Peers protest over powers as Finance Bill clears Parliament

Peers only debated the Bill at second reading, with no committee stage and granting the Bill its third reading without debate. The Lords cannot amend money bills such as the Finance Bill. The Bill now awaits Royal Assent, which is likely to be obtained in the next week or so.

Alongside the Bill itself the Lords considered a report from its Economic Affairs Committee’s Finance Bill Sub-Committee on New Powers for HMRC: Fair and Proportionate?   This report was published in December 2020 and covered a number of tax administration measures which feature (or had been expected to feature) in the Bill – specifically civil information powers (financial institution notices – clause 122), promoters of tax avoidance (clause 117), notifying uncertain tax treatment (held back for further consultation), new tax checks on licence renewal applications (clause 121).

Ministerial opening remarks

Opening the debate, Treasury Minister Lord Agnew said the Finance Bill uses taxation to protect jobs, fix the public finances and lay the groundwork for a resilient economy.

The Government is extending the five per cent reduced VAT rate until 30 September to protect almost 150,000 hard-hit hospitality and tourism businesses and then increase to an interim rate of 12.5 per cent from October until the end of March. He also praised the VAT deferral scheme and trading loss carryback scheme, and said the SDLT change ‘helps buyers and supports jobs which rely on the property industry’. He talked about extension of Making Tax Digital (MTD) requirements to smaller VAT businesses from April next year ‘building on the successful introduction of MTD for VAT businesses’. The minister also said reforms to the penalty regime for VAT and income tax self-assessment will make it fairer and more consistent.

Agnew said the income tax threshold freeze was ‘a fair and progressive way’ to repay the COVID-19 debt and maintaining the pensions lifetime allowance at current levels affects only those with the largest pensions.

Businesses have been provided with over £100 billion of support to get through this pandemic, so it is only fair to ask them to contribute to the overall recovery by raising corporation tax, said the minister. The super deduction is ‘expected to lift the net present value of the UK’s plant and machinery allowances from 30th among the countries of the OECD to first’. On freeports, he said ‘this tax offer’ will be combined with simpler import procedures and duty benefits in customs sites to help businesses trade, along with planning changes to give a green light to ‘much-needed’ development and spending to invest in infrastructure.

Conservative backbench speeches

Lord Bridges of Headley, Chair of the Finance Bill Sub-committee, is unconvinced that the new powers to tackle promoters and enablers of tax avoidance are sufficient to tackle that ‘hard core’ of promoters who continue to promote schemes such as on disguised remuneration. Lord Bridges suggested that no public sector bodies should contract with an employment intermediary that operates disguised remuneration schemes. He wants to know if there are any plans to regulate ‘umbrella’ companies. The Government has failed to produce evidence to support new tax checks on licence renewal applications, he opined.

The peer also expressed concern about an issue that his committee has not yet considered - clause 129 of the Bill, which will give HMRC the power to require certain UK digital platforms to report information to HMRC about the income of sellers of services on those platforms. He noted with concern that consultation on the proposal “has yet to begin, despite the fact that, according to the Government, this power could affect up to 5 million businesses which provide their services via digital platforms.” “Digitising our tax system is laudable,” said Bridges, “but this is no way to proceed.” He told the minister “that he needs to justify why HMRC is being given this power without proper consultation. How can he justify taking a power, the cost and impact of which is unknown? Once again, HMRC’s remit appears to be growing, without consultation, without evidence, without real scrutiny. Is it fair? Is it proportionate? We do not know.”

Lord Forsyth of Drumlean, Chair of the Economic Affairs Committee, wondered “whatever happened to tax simplification? Whatever became of the Government’s declared policy of lower, flatter, fairer, simpler taxes?” Lord Forsyth went on to ask if we are ‘seriously going to take £20 a week from the universal credit of some of the poorest people in the land, just as electricity and food costs are rising’. He said increasing corporation tax is the opposite of what is needed if we want to see more investment, growth and employment. IR35 is having a severe impact and will discourage others from setting up on their own, he said.

