A live blog of the third and fourth public bill committee sitting of Finance (No.2) Bill 2017-19, which took place on Thursday 11 January at 11.30am and 2pm. Issues debated included taxation of partnerships, R&D credits and other corporation tax matters, chargeable gains and capital allowances. Clause 18-29 were passed.
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.
Clause 8 and Clause 33, together with Schedule 9; Clauses 40 and 41 and Schedule 11 were dealt with in Committee of the Whole House on Monday 18 and Tuesday 19 December 2017. Reports on day 1 and day 2 of these proceedings can be found by clicking on the respective links. These reports also include background notes on the Finance Bill, its history and its contents.
Clauses 1-17 of the Bill were passed during the Bill's first two sittings, which are reported on here.
NB. The notes below are 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.
Clause 18 and Schedule 6: Partnerships – both PASSED
This clause and schedule introduce new provisions to provide clarity over aspects of the taxation of partnerships. This schedule specifies how the current rules and reporting requirements operate in particular circumstances where a partnership has partners who are bare trustees for another person or that are themselves partnerships.
Financial Secretary to the Treasury (FST) Mel Stride said the clause provides additional clarity, to address areas of complexity. The Government has considered areas of uncertainty so the amendment is not necessary, and the changes proposed by the Opposition are disproportionate, he said, arguing that HMRC has enough powers to manage this clause.
Anneliese Dodds (Lab) said the proliferation of partnerships leads to questions of unintended consequences, such as with LLPs in accountancy. Labour amendment 45 would enable HMRC to require payments on account from partners in respect of themselves to allow for unknown partners in any case where there has previously been a notice of an enquiry in connection with a return. She said this would be similar to the version used by the self-employed. Reporting of partners must be incentivised, she said. Labour’s concern is that that penalty could be lower than tax due, so the amendment asks the Government reconsider its position. However, she was convinced by the FST's argument that anti (tax) abuse measures are applicable to the matters that concern her party and withdrew her amendment – but she wants this matter under unofficial review by the Treasury.
Clause 19: Research and development expenditure credit - PASSED
Clause 19 will increase the rate of the Research and Development Expenditure Credit (RDEC) from 11 per cent to 12 per cent, for expenditure incurred on or after Jan 1st 2018.
FST Stride said this makes changes to drive up R&D spending to 2.4 per cent of GDP by 2027. These credits support companies to invest, he said, and help productivity. The SME scheme is more generous than the RDEC scheme at present, he said. In 2015/6, the Government provided ‘innovative businesses’ with over £1.3 billion through RDEC, supporting £16 billion of research and development. The changes in the clause will give £170 million of additional support every years from 2019/20. Changes to this Bill will help the UK post Brexit, he argued.
There was an intervention by an MP to speak up for CIOT’s view that there is merit in expanding R&D in product commercialisation. FST Stride said the Patient Capital review covered this and he supported her ‘very well made’ question and this will be monitored.
Labour's new Clause 9 seeks to commission a review of the revenue effects of this change and its effects on levels of research and development expenditure. A recent evaluation by HMRC found that for every one pound of tax up to £2.35 of additional R&D is stimulated, said Stride.
SNP’s economy spokesperson Kirsty Blackman agreed with comments about the need to encourage companies to develop innovative products, although the UK lags behind other developed countries in recent years on this. Given that the UK is leaving the EU, that comes with added negatives, especially in R&D, for example with universities and with loss of European workers generally - we are heading for a backward step because of more barriers to trade, she said. Increasing R&D by one per cent ‘does not cut it’ in this context. The Government needs to support the oil and gas industry in this regard, she said, also speaking up for robotics research currently going on in Aberdeen. The Patient Capital Review is to be welcomed, however.
The SNP tabled new clause 4 which would require the Chancellor of the Exchequer to commission a review of the effect of the increase in Research and Development Expenditure Credit from 11% to 12% on companies’ research and development spending and what effect the increase will have on any changes to companies’ R&D spending as a result of the UK leaving the EU.
