This debate combined Lords second reading debate on the the remaining stages of the Finance Bill with discussion on the Economic Affairs Committee’s Finance Bill Sub-Committee’s report on the draft Finance Bill (which focused on making tax digital), published back in March 2017 – see here. This is a link to the recommendations in that report. The debate jumped around a bit which is not surprising given the Finance Bill was more than 600 pages long and the debate lasted only an hour.
For the Government, Lord Bates said this Finance Bill introduces over 10 policies to help build on tackling avoidance, evasion and non-compliance. HMRC has secured over £160 billion in additional tax revenue as a result of tackling avoidance, evasion and non-compliance. “This includes more than £53 billion from big businesses and more than £2.5 billion from the very wealthiest.” He said challenges to disguised remuneration schemes in the bill, such as the crackdown on interest-free and tax-free loans by placing charges on such loans, will bring in an extra £3 billion by 2021.
He said that overseas companies have for too long avoided their VAT obligations, undercutting British business and HMRC will be in a better position to tackle this unfair practice because of the Bill. Since colonial times, permanent non-dom status has become a source of inequity in the British tax system, he said. The Minister praised the Government for making ‘fair and reasonable’ adjustments to the way in which businesses can claim interest expenses and calculate their losses.
By digitising our tax service, we will make it easier for businesses to get their tax right. “We are encouraged by the aspects of the system that we have been able to test so far.”
Crossbencher Lord Turnbull (a former Cabinet Secretary and Treasury Permanent Secretary) introduced the report of the Sub-Committee of the Economic Affairs Committee (which he now chairs, though Lord Hollick had been chairing when the report was produced) on the draft Finance Bill 2017. The Lord said the old and (now abandoned) MTD timetable was being driven not by what made sense for the project but by what had been agreed by the OBR and put into the Budget arithmetic. He said taxpayer awareness remains low and the pilots are still seen as too limited, there is no sign yet of the revised impact assessments and no clear road map for the proposal to widen the scope of making tax digital beyond VAT.
Lord Wakeham (Conservative, and a former chair of the Economic Affairs Committee) observed that ‘this morning I received in the post something like 15 pages of criticism of the proposals from the Chartered Institute of Taxation’ ’ about MTD. He felt that this indicated that the Government were ‘not yet finished in terms of getting these proposals right’ and suggested that they ‘should take another look at the consultation process to see whether it could be more effective in the future’. Based on his own experience as a Treasury minister he said that finding ‘two or three eminent professional people who would come in and talk about these things informally, off the record and in a quiet and effective way… was infinitely more effective than the formal process of the two sides marching in and doing battle’.
Also from the Conservative benches, Lord Leigh of Hurley, a member of the Chartered Institute of Taxation, said it was ‘eye-opening’ to learn how many taxpayers and members of the public were either digitally excluded or referred to as ‘assisted digital’, who would need some sort of help to interact digitally with the Government. This ranged from about 30 per cent of micro-businesses to 45 per cent of the adult population, he said. He was unconvinced by the behavioural assumptions made implying that errors will always be in the Exchequer’s favour. “The Chartered Institute of Taxation surveyed its members; 41 per cent thought that the changes would have little impact on the level of their clients’ errors, and nearly 40 per cent considered that they would increase errors, which could of course lead to a loss of Treasury revenue.” Looking ahead he expressed particular concern that making corporate tax quarterly returns effective would need “considerable work, not least in assessing accruals, identifying provisions and computating capital allowances. Is this really a constructive use of entrepreneurs’ time?” he wondered.
On Clauses 48 to 59 - fulfilment of third-country goods coming in to the UK via online marketplaces – Leigh was encouraged by correspondence with the Government suggesting that Amazon may be treated as a supply chain for VAT purposes. VAT registration numbers of traders on Amazon are either not being displayed, or, where they are, could be completely bogus. The Lord said he did not agree with the CIOT. (He had earlier been sent our briefing on these clauses, which argued that the sanctions are disproportionate and there are more effective and fairer ways to achieve the policy aims.) He felt that it was welcome that the clauses gave HMRC ‘great powers’ as there was ‘huge’ VAT loss which needed to be countered. Leigh also talked about enterprise investment schemes and venture capital trusts, welcoming what he saw as the Government’s continuing commitment to the schemes. Some excellent research has been done by the venture capital trust association which shows an increase in the number jobs created by VCT investees, he told the Government.
