MPs have given a second reading to the Finance Bill following a debate held on 11 December 2017. There was little explicit debate about tax matters, with more exchanges over infrastructure spending and productivity. There was hardly any mention of Making Tax Digital or online VAT abuse, for example. Many MPs used the debate to talk about issues specific to their constituencies.
Opening the debate, Financial Secretary to the Treasury Mel Stride said the deficit has been reduced by three quarters from 9.9 per cent of GDP in 2009-10 to 2.3 per cent of GDP in 2016-17. “However, at 86.5 per cent of GDP, public debt is still too high and productivity growth remains subdued. This Budget therefore balanced short-term action with long-term investment.” The Bill’s relative small size reflects the Government’s serious’ commitment not to overburden people or to overcomplicate the tax system and is also partly the consequence of the move to a single annual fiscal event. The Government’s package on housing will ‘boost housing supply and address the problem of affordability’. In this ‘critical endeavour’, the tax system should not act as a barrier, he said.
The UK continues to be a world-leading place to start a business, with 650,000 start-ups in 2016 alone. In response to the patient capital review, the Treasury has set out a £20 billion action plan, combining investment with tax incentives. The Finance Bill reforms EIS and VCT schemes, redirecting low-risk investment into growing entrepreneurial companies, while changing venture capital trust rules to encourage higher-growth investments. “We expect these changes to result in over £7 billion of new and redirected investment in growing companies over the next 10 years.”
The Government will invest an additional £7 billion in R and D over the next four years, the largest increase in four decades, he claimed.
The Budget continues the Government’s ‘sustained crusade’ against tax avoidance, evasion and non-compliance, ‘an endeavour that we will pursue with undiminished vigour right through the course of this Parliament’.
Shadow Chief Secretary to the Treasury Peter Dowd complained that the Bill proposes a stamp duty cut that will, according to OBR analysis, increase house prices; and it fails to introduce measures to encourage the building of affordable homes to address the housing crisis. Grahame Morris (also Labour) said the UK needs more social housing rather than stamp duty cuts. “My understanding is that 40 per cent of council houses that were sold under the right to buy are now in private ownership and, on average, rents in the private sector are twice those for council houses in the social housing sector That costs this nation £10 billion—not as a one-off, but each and every year.” Shadow Treasury Minister Anneliese Dodds complained that there is no action in the Bill to deal with the inequitable situation where some housing co-ops are facing higher rates of stamp duty than private housing providers.
Conservative MP Kit Malthouse suggested that a ‘general loosening’ of the stamp duty regime, and therefore more transactions in the property market, is more likely to mean that more people can access it at all levels.
SNP Economy spokesperson Kirsty Blackman is sceptical about the cut in stamp duty leading to better access to the property ladder. She said that to improve access to the housing market, the UK Government should follow Scotland’s lead and commit themselves to more social housing. “Unlike us in Scotland, the UK Government has not made any reductions in the right to buy scheme, and council housing stock has been decimated as a result.”
Stella Creasy (Labour) said that this Bill is being considered in the context of the Government having agreed to close the tax loophole whereby overseas-based companies sold UK commercial property without having to pay capital gains tax. But it has sadly become apparent since the Budget that the Government have not got to grips with the loophole, she said. “They think that they are going to raise only half a billion pounds, but it is clear, given the sums involved in commercial property sales in the UK, that we could be looking at £5 billion or £6 billion. With this Bill, the Government could have learned the lessons of the Paradise papers, particularly as regards the loophole for companies that register properties in Luxembourg, because the Luxembourg treaties will allow those companies to avoid capital gains tax.” She called this a ‘loophole, within a loophole’.
Conservative MP Helen Whately welcomed plans to cut down on online VAT evasion because of the ‘advantages that gives to online businesses in paying VAT, because I want us to achieve a more level playing field between online businesses and those with premises such as our high street shops’.