Shadow Chief Secretary to the Treasury Peter Dowd (Labour) said the Government is not giving enough financial support to R&D, such as in terms of firms that are able creating new ‘knowledge’. If the UK is to keep its status as a leader in R&D, the Government needs to address more fully how Brexit will impact on its spending - ‘one per cent is simply not enough’, he said. This is why there needs to be a review, as Labour argues in its amendment. Half of our research output is the result of international collaboration and this clause does not help with that; seven of the top ten collaborators with the UK are EU countries. The Bill neither addresses the future of grants nor attracting and keeping international talent (EU and non-EU). Again, he said Labour’s wish for a review of R&D reliefs will enable MPs to look at these matters and see the impact on external investment into UK firms. If we are to raise productivity, how do we know that is linked to R&D? Hence the need for a review. What Germany produces in four days, the UK produces in five, he said.
(The deputy speaker intervened for the second time in Dowd's speech to say it was heading away from debate of the Bill).
Dowd continued that Labour wants a government review to cover regional disparities in this expenditure. He agreed with an intervention from an MP that there was no clarity of any mechanism to address this disparity, at the moment - let's have some evidence-based rate changes, he said. Dowd asked FST Stride for the percentage change in regional distribution of R&D as a result of the clause.
FST Stride welcomed the wide-ranging debate. He claimed the committee agrees on the essential role that R&D plays in driving productivity. He does not accept that the Government is not doing enough, citing major announcements on infrastructure. The support for universities is critical, he accepted, citing changes to immigration. Any Horizon 2020 projects will be underwritten by the Government (if agreed before Brexit). Responding to an intervention, he said ERDF is under review by the Government.
Dowd said the PAC reported that the cost of R&D tax relief increased from £100 million in 2001 to over £1 billion in 2011/12 but the amount of business expenditure on R&D stayed the same. Another argument for a review, he said.
Stride said it was ‘demonstrably the case’ that if you use provide attractive tax reliefs to encourage R&D investment from companies you will see a displacement of activity into those activities.
New clauses are voted on at the end of proceedings on the Bill.
Clause 20: Intangible fixed assets: realisation involving non-monetary receipt - PASSED
Clause 21: Intangible fixed assets: transactions between related parties - PASSED
These two clauses are related measures aimed at counteracting tax avoidance based on exploiting, within the same corporate group, the differences between the accounting treatments that have to be adopted by a licensor and a licensee of intangibles.
FST Stride said the clauses prevent companies from claiming unfair tax relief on intellectual property.
These types of transactions covered by the clause can occur when setting up joint ventures but also tax avoidance, and see intellectual property leaving the UK. This clause will ensure that intellectual property is always taxed properly when leaving the UK.
Anneliese Dodds (Lab) said there is a ‘pertinent question’: the clause tries to grab at a ‘holy grail’ which is the assigning of market value for particular kinds of intangibles for tax purposes and in that regard they contradict some of the direction of travel in ‘at least’ the previous finance bill where the tax impact of intra-group transactions was limited rather than regulated, as with these clauses. Rather than a reduction of immiscibility of intra-group payment as a means to reduce tax, we have an attempt to regulate how they are calculated, which may be ‘flawed’. There is an assumption that there is a market value for these intangibles and underlying that view is an image of a market of activity with buyers and sellers, but this is not the case for some intangibles. There were just 81 transfer pricing specialist at HMRC in 2016, she said, which is ‘dwarfed’ no doubt by the Big Four. The trouble with the clause, she said, is that the Government do not define what an intangible fixed asset is – where are the qualifying criteria? She asked the minister if the Government plans to bring forward legislation to provide clearer guidance about what an intangible asset should be for tax purposes.
