government's assurance that smaller companies will not be affected, the increase to 25 per cent may look like a 6 per cent rise but is “actually a 31 per cent increase”.

Former Home Secretary Priti Patel agreed with Drax that increasing taxes and then providing relief to compensate for them creates complexities in the tax system. She argued that small businesses in Essex will have to “employ armies of lawyers, tax accountants, and specialists” to navigate the complicated tax system. Patel suggested that a “simplified tax code underpinned by lower taxes” is the way forward.

From the opposition benches, Sammy Wilson (DUP) expressed concern that the increase in corporation tax would lead to businesses losing more money than the allowance offered.

Responding to the concerns, the Financial Secretary, Victoria Atkins, assured the House that smaller businesses would not be affected, and only larger companies with profits between £50,000 and £250,000 would be subject to the full main rate.

SNP Treasury spokesperson Stewart Hosie was among the MPs who praised the introduction of ‘full expensing’ though he noted that it was only temporary. Meanwhile, he thought, “the failure to increase the annual investment allowance means that businesses planning to benefit from £1 million of investment allowance will find that that £1 million of planned investment has been badly eroded by inflation.”

Shadow Financial Secretary, James Murray (Lab) thought that temporary full expensing for expenditure on plant and machinery “will make no difference whatever” to medium-term levels of business investment.

Nigel Mills (Con) was confused about what the government are trying to do with the tax relief regime for expenditure on capital assets. “Could we just stand back at some point and think about what we are trying to incentivise business to do?” He was unconvinced that many businesses will be able to use full expensing on large capital expenditure, because they will not have the profit. “Most of the large businesses I ever worked with focused on the rate of tax they had to account for in their accounts… rather than the cash position, which was hugely complex if they were leasing an asset, finance leasing it, hire purchasing it or God knows what. So I would be a little suspicious or cynical about our actually getting the big change that the government were hoping for here.”

Mills suggested moving to giving people tax relief in line with their accounting treatment, “so if they think this piece of kit has a five-year life and they account for it over five years, let’s just go for that?”

Lib Dem Treasury spokesperson Sarah Olney expressed disappointment at the lack of movement in the research and development tax credits for SMEs in the Bill. She highlighted the importance of such incentives for small businesses and urged the government to consider other tax incentives, including those for training, digital investment, and energy efficiency upgrades. She argued that the temporary measures proposed in the Bill do not provide businesses with the confidence to make investment plans for the future.

Speaking at the end of the debate, James Cartlidge, the Exchequer Secretary, noted members’ comments and said that the increase in corporation tax is a difficult but necessary decision to maintain a sound and stable public finances. The government “does not want to put up taxes” he stated, but it has a duty to run public finances in a sound and stable manner.

OECD Pillar Two

There was also considerable scepticism on the Conservative benches over parts three and four of the Bill, which introduce a ‘multinational top-up tax’ and a ‘domestic top-up tax’.

The Financial Secretary explained that these measures would prevent large multinational businesses from using aggressive tax planning to avoid paying their fair share of tax. This will implement the OECD pillar two agreement which aims to address tax challenges in a globalised and digital economy, she argued.

“How many countries have signed up to this mad, mad move? Richard Drax asked the minister. 135 so far, came the reply.

Another Conservative, Richard Fuller, suggested that the UK should implement the changes only when all major OECD countries, including the United Stated, have done so. The Financial Secretary replied that the United States already has rules requiring US-headquartered groups to pay a minimum level of tax on their foreign activities. She emphasised that the UK would be acting alongside other countries in implementing the global minimum tax.

Nigel Mills (Con) raised concerns about Overseas Territories and Crown Dependencies with a corporate income tax rate below 15 per cent. He urged the government to have discussions with those territories to reform their position, so that they do not have their tax topped up elsewhere. In response, the Financial Secretary agreed that this was about “having a minimum floor of tax to prevent aggressive tax planning” and ensuring that businesses pay a fair amount.

Shadow Financial Secretary James Murray said he was pleased to see the provisions in the Bill, though noted that President Biden had originally proposed to set the minimum rate at 21 per cent. Richard Fuller challenged him on whether it was his intention, “if there is a future Labour Government, that they will press OECD countries for an increase in that 15% to achieve the 21% that he has been advocating?” Murray replied that the challenge now was “to make sure that the likes of the hon. Gentleman do not get in the way” of the implementation of this agreement.