Blackman (SNP) welcomed that VAT liabilities should not apply on Scotland’s Fire and Police services but ‘surely they should not have applied in the first place. Our police and fire services would very much like the £140 million in VAT that they have paid so far to be returned’.
Conservative Bill Grant said: “I am particularly pleased that the Government will mend the muddle of the Scottish Government, namely their poor judgment in surrendering the VAT exemptions for the Scottish fire service and Police Scotland.”
Corporate taxes (including the bank levy)
Ruth George (Labour) said the Bill is a wasted opportunity. It continues to reduce corporation tax (to be less than income tax) and thereby creates a false impetus for creative accounting, she said. “From my time negotiating with the shopworkers’ union, the Union of Shop, Distributive and Allied Workers, I know that the reductions in company accounts for corporation tax are far greater than the amount that goes in extra pay for workers."
Charlie Elphicke (Independent) asked about the variety of measures in 2015 that changed the basis of taxation for banks. Over the period of the coming forecast, the UK will be receiving some £4.5 billion in additional income from banks by way of taxation as a consequence of those changes, he was told by Stride.
Stride told John Howell (Conservative) that the Treasury has moved away from a levy on the capital assets of banks as regulation has improved, and towards a tax on the profitability of banks as that profitability has recovered after the events of 2008 to get a fair contribution paid by the banks, matched against the risk they pose to the whole UK economy. Along with the eight per cent surcharge, the Treasury has restricted banks’ ability to carry forward losses to offset against profitability. Rachel Maclean (also Conservative) is proud that the average amount paid by the banks every year under the Conservative party is 13 per cent higher than it was under Labour. HMRC data shows that the average annual amount of tax paid by the banking sector between 2010-11 and 2016-17 was £23.2 billion, she added.
Dowd (Labour) wants banks to pay ‘a little more’ than the Tories will ask, saying the bank levy will take £4.7 billion less in tax revenue as a result of current Tory policy, and ’this at a time when the crucial services on which many children and families rely are at risk of collapse’. Gareth Thomas (Labour) said keeping the bank levy at its current rate would be some compensation to the consumer and the taxpayer for the excess profits they make. He pointed to Competition and Markets Authority investigation into banking, which noted a lack of competition in banking and highlighted the lack of innovation and the fact that the big five banks control 85 per cent of the retail banking market.
Luke Graham (Conservative) praised the tax break for the oil and gas industry through the transferable tax history scheme as an example of how the Budget delivered for Scotland. (He also cited the duty freeze for the Scotch whisky industry and a funding commitment to a number of city deals across Scotland.) Blackman (SNP) would like the UK Government to commit to supporting the Oil and Gas Authority’s “Vision 2035” for the sector, which has cross-party support.
R&D and investment
Malthouse (Conservative) ‘enormously’ welcomed the increase in the R and D tax credit from 11 per cent to 12 per cent, ‘especially alongside the Government’s stupendous support for British science’. Malthouse also backed the increase in the lifetime allowance for investment in business, and the increase in the amount that an individual can invest in one year. “Those people who are wealthy enough—there are not that many—to put £2 million a year into business should do so.” The notion of a knowledge-intensive company test effectively introduces an extra layer of regulation into the system that may deter people from investing more money, he warned. He is also worried that the Government’s determination to stamp out capital preservation schemes that take advantage of tax-efficient structures may lessen capital going into British industry if managed poorly
Another Conservative, Grant, said encouraging more private sector investment in R and D in that way is a welcome step forward.“The Government have set the ambitious target of increasing overall R and D funding to 2.4 per cent of GDP within a decade, and they are on course for an eventual three per cent figure. That is an unprecedented investment in the future of the UK.”