Clause 22: Oil activities: tariff receipts etc - PASSED
This clause amends Chapter 4 of Part 8 of the Corporation Tax Act (CTA) 2010 to include a definition of tariff receipts for the purposes of Ring Fence Corporation Tax (RFCT) and Supplementary Charge (SC). This will have effect for accounting periods beginning on or after 1 January 2018.
FST Stride said the clause ensures oil and gas companies will have the certainty they need to continue to invest in infrastructure. He then explained the government investment and cluster scheme and allowances.
SNP’s Kirsty Blackman welcomed the clarification in the clause. She is unhappy that there is still no ‘oil and gas ambassador’, as promised by David Cameron when PM – has this been shelved?
FST Stride said he will ask about the ambassador and then respond to her.
Clause 23 and Schedule 7: Hybrid and other mismatches – BOTH PASSED
The current hybrid and other mismatches regime was introduced by Finance Act 2016. The purpose of the regime is to prevent multinational companies taking advantage of differences between laws in different countries to artificially reduce their tax bill using techniques such as claiming the same deduction twice. The regime reflects the recommendations of the G20/OECD project to tackle Base Erosion and Profit Shifting (BEPS). This clause and schedule make a number of detailed changes to the rules in this area, primarily attempting to clarify the operation of these rules.
FST Stride said this clarifies how the rules should apply but they do not impact on the effectiveness of the regime. On Labour’s amendment that calls for a review of the hybrid and mismatches legislation, especially on hybrid transfer arrangements, he said the changes have been in line with OECD guidance. Hence, the review is not necessary as this is already being monitored.
Anneliese Dodds (Lab) said Labour agrees with the ‘general direction of travel’ on this, which she accepts we need more complicated rules. A review is sensible, 12 months after the introduction.
Labour's amendment 49 provides for a review of the measures against hybrid transfer arrangements to reduce a taxpayer’s tax liability, and that this review consider whether alternative or additional measures would be more appropriate, and how these measures compare to the EU Anti Tax Avoidance Directive. It was not pressed to the vote.
Adjourned until 2pm today.
Session four - Tuesday 11 January 2018, 2pm
Clause 24 and Schedule 8: Corporate interest restriction - BOTH PASSED (WITH GOVERNMENT AMENDMENTS)
The minister moved formally (ie without any debate) that clause 24, government amendments 46 and 47 to schedule 8, and schedule 8 as amended, be part of the Bill. This was agreed without the committee dividing.
The corporate interest restriction rules were introduced in Finance (No.2) Act 2017 – the Act which gained Royal Assent on November 16th 2017 – with retrospective effect from April 1st 2017. The rules restrict the amount of interest and other financing amounts that a company may deduct in computing its profits for the purposes of corporation tax. The amendments made by schedule 8 of this Bill include both technical amendments to correct anomalies in the original legislation and limited policy changes.
The minister had previously set out in correspondence the purpose of amendments 46 and 47. The amendments were to correct a technical omission in the original drafting of schedule 8, in relation to subsidiaries 'held for distribution to owners'.
Clause 25: Education Authority of Northern Ireland - PASSED
This clause introduces a new corporation tax exemption for the Education Authority of Northern Ireland.
The minister moved formally (ie without any debate) that clause 25 remain part of the Bill. This was agreed without the committee dividing.
Clause 26: Freezing of indexation allowance for gains chargeable to corporation tax - PASSED
Announced at Autumn Budget 2017, this provision freezes indexation allowance on corporate capital gains for disposals on and after 1 January 2018. The allowance for subsequent disposals will be frozen at the amount that would be due based on the Retail Price Index for December 2017. The measure is believed by the Treasury to be a significant revenue raiser, with the government estimating that it will raise £30m for 2017-18 rising to £525m for 2022-23.