Forsyth also opined on HMRC powers, saying it now seemed that every Finance Bill brought forward new powers for HMRC, even before the review of the use of existing powers was completed. He attacked the “disgraceful and effectively retrospective treatment of loan charge victims, such as local authority and health service workers placed in schemes by their employers without full understanding of what they meant,” saying it “has not been matched with the same zeal in pursuing those responsible for marketing those schemes, now languishing on their superyachts with their ill-gotten gains. I am disappointed that the Government have refused to apply measures retrospectively to these promoters, as recommended by the Finance Bill Sub-Committee, but I welcome the proposals for tougher action that are currently subject to consultation. It is beyond belief that these schemes are still being promoted”.

Baroness Neville-Rolfe said the aid to business, especially the simple suspension of VAT and the rates, has shown ‘bravery and flexibility’. The Treasury and HMRC have done well during COVID-19 as they have been allowed to take risks and innovate. The Baroness said: “I was concerned to see the briefing from the Chartered Institute of Taxation, which suggested problems with the penalty provisions (Clauses 112 and 113). These include a risk of disproportionately high penalties – so more reasons for people to be fearful. Lord Forsyth of Drumlean is right to argue for a look at the Bill and, perhaps more importantly, the whole tax code in the spirit of simplification and, I suggest, with an eye to encouraging enterprise and SMEs.” Instead of the plastic packaging tax, she remarked that plastics are oil-based and there may instead be a case for a simple duty like that on petrol or alcohol, albeit at a much lower level.

Lord Leigh of Hurley, a chartered tax adviser, said it was an ‘eminently sensible and pragmatic decision’ not to increase CGT rates or equalise income tax and capital gains tax. Lord Leigh remarked that ‘a lot is riding on corporation tax yield increasing as the rates move up’. On OECD plans, he said: “I am indebted to Glyn Fullelove, formerly president of the Chartered Institute of Taxation, for sharing with me his calculations, which suggest that a figure nearer to £2 billion or £3 billion could be the amount raised by the pillar 1 and 2 proposals. Perhaps HM Treasury could share its estimates with us at some point.” He went on to say that the Digital Services Tax has made it harder for SME retailers to compete with Amazon. The current DST legislation is defective in not taxing the user-created value arising from sales made by marketplace providers on their own account, he claimed. Additionally, the application of the DST to marketplace fees and commissions charged to third parties, without a corresponding charge arising on the value created when the provider uses the platform to make sales on its own account, is a ‘distortion to competition’. He proposes that the scope of the DST be extended, so that when a marketplace provider uses the marketplace for its own sales—or uses a similar platform alongside the marketplace—an amount of digital services revenue, which can be taxed, arises.

Labour speeches

Lord Sikka complained that the Finance Bill depresses people’s purchasing power. He bemoaned that there is no reform of national insurance contributions which is ‘another regressive tax’. He sees ‘no rationale whatever’ for taxing capital gains at a lower rate than earned income, even saying ‘the Government’s policies on capital gains are also a bonanza for the tax avoidance industry’. Increasing the personal allowance has done nothing for 18.4 million individuals whose annual income is less than the personal allowance, he argued. Sikka, who is an unpaid adviser to the Tax Justice Network, went on to say: “Big accounting firms have been peddling unlawful tax avoidance schemes and are not investigated, fined or disciplined but are given government contracts and seats on HMRC’s boards. The advisory panel on the general anti-abuse rule, GAAR, is also dominated by the same people. Amazingly, none of the GAAR panel’s rulings relate to any of its clients.”

Labour Treasury spokesperson Lord Tunnicliffe began by thanking the sub-committee for its report on new powers for HMRC. “The report raises concerns that will sound familiar to many: the questionable timing of announcements, somewhat odd prioritisation of workloads and the often relaxed attitude towards best practice and evidenced-based policy-making. Given both the economic and moral case for cracking down on tax avoidance and other forms of non-compliance, the findings of the report are of concern.”

Tunnicliffe complained that the Bill enables a corporate super deduction while freezing the income tax allowance, saying ‘the latter will hit low-paid households that have been lifted out of income tax only in recent years’, and the Budget laid out plans to cut certain welfare benefits and slash departmental budgets. The Labour spokesperson went on to say the Government opposed measures to ensure that large multinationals pay their fair share, to increase transparency around the actual economic impacts of freeports, and to review the effectiveness of plans to prevent overseas entities funnelling dirty money through UK property.