Tax avoidance, evasion and Paradise Papers
Conservative Alister Jack is pleased that this Government have such a ‘strong record on reducing tax evasion and aggressive tax avoidance’. The UK tax gap is now just six per cent down from 6.7 per cent in the final year of the last Labour Government—and the measures that this Government have put in place to reduce the gap have saved £12.5 billion in the past year alone, he said. Whately (Conservative) also welcomed the actions on tax avoidance and evasion to ‘make sure that we collect more, if not all, of the tax owed’. Geoffrey Clifton-Brown (also Conservative) said Labour spokesperson Peter Dowd was living in a 'fantasy land' if he thought he could collect more money from tax evasion that the Government have managed since 2010, which is £160 billion.
For Labour, Dodds said: “In the previous Finance Bill, the Government restricted the tax deductibility of interest payments to intra-group companies, albeit taking the most permissive option offered by the OECD rather than tightening up significantly. That measure at least followed the OECD’s call for profit shifting to be counteracted. In clause 21 of this Bill, in contrast, we see not an attempt to counteract profit shifting, but instead just a new approach to assessing its value—incoherence!” That will be compounded by the Government’s determination to push ahead with the restructuring of HMRC, she added. Her colleague Dowd commented that, despite the recent revelations in the Paradise Papers, there are few serious avoidance measures in the Budget and the Bill creates even more powers for HMRC officers, with even more work, but very little if any resource to go with it.
Grahame Morris (Labour) said the record low tax gap does not take account of the vast ‘treasure trove’ unearthed by the Bureau of Investigative Journalism in the Paradise Papers or of other vast sums of wealth, on which we have no idea how much tax is actually due. Creasy asked about the problems caused by the Luxembourg Treaty ‘which could see us losing out on £5.5 billion a year of the tax collected through Budget changes to property taxation. Mel Stride replied that a number of the measures coming out of the OECD’s BEPS project, which we have been in the vanguard of, bear down on exactly the issues that she mentions.
Finance Bill scrutiny (including Better Budgets report)
SNP spokesperson Blackman said: “I would like to take the opportunity again to highlight deficiencies in the Budget process. The “Better Budgets” report, published by the Chartered Institute of Taxation, the IFS and the Institute for Government, pointed out several ways in which scrutiny could be improved. One suggestion is for the Finance Public Bill Committee to take evidence in public. I am firmly of the opinion that such a change would improve scrutiny and increase Committee members’ understanding of a Budget’s measures. This will be my third Finance Bill Committee, so I feel that I can now speak with some expertise on the subject. I urge the Minister to consider this request once more, given that the previous two Finance Bill Committees I served on sat for only six sittings each. We have extra time in the legislative timetable before us, and two hearings on the first day, for example, would not stretch that. That has been the Government’s main objection, so I push the Minister to consider the proposal again.”
Margaret Hodge, chair of the All Party Group for Responsible Tax, wanted an explanation of why the Treasury has limited the scope of the Finance Bill in such a way that amendments cannot be tabled to ensure that we have a date by which measures such as country-by-country reporting, ‘which is crucial to bringing in tax that is otherwise avoided’, should be introduced? Blackman also asked why the UK Government did not put forward an amendment of the law resolution. It is not the normal state of play to have no amendment of the law motion after a substantive Budget, she said. An amendment of the law resolution would have allowed the Opposition to put forward what the Government might consider to be good ideas to reduce the amount of tax avoidance.
Stride said the previous Finance Bill was introduced under exactly the same Ways and Means procedure. “There is nothing in the resolutions that prohibits full, open and proper discussion and scrutiny of the Bill.”
Creasy complained about the lack of impact assessments on Finance Bill measures that specifically look at gender. Other opposition MPs also expressed disappointment at the lack of equality impact assessments of the Finance Bill.
Broader economic issues
Dowd (Labour) said economic growth stands at its lowest point since the Conservatives came to power, and it has been revised down by the OBR for every year of the forecast. The UK has the slowest growth in the G7, and the IFS has warned of two decades of lost earnings growth. The OBR’s decision to revise down UK productivity rates for every year of the forecast is ‘seismic’, and it reflects years of inaction from a government who have ‘refused to invest in our infrastructure and skills or in the UK workforce’. The Bill contains no measures to redress the disproportionate effect of austerity on women, and particularly on black and minority ethnic women, he added.