Peter Dowd (Labour) spoke first in this debate, moving amendment 48, which provides for a review to be undertaken on the revenue effects of freezing indexation allowance for gains chargeable to corporation tax in Clause 26 of the Bill. He described the indexation allowance as effectively a tax relief on capital gains on inflation. He said the indexation allowance was a needless complication in the tax system, with one set of rules for individual taxpayers and another for companies. He challenged the government's assumptions underlying the revenue estimates, saying the figures needed testing, and said this was the reason for Labour's proposed amendment.
Alison Thewliss (SNP) highlighted concerns of the insurance industry about the impact this change could have on people with a relatively small amount of savings. "We would not be entirely content with this going ahead as it is at the moment", she said, adding that while she would not be opposing the measure at this stage she reserved the right to return to it at report stage. She challenged the government's assessment that the impact would be 'modest'.
Financial Secretary Mel Stride introduced the proposal, explaining that "removing this outdated allowance supports the UK's competitive rate of corporation tax by removing a relief that is not available consistently across corporation tax, to individuals... or in most major, comparable economies." He said the revenue forecast had already been confirmed by the OBR, but it would be kept under review.
Responding to the debate Peter Dowd said that Labour was happy to withdraw its amendment and 'keep tabs on' this area.
The amendment was withdrawn and clause 26 was approved without a vote.
Clause 27: Assets transfer to non-resident company: reorganisations of share capital etc - PASSED
This clause ensures that tax postponed under section 140 of the Taxation of Chargeable Gains Act 1992 does not become due on the occasion of a subsequent corporate restructuring involving the exchange of shares in an overseas transferee company where the substantial shareholdings exemption (SSE) applies to the share exchange.
The minister, Mel Stride, introduced the clause, explaining that the SSE rule had had unintended consequences around company restructuring, which this clause would correct. It would affect groups which commonly operate overseas through branches. It would have negligible fiscal impact, he said. He offered to provide Labour with further information on the points raised by their new clause.
Peter Dowd, for Labour, introduced Labour's new clause 11, which provides for a review of the revenue impact and the impact on business of the change. Noting the Government's claim that SSE presents barriers to companies seeking to restructure, he invited them to present examples in support of their case. He also questioned the costing that indicated the change would, in effect, have zero financial impact.
Responding, the minister said the change would affect a very small number of businesses, which was part of the reason for the negligiblity of the cost.
Clause 27 was agreed without a vote.
Clause 28: Depreciatory transactions within a group of companies - PASSED
This measure removes the time limit of six years for which a company must look back and adjust the capital loss claimed on sale of shares in a subsidiary company to account for earlier depreciatory transactions that have materially reduced the value of those shares.
This was moved formally (no debate) and passed without opposition.
Clause 29: Capital allowances - First-year tax credits - PASSED
This clause extends First Year Tax Credits until 31 March 2023 and reduces the rate of eligible claims to two-thirds of the corporation tax rate.
The Financial Secretary said this would ensure loss making companies are incentivised appropriately to invest in energy-saving equipment. With regard to Labour's new clause 12 he said the Government regularly reviews tax reliefs. This legislation includes a sunset clause which means it will expire in 2023 unless renewed.
Anneliese Dodds, for Labour, said the new clause 12 would require the Chancellor of the Exchequer to commission and lay before the House of Commons a report into the effectiveness of First Year Tax Credits. Labour would also like a review of the revenue associated with this proposal. She thought there was a lack of information about who is using this tax relief. Such information as there is is bundled up with other data on use of capital allowances. The cost of all capital allowances in 2016-17 was estimated at £22.5 billion, she told the committee. She expressed a hope that the Office for Tax Simplification would undertake a review of environmental taxation.
The Financial Secretary said that this was another measure affecting only a small number of businesses. The Government would keep it under review. It would be disproportionate to have a full review into its effects.
Clause 29 was agreed without opposition.
The committee was adjourned at 2.36pm, to resume at clause 30 on Tuesday morning.
CIOT External Relations Team
Sitting 3 - Hamant Verma, External Relations Officer
Sitting 4 - George Crozier, Head of External Relations