Finance Bill 2020 Committee - 3rd sitting (liveblog)

A live blog of the third public bill committee sitting of Finance Bill 2020 (also known as Finance Bill 2019-21), which took place on Tuesday 9 June 2020 from 9.25am. Topics covered included the annual allowance for tax relief on pension contributions, changes to entrepreneurs' relief, private residence relief and corporate capital losses.

Documents on the Bill can be read here. These include explanatory notes on the clauses and the text of amendments and new clauses tabled for debate.

Proceedings can be listened to here

Reports on previous debates on this Finance Bill and other relevant reports are available:
Second Reading debate - Monday 27 April 2020
House of Lords report on off-payroll proposals - Monday 27 April 2020
Resolution approving changes on off-payroll working - Tuesday 19 May 2020
Public Bill Committee - 1st sitting (liveblog) - Thursday 4 June 2020 (am)
Public Bill Committee - 2nd sitting (liveblog) - Thursday 4 June 2020 (pm)

NB. The live blog below is contemporaneous and not checked against Hansard. We cannot guarantee that no errors have crept in and we advise on checking any passage against Hansard before repeating it.

New clauses debated during proceedings will not be voted on until the end of the committee's proceedings

Committee members

Committee members are listed here. The main contributors were:

For the Government:
Jesse Norman, Financial Secretary to the Treasury (FST)

For the Opposition:
Bridget Phillipson (Labour), Shadow Chief Secretary to the Treasury
Wes Streeting (Labour), Shadow Exchequer Secretary to the Treasury
Stephen Flynn (SNP), SNP Treasury Spokesperson

Finance Bill Public Bill Committee - Sitting Three - Tuesday 9 June 2020, 9.25am

Clause 21: Annual allowance: tapered reduction

Increases the maximum threshold income and adjusted income which an individual can earn without their annual allowance (for tax relief on pension contributions) being reduced (or ‘tapered’). Tapering of the annual allowance will only apply to individuals whose adjusted income is greater than £240,000 (previously £150,000) and whose threshold income is greater than £200,000 (previously £110,000). Also decreases the minimum tapered annual allowance from £10,000 to £4,000. Under the changes, someone earning £200,000 who received an employer pension contribution of £40,000 will not face any pension tax charges after April 6. This contrasts with a tax penalty of about £13,000 under the previous rules. This responds to concerns that senior doctors were turning down extra shifts because of high financial penalties, but applies to high earners in all sectors. Expected to cost HMT £2.2 billion over the next five years.

The FST, Jesse Norman, said that the measures fulfilled a government manifesto commitment to review the impact of the annual allowance on NHS doctors and that they were consulted upon with the medical profession. He said that NHS England had introduced special arrangements for 2019/20 to ensure doctors could undertake additional work without penalty. He said these measures had also been replicated by the devolved administrations in Wales and Scotland and that the government has estimated that they will take 96 per cent of clinicians out of these pension tax charges. Measures to reduce the minimum tapered allowance from £10,000 to £4,000 will ensure that the highest paid pay their fair share. The FST said this would apply to those with an income greater than £300,000.

Bridget Phillipson (Labour) said her party welcomed the government's proposal, noting that the introduction in 2016 of the annual allowance tapered reduction was to reduce tax avoidance in the private sector. But because it had not been properly thought through, she said it had resulted in an adverse impact on the NHS, with many doctors reducing their hours or retiring to avoid punitive charges if they exceed their limit by as little as £1. Phillipson also spoke to the wider impact on staffing levels and the government's policies towards the National Health Service and further noted its impacts on the armed forces.

Phillipson noted that the measures take effect from 6 April 2020, after the onset of the Coronavirus pandemic. She cited evidence from the Chartered Institute of Taxation suggesting that doctors taking on extra shifts at the start of the crisis face the risk of higher tax bills and asked the government to set out how it proposes to address these concerns. She also noted the calls of CIOT and others for a review of how pensions tax relief applies to pension savings and asked whether the government plans to review the regime.

Responding, the FST said the doctors working extra shifts in 2019/20 would be protected by the measures introduced last year by NHS England (and the devolved administrations) and that the measures introduced from 6 April would lift 96 per cent of doctors from the effects of the taper, a move he said had been welcomed by the medical profession. He said that the Treasury would continue to monitor the effects of its introduction. On proposals to remove the taper, the FST said this would create a cliff edge. On the review of pensions tax relief, he said that the Treasury had conducted one a few years previously and that its results had been inconclusive.