From the Labour benches Lord Campbell-Savours said the effect of inheritance tax on the property market is to ‘grossly’ inflate the price of housing. The Lord is in favour of an alternative system, the German system, which he argues would lead to a wider distribution of wealth. If we were to go down the German route, we would then pay in the UK context tax on inheritance at a person’s marginal tax rate, but we would have a differential threshold for family, friends or charities. We could have a different threshold for each group of recipients. But the recipients of a will would pay the tax at their marginal rate over and above the threshold. On stamp duty and the new surcharge, he claimed people are caught in a trap when buying and selling. “If you buy a house, having not sold your existing house, you end up with the house you are purchasing being treated as your second home for stamp duty purpose.” There is every evidence that the system is damaging the property market, and the Government should look at it in the Budget, he said. On a related matter, he said the Treasury currently estimates that the national tax gap from rental income is £590 million is a gross under- estimation of revenue, when research by Newham Council estimates a figure of nearly £200 million in London alone for undeclared tax by landlords. The Government should promote a registration scheme for landlords nationally, for every borough, whereby they could link up with HMRC and increase the tax take from private landlords.
Labour spokesman Lord Davies of Oldham said on MTD that Labour welcomed the fact that the Government ‘have moved a little on the timetable—but not, we think, far enough.’ He noted that Lord Campbell-Savours had “identified that there is at least a significant case for the Inland Revenue, and for the Government, to concentrate rather more on wealth than income. We all know how wealth has accumulated in recent years, and how limited the range of that wealth is in the numbers of people who have benefited from it. So it is right that we look at the issues introduced by [Campbell-Savours], particularly on inheritance tax.” He concluded that: “This is a finance Bill whose only merit is that it will in fact be supplanted by another one in the very near future.”
For the Lib Dems Baroness Kramer said it is about time that the Government ‘looked again’ at the possibility of a general anti-avoidance rule rather than living as we do at the moment with a general anti-abuse rule, which limits our capacity to shut down many such operations in the early stages of their development. On non-doms, she said there has been a tightening up of non-dom regulation, but through a potential loophole with offshore taxes, ‘it almost feels as though there has been tightening with one hand and loosening with the other’. On MTD she argued that: “There is no meaningful rationale for making this process mandatory on smaller entities. It should be a voluntary process.”
Closing the debate, Lord Bates said VAT already requires quarterly digital returns, so no business will need to provide information to HMRC more regularly that it does now; nor will it need to provide extra information. And that businesses can continue to use spreadsheets as part of maintaining digital records and performing tax calculations to meet making tax digital requirements. A revised impact assessment will be published ‘shortly’. On stamp duty, he said the Government keeps all taxes under review.
The minister devoted some time in his closing remarks to points made during the debate about the policy process. He said Lord Wakeham should come to the Treasury “where he could meet us and talk about the consultation exercise. I think that that would be a very good thing, so I put it on the record, and my colleagues will ensure that that happens. He talked about the informal conversations and people talking through particular problems. That would be helpful. There are standard guidelines on how consultations are now supposed to be undertaken in operation across government, and there are areas where that could be improved.” Bates added that the decision ‘to move to a single, annual autumn Budget allows more time to consult before tax changes take effect’. He also acknowledged a tension in the legislative process: “do you make changes explicit in law, and therefore run the risk of criticism for producing a Bill of 664 pages, or do you establish general principles? Because that often leads to contested cases going through the courts, trying to determine what was in the mind of the legislators, we recognised that we should try to be explicit about our intentions wherever possible.”
The full debate can be read here.