Session 2013-14
Publications on the internet
Finance Bill
FINANCE BILL
The Committee consisted of the following Members:
Chairs: †Mr David Amess , Mr David Crausby
† Ashworth, Jonathan (Leicester South) (Lab)
† Baker, Steve (Wycombe) (Con)
† Cryer, John (Leyton and Wanstead) (Lab)
† Doughty, Stephen (Cardiff South and Penarth) (Lab/Co-op)
† Duddridge, James (Rochford and Southend East) (Con)
† Evans, Chris (Islwyn) (Lab/Co-op)
† Gauke, Mr David (Exchequer Secretary to the Treasury)
† Gilmore, Sheila (Edinburgh East) (Lab)
† Hands, Greg (Chelsea and Fulham) (Con)
Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/Co-op)
† Javid, Sajid (Economic Secretary to the Treasury)
† Jones, Mr Marcus (Nuneaton) (Con)
† Kwarteng, Kwasi (Spelthorne) (Con)
† Leslie, Chris (Nottingham East) (Lab/Co-op)
† McKinnell, Catherine (Newcastle upon Tyne North) (Lab)
† McDonald, Andy (Middlesbrough) (Lab)
† Mearns, Ian (Gateshead) (Lab)
† Mills, Nigel (Amber Valley) (Con)
† Mowat, David (Warrington South) (Con)
† Murray, Sheryll (South East Cornwall) (Con)
Nash, Pamela (Airdrie and Shotts) (Lab)
† Newmark, Mr Brooks (Braintree) (Con)
O'Donnell, Fiona (East Lothian) (Lab)
Offord, Dr Matthew (Hendon) (Con)
† Pearce, Teresa (Erith and Thamesmead) (Lab)
Qureshi, Yasmin (Bolton South East) (Lab)
Shannon, Jim (Strangford) (DUP)
† Stephenson, Andrew (Pendle) (Con)
† Stewart, Rory (Penrith and The Border) (Con)
† Thornton, Mike (Eastleigh) (LD)
Uppal, Paul (Wolverhampton South West) (Con)
† Williams, Stephen (Bristol West) (LD)
Simon Patrick, Committee Clerk
† attended the Committee
Public Bill Committee
Thursday 20 June 2013
(Afternoon)
[Mr David Amess in the Chair]
Finance Bill
(Except clauses 1, 3, 16, 183, 184 and 200 to 212, schedules 3 and 41 and certain new clauses and new schedules)
Clause 219
International agreements to improve tax compliance
Amendment proposed (this day): 141, in clause 219, page 127, line 13, leave out ‘the purpose of’ and insert ‘or in connection with’.—(Mr Gauke.)
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Question again proposed, That the amendment be made.
The Chair: I remind the Committee that with this we are discussing the following:
Government amendments 142 to 146.
Amendment 109, in clause 219, page 128, line 8, at end add—
‘(8) Her Majesty’s Revenue and Customs shall review the possibility of bringing foward measures to work in conjunction with other G8 countries and the members of the Organisation for Economic Co-operation and Development, to require multi-national companies to publish a single easily comparable figure for the amount of corporation tax they pay, and within six months of the passage of this Act, place a copy of the review in the House of Commons Library.
(9) The Chancellor of the Exchequer shall review the effects of incorporating a global standard for public registration of ownership of companies and trusts via a convention on tax transparency, including a requirement on companies to publish a single easily comparable figure for the amount of corporation tax they pay in the UK, on Treasury tax receipts within six months of the passage of this Act, and consult with G8 countries on their effectiveness. He shall place a copy of the review in the House of Commons Library.’.
New clause 6—Transfer pricing arrangements—
‘Within 30 days of the coming into force of this Act, Her Majesty’s Government shall propose to the governments who are members of the Organisation for Economic Co-operation and Development that co-ordinated action be taken at the earliest opportunity to prevent the abuse of transfer pricing arrangements by multi-national corporations and that early consideration should be given to a review of the current Transfer Pricing Guidelines for Multi-national Enterprises and Tax Administrations.’.
Steve Baker (Wycombe) (Con): The longer I follow the matters of tax compliance and transparency, the more I have come to applaud the Government’s prospective direction of travel; I will come to retrospection later.