Clause 21 was approved without division.

Clause 22 and Schedule 2: Entrepreneurs’ relief: reduction in lifetime limit

Reduce entrepreneurs’ relief (a CGT relief) lifetime limit from £10 million to £1 million for qualifying disposals made on or after 11 March 2020 and renames the relief ‘Business Asset Disposal Relief’. There are measures designed to counter arrangements entered into in anticipation of the Budget that were designed to lock in the higher lifetime limit. The broad effect is the lifetime limit applicable to those transactions will only be £1m, not £10m.

The FST said the purpose of renaming the relief was to 'reflect its function and purpose more accurately'. He said evidence had shown that the relief had been used by 'some of the richest people' to reduce their tax liabilities rather than acting as an incentive for entrepreneurship. He said that last year, three-quarters of the cost of the relief was the result of the claims of 6,000 people disposing of assets with gains of over £1 million. Norman said the reform would ensure that the government can more sustainably support small business people. The clause also makes special provision for disposals entered into before 11 March 2020 (Budget Day) that have yet to be completed. It ensures those people can benefit from the old relief levels, provided that the deal has not been articifically structured for tax advantage purposes.

The FST said the proposals will raise £6 billion for the Treasury over the next five years.

On new clause 8 proposed by the SNP (which would require the Chancellor to review the impact of the changes within six months of the passing of the Finance Act), the FST said that the government had already conducted an internal review that had strongly influenced the proposals being considered. Mr Norman said that the government will continue to monitor its impact 'as standard'.

Bridget Philipson welcomed the review, which she said was overdue and could have gone further. She said the relief had been introduced in 2008 by the last Labour government as a means of boosting entrepreneurship. She said that measures introduced since 2010 had increased the costs of the policy (thanks to the provision of more generous reliefs) but that there had been little evidence of their impact on boosting jobs and economic growth across the UK. She cited evidence from the Institute for Fiscal Studies and Resolution Foundation showing the disproportionate impact of the relief on higher earners in London and the South East of England, alongside figures from HMRC showing that less than 10 per cent of beneficiaires had said the tax relief influenced investment decisions.

Ms Phillipson noted the CIOT's concern over the lack of transitional provisions and the strength of the anti-forestalling measures, which the CIOT has warned could give rise to human rights challenges. She asked the government to consider the CIOT's proposal to change the clause to enable shareholders disposing of shares to retain their eligibility for the £10 million limit. Philipson also suggested the government go further in reviewing ER, which she said remained costly and failed to meet its intended objectives.

Stephen Flynn (SNP) said his party's amendment was 'constructive' and encouraged the government to consider the wider impact of its proposals. Flynn said that the government had originally intended to abolish the relief but had not done so due to the threat of a backbench rebellion. He called on the government to set out its long-term policy objectives, saying it couldn't be driven by backbench dissatisfaction. Flynn quoted the CIOT's view on the need for a public consultation on the wider efficacy of the policy.

Jesse Norman (FST) acknowledged that the relief had attracted widespread criticism but said that the government had 'attempted to strike a balance' between protecting entrepreneurs and preventing tax planning. He said the anti-forestalling measures were necessary to prevent abuse and avoidance. Norman said he was sympathetic to calls for a more structured evaluation of tax reliefs and that there was scope to consider further reforms at future fiscal events.

Clause 22 and Schedule 2 were approved without division.

Clause 23: Relief on disposal of private residence

Private residence relief provides relief from CGT when a person sells a dwelling that has been used as their only or main residence. The two main changes being made by this clause reduce the scope of this relief (ie they save the government money), by (a) reducing the final period exemption from 18 months to 9 months (whilst retaining the existing 36 months that are available to disabled persons or those in a care home), and (b) reforming lettings relief (an ancillary relief of PRR) so that it only applies in those cases where the owner of the property shares occupancy with a tenant. Other changes include extending an ancillary relief where a home owner is in the armed forces and some minor technical changes legislating two Extra Statutory Concessions.