Other speeches

Lib Dem Treasury spokesperson Baroness Kramer said that she was glad that the G7 is coming together to tackle taxation of multinationals. “To me, it is a real illustration of the might of the United States and the flexing of its muscles. Almost every country will take some benefit from the changes in the way that a global corporate tax will be raised as a consequence but, in fact, it will be quite modest for most countries. The United States Treasury is the very big winner, and it is a reminder that when you delve into the world of economics and power politics you have to recognise size and power.”

Kramer said she was “delighted if HMRC is now determined to use powers, and extended powers are fine, to deal with promoters. But I am very frustrated that the retro-effective philosophy which is being used against individuals caught up in the loan charge, going back as far as 2010, is not being applied to the promoters who have accumulated huge profits in giving advice which, frankly, was from day one exceedingly questionable.” She also said she was worried about HMRC’s increasing instinct to outsource its compliance responsibilities: “the extension of the use of private companies to make the call on whether contractors they hire are caught by IR35 or not struck me as an overreach. We know that those companies, anxious not to have a fight with the tax authorities, are using quasi blanket determinations. Although an individual company can challenge a determination, it knows that at that point it gets labelled as a troublemaker and probably blacklisted for any future business.”

Finally she raised oversight and scrutiny of HMRC, especially in respect of powers to circumvent the safeguards of the tax tribunal. She said many peers had received a copy of an email that the Loan Charge Action Group accessed through a freedom of information request. It dates to 31 January 2019, and was from HMRC boss Jim Harra, who had written: “In recent months I have repeatedly tried to obtain legal analysis to understand the strength of our claim”— that is, said Kramer, the claim that there is a legal basis for going after individual contractors—“with very little success.” She challenged anyone to show her where, in any of its evidence given to the Treasury Select Committee or the Finance Bill Sub-Committee, HMRC reflected that level of uncertainty. “It demonstrates that the temptation to be parsimonious with the truth, to press on to achieve the target of maximum revenue-gathering, means that HMRC, like every other organisation, needs outside scrutiny. The importance of tax tribunals is paramount, and we must stop the constant whittling away of that power.”

Crossbencher Lord Butler of Brockwell is concerned that IR35 is pushing people into using ‘umbrella’ companies. He said: “It would be a tragedy if another version of the loan charge were to become established, which could cause distress for its victims for many years to come.”

Fellow crossbencher Lord Bilimoria, President of the CBI, said the Office of Tax Simplification’s suggestion to equate capital gains tax with income taxes ‘would be suicide’ because it would deter investment, entrepreneurship and risk-taking. The super deduction was a ‘masterstroke’ although he suggested it should not be taken away in two years’ time, just at the time when corporation tax will go up. He wants the current cap on carried-forward losses to temporarily lift to allow businesses even greater flexibility in how they use their exceptional COVID-related losses. On green taxes, he complained that there is very little in the Budget about net zero and tax.

DUP’s Lord Dodds of Duncairn asked the Government to keep under review measures that will alleviate the burden on businesses and families of air passenger duty on internal UK flights.

UUP’s Lord Empey believes that we are not explaining to the people in devolved parts of the UK where the money that the devolved Administrations spend comes from: on an annual basis the Treasury should produce a short leaflet, or put it online, to show people where the money actually comes from, he suggested. Local authorities often send out leaflets telling people how their taxes are spent but that does not happen nationally, he said.

Green Party peer Baroness Bennett of Manor Castle commented that the headline measure is a super deduction for the largest companies, ‘many of which have done very well out of the great tragedy and suffering of the global pandemic’. The OBR said that £5 billion of the spending that would be covered by this will be spent on previously planned investments, she added. Despite the Government’s talk of an end to austerity, a £15 billion cut in annual government departmental spending is planned.

Ministerial response to the debate

Concluding the debate, the minister, Lord Agnew of Oulton, began by addressing HMRC powers, the subject of the Finance Bill Sub-committee’s report. He noted that that nine of the committee’s recommendations were accepted by the Government and six were partially accepted. He said it is crucial that HMRC has the powers necessary to identify the minority of people and businesses who seek to avoid or evade tax.

On information notices, the minister said a notice may be issued only where the information is reasonably required to check a known person’s tax position or in connection with the recovery of a tax debt. An authorised officer must approve all notices and must pass a test every three years to retain their status. The financial institution can appeal against any penalties charged for failure to comply with the notice, and HMRC is required to make an annual report to Parliament on the use of the notice.