Blackman (SNP) said there is still no acceptance of the economic impact of and there are no taxation measures to fix that, in the Bill. The SNP wants an emergency UK Budget to answer these questions. The SNP will be tabling amendments on Brexit during the Bill’s passage.
Malthouse (Conservative) is worried about HMRC having the power to enter premises and break into vehicles or vessels without a warrant.”[The Bill] would grant more powers to the taxman than the police have to pursue crime. That makes me a little nervous”. He hopes that Ministers will think carefully about whether it might be more appropriate for a warrant to be obtained to access someone’s premises, in the same way that the police do when they have suspicions.
Malthouse also said more employee share schemes will help drive up productivity and businesses should be allowed to gift shares to their employee. He would like a company that had a certain percentage of its shares in employees’ hands to pay a lower corporation tax rate than one that failed to involve its employees in the balance sheet. Kevin Hollinrake (Conservative) said tax advisers advise against employee share schemes on the grounds of complexity and cost.
Kevin Hollinrake called for an extension of the tribunal system, similar to the employment tribunals, so that small businesses can seek redress without going to the huge cost of suing a bank in the courts. Financial services tribunals already exist, but for the wholesale markets. “We need to expand that system to bring in SMEs, so that judges preside over cases, instead of us having a cosy internal system involving ex-bankers who now work in a different part of the sector.”
Alison Thewliss (SNP) said that there needs to be a real national living wage that is available to everybody, including those under the age of 25.
Close of debate
Exchequer Secretary to the Treasury Andrew Jones closed the second reading debate. He said the Government’s 100 measures on tax evasion since 2010 have raised more than £160 billion. The stamp duty measure in the Bill will make sure that the tax system does not act as a barrier to first-time buyers who are seeking to get on to the housing ladder, he added. “The economy is 15.8 per cent bigger than it was in 2010. Unemployment is at its lowest level since 1975 and income inequality is at its lowest level since 1986. We have cut the deficit by more than two thirds and, based on our plans, the OBR expects debt to fall from next year”
Labour’s amendment to decline to give the Bill a second reading because of multiple doubts about its breadth and effectiveness (see below) was defeated by 271 to 312. The second reading was then granted by 313 votes to 269.
Committee stage in the House of Commons (Committee of the whole House) will begin on December 18th with debate on Clause 8 (exemption for armed forces’ accommodation allowances); Clause 33 and Schedule 9 (the bank levy); and Clauses 40 and 41 and Schedule 11 (stamp duty land tax). On December 19th the House will debate opposition relating to the effect of the Bill on equality, and the effect of the Bill on tax avoidance and evasion. The remaining clauses will be considered in Public Bill Committee between January 9th and January 18th.
The CIOT External Relations Team will be liveblogging the Bill’s committee stage.
The full debate can read here.
Footnote: Text of Labour’s reasoned amendment
“this House declines to give a Second Reading to the Finance (No. 2) Bill because it contains no measures to address the fact that the UK has the slowest economic growth in the G7 while the IFS warns of two decades of lost earnings growth, it fails to reverse the Government’s 2015 Bank Levy cut resulting in £4.7bn less in tax revenue from banks over five years and contains measures to further limit the scope of the Bank Levy resulting in a further fall in revenue, whilst at the same time crucial services that many children and families across the country desperately rely on are at risk due to seven years of budget cuts, it proposes a stamp duty cut that, according to the analysis of the OBR, will increase house prices, instead of helping to address the housing crisis through measures to build more affordable homes, it proposes policies without the benefit of an adequate Equalities Impact Assessment, it arises from a Budget which made no provision for lifting the public sector pay cap or addressing the funding crisis in social care and the NHS, it includes no measures properly to tackle tax avoidance and evasion and it is not based on an amendment of the law resolution, thus restricting the scope of amendments and reducing the House’s ability to properly scrutinise and improve the Bill.”