In moving the clause, the FST set out the background to the measures and said they would help to keep family homes outwith the scope of Capital Gains Tax, while ensuring that the reliefs are better targeted at owner-occupiers and are more efficient.

Bridget Phillipson described the measures as 'well-intentioned' but warned of the wider impact of COVID-19 on the UK housing market. She specifically cited CIOT concerns that the evidence base used to set the policy has been undermined by the impact of Coronavirus on the housing market. Zoopla research - cited in the CIOT's evidence - showed that 41 per cent of would-be home movers had put transactions on hold as a result of Coronavirus uncertainties. Ms Phillipson said these uncertainties warranted further consideration of the timing of the government's proposals.

Phillipson also expressed some concern that the measures being proposed ran contrary to the parliamentary convention on retrospective taxation (that is, that retrospection is permissable only when dealing with unacceptable avoidance). This was not the case here because the measures involved changing longstanding reliefs (rather than countering avoidance). Ms Philipson said that ICAEW had recommended that the measures be delayed to the start of the new year, to make them simpler to implement and understand, while the CIOT had suggested that better communication was needed from government to ensure taxpayers understand the impact of these proposals.

Jesse Norman said that the Government did not regard these changes as retrospective and that taxpayers had been provided with sufficient time to sell their properties under the old rules. Norman said that he would consider the potential impact of COVID-19 on the property market but added that those who failed to sell within 9 months may pay very little in CGT because the annual exempt amount kept small gains out of the regime.

Clause 23 was passed unanimously.

Clause 24 and Schedule 3: Corporate capital losses
Clause 25: Quarterly instalment payments

These two clauses were debated together.

Clause 24 and Schedule 3 introduce a restriction on the amount of chargeable (capital) gains that a company can relieve with its carried-forward allowable (capital) losses from previous accounting periods. Specifically a company will only be able to offset up to 50% of chargeable gains using carried-forward capital losses. It mirrors restrictions on the use of carried-forward corporate income losses made by Finance (No 2) Act 2017. There are various exemptions including individuals holding life assurance policies through a corporate wrapper or receiving dividends from a REIT, and capital gains within the Oil and Gas ring-fence.

Clause 25 relates to the timing of payment of corporation tax by big companies. The normal corporation tax due date is nine months and one day, after the end of an accounting period. However regulations require ‘large’ and ‘very large’ companies to pay their corporation tax liability by instalments in advance of that date. This clause moves some companies (those which are only paying CT because of chargeable gains) from ‘very large’ to ‘large’, which means they get an extra four months to pay CT.

SNP new clause 9 was debated with these clauses. This would require a review of the impact on investment, employment and productivity of the changes to capital allowance over time; in the event of a free trade agreement with the USA; and in the event of leaving the EU without a trade agreement, with an agreement to retain single market and customs union membership, or with a trade agreement that does not include single market and customs union membership.

The FST said clause 24 would bring the treatment of capital losses into line with the treatment of income losses. Less than one per cent of companies will have to pay additional tax as a result of this change. It is a proportionate way of ensuring big companies pay some tax when making large capital gains, he added.

The FST said the review proposed by the SNP new clause was not necessary; the government has set out detailed information on the impacts referred to. The OBR had said that the changes made by this clause were not expected to have a significant macroeconomic impact.

Wes Streeting, for Labour, thought clause 24 ran counter to the Government’s stated aim of simplifying the tax system, noting that even the explanatory notes run to 10 pages. He said the OTS’s job is made a lot more difficult if, at the same time they are trying to simplify the tax code, ‘we are adding reams and reams of clauses’.

Streeting said he would not oppose the measure but he wondered about the timing of the measure, in the context of concerns around Britain’s competitiveness and departure from the EU.

On clause 25 he quoted from a letter sent to the Chancellor by the London Society of Chartered Accountants, which had welcomed the change but said it was unfortunate that the change did not apply to events before 11 March 2020, where companies have had to rely on a concession by HMRC.

Turning to the SNP’s new clause 9, he said analysis of wider context of changes was essential. Unravelling the UK from the EU would not be simple or straightforward.