Responding to Lord Bridges on umbrella companies, the minister said that the Government agrees on the importance of regulating ‘umbrella’ companies properly and have already committed to regulating them by extending the remit of the Employment Agency Standards Inspectorate to include them. An employment bill will be brought forward as time allows, he said.

On licensing authorities, Agnew said the check has been designed to be minimal in scope and will only test compliance with the most basic obligation to be appropriately registered for tax. “It does not create new tax obligations but simply ensures that these existing rules are complied with,” he told the House.

Responding to Lord Forsyth on the impact of IR35 on the self-employed, Agnew said it was important to note “that the reform does not apply to those who are self-employed according to the existing employment status tests. A worker’s employment status for tax purposes is not a matter of choice but is determined by the terms and conditions under which they work.” More generally he promised that the Government would bring forward measures to establish an employment framework which is fit for purpose and keeps pace with the needs of modern workplaces.

At 25 per cent, the corporation rate is still highly competitive relative to our international peers, the minister argued.  Promoters of tax avoidance schemes are already subject to significant penalties if they fail to meet their obligations, he said. He told peers that the freezing of income tax thresholds would not come into effect until April 2022, when the economy will be on a stronger footing.

Responding to Lord Leigh on capital gains tax reform and Digital Services Tax, the minister said first that the Government were committed to a fair and simple CGT system which strikes the right balance between raising revenue and supporting the UK’s economic recovery and long-term growth. The Government will respond to the OTS report in due course. Agnew emphasised the Government’s strong preference to secure a comprehensive global solution on digital tax and remove the DST once this is in place. He said it was premature to set out revenue estimates—the final design details and parameters of the rules will need to be worked though—but “a key condition for the UK is that pillar 1 appropriately addresses our concern and ensures that the amount of tax that multinational groups pay in the UK is commensurate with their economic activities here.”

Responding to Lord Sikka’s remarks on tax avoidance by large firms, the minister said rigorous anti-avoidance activity by HMRC has seen a significant proportion of those promoting schemes, including the large accountancy firms, being driven out of this market. “It is now only a hard core of unscrupulous promoters, largely based offshore, who continue to promote tax avoidance schemes,” he explained.

Responding to Lady Neville-Rolfe’s comments on the new penalties regime, Agnew  said the current penalties and interest levied on taxpayers when they miss a submission deadline or pay their tax late are inconsistent across different taxes and the changes in this Bill bring ‘consistency’.  Taxpayers will incur penalties proportionate to the amount of tax they owe and how long payment is outstanding.

Finally, the minister responded to the shadow minister, Lord Tunnicliffe telling him that the UK was delighted at the G7 agreement: “Our consistent position has been that it matters where tax is paid, as well as the rate at which it is paid. So we are delighted that we have G7 backing for both pillars of the OECD proposals on reallocating taxing rights as well as the global minimum taxation.” He closed by saying the Government have a firm commitment to ensure that transparency extends to the freeports programme.

Sub-committee chair’s response to the debate

Curiously, after the Bill had passed its second and third readings, Finance Bill Sub-committee chair Lord Bridges had an opportunity to respond briefly to comments on his sub-committee’s report on HMRC powers. He thanked the minister for his response but asked if he could write to him with a response to the points he had made on clause 129, which he described as an enormous ‘power grab’. He was relieved to hear that action will be taken on umbrella companies, and was grateful that the Minister mentioned that the Government are still committed to their manifesto commitment at least to look at the measures in the Taylor review. “We need to address the impact which the digital revolution is having on our tax and employment systems. Until we do that, I fear that all the other tinkering that we do will be nothing but sticking plasters. We absolutely need a radical review, and this cannot happen soon enough.”

Bridges said he found it depressing that more peers had not spoken in the debate. One reason might be the hybrid nature of current proceedings, he thought. He also bemoaned “that we spend hours debating in committee, then coming up with committee reports outlining practical measures that can and should be taken by the Government on the Finance Bill. And what happens? In the space of an hour and a half, the entire Bill has gone through and it has gone through all those processes in the space of under a minute.” He saw a need to look ‘long and hard’, with the Commons, on how the Lords could make amendments to the Finance Bill that do not tread on their toes. “I seriously think that, as the noble Lord, Lord Butler, said, we need to look at this because there are some powers in this Bill that have not had anything like the amount of scrutiny they demand. Clause 129 is a good case in point. That really should change.”

The full session can be read on the link.

By Hamant Verma