Pension tax changes

Labour’s amendment to the government motion argued that the House should decline to give the Bill a second reading because, as well as failing to set out “an ambitious plan for growing the economy”, it in particular, “fails to introduce a targeted scheme to address pension issues affecting NHS doctors, instead making blanket changes to tax-free pensions allowances which, as they will cost around £1 billion a year and benefit only those with the biggest pension pots, should not be the priority”.

“The Conservatives could have included in the Bill a targeted scheme to encourage doctors to work overtime and not to retire early,” said the party’s spokesperson James Murray, “but instead they have introduced an expensive blanket change that will benefit all those with the biggest pension pots. This approach fails the test of providing value for money.”

Sir Stephen Timms (Lab), chair of the House of Commons Work and Pensions Committee, thought it ‘extraordinary’ that the Chancellor had thought it right at this time to introduce this tax cut favouring the wealthiest. He suggested the government could use pension tax relief in a “more progressive manner to promote pension savings among lower-paid employees”.

Ashley Dalton (Lab), echoing his colleague, highlighted that the policy introduced by the government allows individuals to “hoard unlimited wealth in pension pots tax-free”.

Similarly, Shadow Exchequer Secretary Abena Oppong-Asare (Lab) called the change a permanent tax cut for the richest. She continued that her party “will continue to oppose these measures”.

Stewart Hosie said the decision to remove the cap on lifetime pension allowances would benefit “a tiny number of already pretty comfortably well-off or indeed very wealthy people”. He said that if the purpose is to help doctors and other workers out of a pension and employment trap, the government should provide a more effective and targeted solution.

However, Conservatives backed the move. Craig Mackinlay emphasised that changes to the lifetime allowance for pensions should not just be carved out for those in the NHS (as Labour have suggested), but for other senior professionals as well. He claimed that raising the threshold will encourage senior professionals to stay in their posts.

And Nigel Mills said that the reduction and freezing of the lifetime allowance had created a problem on pensions tax, and scrapping it completely was the only solution.

Mills also addressed clause 25, which, he commented, “finally sorts out the net pay arrangement for pensions.” “We have been trying to find a solution for this for quite some years”, he observed. Unsure of the start date for the measure he said he hoped it would be soon “and it would have been nice if HMRC had actually paid some back pay. People who are saving pretty small amounts, who are the ones on the very lowest levels of income, could have had the tax back that they should have been getting for the past decade or so”.

Wider employment tax issues

Criticising the government's freeze on personal allowances and the council tax increase, James Murray observed that the Bill contains no mention of these ‘stealth tax rises for working people’. He also argued that the government has failed to address the non-dom tax issue, saying that “while families across the UK face higher taxes year on year, the government are helping a few at the top to avoid paying their fair share of tax when they keep their money overseas”.

Craig Mackinlay worries about decreases in the dividend-free allowance. He said that he could live with a £1,000 allowance because that accords with other small amounts of income that HMRC is happy to disregard, such as the trading allowance, but he issues a plea to ministers not to cut it further, to £500, next year. Taxpayers who have been PAYE all their lives will now need to do a tax return in order to recover 8.75% on that marginal pound over £500, he highlighted. “This seems to be unduly parsimonious, and I sincerely beg those on the Front Bench to look at it again. It will cost more for HMRC to administer these small amounts of tax receipts; there is no sensible intention here at all.”

Office for Tax Simplification

Ministers also faced challenge from both sides of the House over the decision to abolish the Office of Tax Simplification (OTS).

Treasury Committee chair Harriett Baldwin (Con) was the first of a number of MPs to raise the issue. “I do not think that anyone would say that the tax system is simpler than it was when the OTS was established,” she observed wryly. “Could the Minister outline how we on the Treasury Committee can hold her accountable for continuing to simplify our tax system?”

The minister, Victoria Atkins, replied that she has set her officials three objectives: “making tax fairer, simpler and supportive of growth; and, for every single decision that we make, having explanations of how we will meet those three objectives.” But, she added, we must acknowledge that, “sometimes, there is a tension between the wish to make tax fairer and the wish to make tax simpler.”

Atkins said the government had taken the approach of abolishing the OTS “because what we want, rather than an arm’s length body overseeing simplification – albeit one with some very interesting ideas that I have certainly read carefully and been interested to consider – is a clear mandate to officials in the Treasury and HMRC to prioritise tax simplification at the heart of policy making”.