He also made a broader point about new clause 9 and others like it:

“The reason that we have new clauses like this and other amendments calling for reviews, is that calling for a review is one of the few ways in which opposition parties can now debate issues in the context of the Finance Bill. Because, in recent years, and to the shame of ministers, ministers have been too frightened, and too cowardly it seems, to allow Finance Bills to be subject to amendments in the way that they have traditionally been able to be amended.

“So rather than proposing practical, concrete changes that we might like to see, and I think actually strengthens democratic and political debate in Parliament, where oppositions don’t just criticise government, but can actually lay down alternatives, and we can debate the merits of those alternatives against the Government’s approach, we don’t have the same freedom and flexibility to do that any longer and so instead we call for reviews. Now I’m not very excited by the prospect of this review, or in fact of any other review that’s been tabled by my party or the SNP in the Finance Bill, but calling for a review is one of the few ways in which we get to air issues; and I think that is a great shame. It diminishes political debate, it grinds us into the sort of boring, dull, technocratic – worthy, but ultimately technocratic and dull – conversations that we’re going to be having today. And it restricts the ability of members across the House to raise the sorts of issues that are regularly raised with us by our constituents”.

He lamented that when MPs go the Public Bill office in Parliament seeking to table amendments an immediate conversation is whether amendments are ‘in scope’. He hoped the Government would revisit this.

Stephen Flynn, for the SNP, said he was seeking to be constructive with his new clause, allowing the Government ‘to open their eyes to what is coming down the track’. Ultimately this is not just about helping the Government to see the error of their ways, but also to reinforce to members the huge, detrimental impact leaving the EU will have on the people of Scotland. Leaving the EU single market will have a ‘devastating’ effect on Scotland’s growth and prosperity. He challenged the minister's assertion that the proposed review would not provide any useful information.

The FST wound up the debate. He said Wes Streeting was 'absolutely right' that simplification of the tax system was a desirable thing. He drew a parallel to some of the work done by Thomas Kuhn on how science proceeds:

"He distinguishes between times in which normal science proceeds in a normal fashion, and times when there is a paradigm shift and everything changes. And often the effect of the paradigm shift is to create a moment of radical simplification to a system which was becoming overly complex in its theoretical analysis before. That was the effect of Copernicus on the Ptolemaic system. That was the effect of Newton on pre-Newtonian physics. And there may well come a case, as there has done in the past, when this government or its successor decides on a radical tax simplification, but while we're in the world of existing tax, that is not the world we are talking about."

The FST said, quoting from an article in Tax Journal (without identifyikng the author), that this measure has been regarded within the profession as a model of how to achieve effective tax legislation. 

Responding to Wes Streeting on the issue of the Government 'disallowing' legitimate challenge to the Bill he observed that 'one man's meat is another man's poison'; the effective of this structure to the Bill is that as we grind through these clauses... as we give them the kind of detailed consideration that this Parliament would expect... that is being done now under a system in which non-charging measures are covered by individual resolutions - that is an increase in clarity and, I think very much to be welcomed." 

Clause 24, schedule 3 and clause 25 were passed without division.

Clause 26: Relief from Capital Gains Tax for loans to traders

Relief for loans to traders gives relief where a loan is made to a UK company, sole trader or partnership for the purposes of an ongoing trade, profession or vocation, or the setting up of trade, and the loan subsequently becomes irrecoverable. This clause extends the relief so it applies to loans made to trading businesses resident outside the UK. This is being introduced to comply with EU freedom of movement of capital rules.

The FST described this as a 'very small and technical measure'. He said it would give UK-based investors a remedy should overseas investments be lost. Draft legislation published over the summer had received no comments.

Wes Streeting, for Labour, observed that only towards the end of the minister's remarks had he referred to the fact that the clause is designed to ensure that the UK is compliant with EU law. He asked whether the Government intended this alignment to be permanent. He said that the Government had recognised with this clause that the UK does have obligations to meet, and he hoped the Government would acknowledge that in terms of our future relationship there may well be occasions when it is in our interests to align with the EU or persuade the EU to align with us.

Responding, the minister said he was sure it was right that there would be times when we wished to align with the EU on a sovereign basis.

Clause 26 was passed without division.

The committee adjourned at 11.01am. It will return for the fourth session at 2pm, when matters under consideration will include increases in the rate of the Research and Development Expenditure Credit (RDEC), and of Structures and Buildings Allowances.

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