But this did not stop other MPs raising the issue. Craig Mackinlay expressed concern about the decision. “I would like to hear more about how we are going to replace the OTS,” he said.

Nigel Mills said somebody “must have a sense of humour to produce a 456-page Bill and then hide in clause 346 the abolition of the Office of Tax Simplification, probably at the exact time that we really need it.”

Stephen Timms suggested that the real reason for the abolition of the OTS is that the government is not “interested in simplifying the tax system” and are not willing to commit to the resources needed to achieve meaningful tax simplification. Noting that the Chancellor announcing the decision said he had “mandated every one of my tax officials to focus on simplifying our tax code” Timms reflected: “If everybody is responsible for something, in reality nobody is”. “The Office of Tax Simplification has done valuable work and, having followed the progress of work on the issue since 1995, I am sorry to see it go,” he added.

Richard Fuller, though now a backbencher, noted that that the decision to abolish the OTS had been made during his time as a Treasury minister. “I have no concerns or criticisms about the work it did but, if a government of any stripe are serious about tax simplification, I do not think that process was going to achieve that objective,” he told the House. “My view was it would be better to embrace that as a whole-government effort. I hear [Stephen Timms’] concerns about no one being in charge if everyone is in charge, but that was never the intention, of course; the intention was to move to have someone in the Treasury directly in charge to look at tax simplification on a much more holistic basis, rather than take the case-by-case approach of the OTS.”

Energy and environment taxes

James Murray expressed his disappointed that the Finance Bill does not close loopholes in the windfall tax on oil and gas companies and that billions of pounds in windfall profits are being left on the table instead of “helping to support families through the cost of living crisis”.

Similarly, Sarah Olney said that, to fund additional support for households, the Lib Dems “would implement a proper windfall tax on the super-profits of the oil and gas giants by raising the rate and abolishing the fossil fuel investment loophole”.

From the Conservative benches, Richard Fuller said he wanted to hear more from the government about what the plans are on carbon taxes in the UK. “If we want to achieve a social objective, the introduction of a carbon tax would be one effective way of doing it. If that could be combined with reductions in general corporation tax, it would be a helpful move.”

Responding to a query from Sammy Wilson, Exchequer Secretary James Cartlidge said that the government has published secondary legislation that will extend full VAT relief for energy-saving materials to Northern Ireland and it will come into the force from 1^st May 2023.

Alcohol duty

Alistair Carmichael (Lib Dem) juxtaposed the decision not to reverse the double-digit duty hike previously announced for whisky with the freeze on duty for “warm ale”. He questioned how this was consistent with the government's previously stated policy of reforming spirit duty to support the Scotch whisky industry.

Stewart Hosie felt similarly. He said that while he supported sensible duty measures and would support a duty regime based on alcohol content, with no other criteria, the decision to significantly increase duty on Scotch showed that the Treasury viewed the industry as a “cash cow”.

In response, Financial Secretary Victoria Atkins acknowledged the concerns and highlighted that in the last 10 fiscal events before the current one, the whisky industry had benefited from either freezes or cuts in duties. She recognised that private sector investment is crucial and said that is why the government is lowering business taxes to incentivise investment and tackle the productivity gap.

Votes and the Programme Motion

The vote on Labour’s amendment resulted in 211 in favour and 289 against, leading to it being rejected. Afterward, a second vote was held and the Bill given a second reading, allowing it to proceed.

MPs then passed a programme motion for the Bill’s committee stage. The clauses selected by the Opposition for Committee of the Whole House are as follows –

Day 1 – 18 April – Corporate taxes (clauses 5-15 and parts 3-4) – one single debate of up to six hours including full expensing, AIA, R&D relief and OECD Pillar 2 (multinational and domestic top-up taxes)

Day 2 – 19 April – three separate debates of up to 2 hours each –

Pensions (clauses 18-25) – including abolition of LTA as well as net pay arrangements

Electricity Generator Levy (part 5)

Alcohol duty (parts of part 2) and tax treatment of devolved social security benefits (clause 27) (selected by SNP)

Public Bill Committee will cover the remaining clauses and schedules. It is scheduled to start with two sessions on Tuesday 25 April, continuing with two sessions on Thursday 27 April and further sessions as needed in subsequent weeks.

You can read the full debate here.