It seems perfectly clear that until everyone feels the burden of taxation imposed by the state and the sheer weight imposed on the poor and the employed middle classes, we will not find sufficient numbers of people coming forward who are prepared both to advocate and to fund the advocacy of the policies that would lead to the lower taxes that they wish to pay. I believe that lower taxes would be in the general interest, so I welcome what the Government are doing to improve tax compliance, particularly under clause 220, which is about the disclosure of tax avoidance schemes. I hope that the result is that more people get involved in an open and honest debate about the level of tax and spend in this country.
Nigel Mills (Amber Valley) (Con): I am happy to follow my hon. Friend the Member for Wycombe; I agree with what he said.
I support clause 219. It seems an eminently sensible provision, and I hope that the powers are brought into force for as many countries as possible, as soon as we can.
When the Minister replies to the debate, will he talk about our Crown dependencies and other overseas territories? There is a bit of a risk that we sweep them all into one and tar them with the same brush. My understanding is that some of them have been pretty keen to comply with any transparency arrangements that we have asked them to make. In fact, some have been ahead of the curve well before we summoned them to Downing street and tried to force them. Will the Minister point out which ones should be of more concern to the Committee and which ones are on a white list and are behaving well? That would help us to focus our consideration on where it ought to be.
Turning to amendment 109, I am intrigued as to what on earth a
“single easily comparable figure for the amount of corporation tax they pay”
might be, especially if we are trying to compare across borders. Everyone has a vastly different corporation tax regime, and we have some particularly innovative, interesting or creative ways of relieving or charging tax. That may make it difficult to produce a sensible comparison. I sense that that is why we require large companies to show in their accounts a deferred tax figure, to show us what their real, effective rate of tax is, rather than just the cash they pay in the year. The amendment seems to set an impossible task.
I ask the Opposition to reconsider their suggestion and perhaps support a proposal that I raised only a few months ago—that we require large corporations in the UK to publish all their corporation tax returns and supporting computations. We could require them to be filed with their annual accounts at Companies House, so there would be no need to create a new way of publishing. That way, we would be able to see all the cash tax that they pay and understand how they got from their account profit to that amount.
Steve Baker: Reflecting on my prior experience, with filings in extensible business reporting language going into Her Majesty’s Revenue and Customs, there is an opportunity for people to automate that analysis. That might be quite useful.
Nigel Mills: I am grateful to my hon. Friend for enhancing my proposal further.
I think there is one objection, which is that we have a long tradition of taxpayer confidentiality. I can see much more logic for that with individuals, who are not generally required to disclose their total annual taxable income—clearly, we, as Members of Parliament, are. However, companies are already required to publish a huge amount of detail about their activities, income and expenses. Requiring them to show transparently how they got to their tax liability would help to move the debate along. We would be able to see which companies have strange tax planning or avoidance entries in their returns to get down to a zero or very low cash tax liability, and which ones have acceptable reliefs entirely intended by Parliament. We would then perhaps be able to focus public anger on only the guilty rather than the innocent. I urge the Opposition to reconsider the amendment and support my idea as a way of improving the debate.
We need to be a little careful when discussing transfer pricing. I am not accusing the hon. Member for Newcastle upon Tyne North, but we do hear people talking about banning transfer pricing. Short of banning the cross-border transfer of goods and services, it is hard to work out how we could actually ban a price being set for them. I think what we mean is to try to stop aggressive planning and the abuse of transfer pricing rules. I agree that that needs to be a cross-border situation. It might be interesting to find out whether the Minister has received an update on the discussions from the G8 on whether the Chancellor or the Prime Minister urged the US Government to reform their rules, in particular their entity classification and subpart f rules, through which most multinational corporate tax avoidance is enabled. If the US Government are serious about that agenda, they should scrap their check-the-box election, at which point we could actually make some real progress. I wonder whether any assurance was given that they might try to convince their Senate that it was a good idea.
Some co-ordinated action to try to improve transfer rules and to make them more consistent with modern ways of doing business is clearly right. I am not sure, however, that the mischief in the UK is with our transfer pricing rule, which broadly says that transactions with related parties must be on an arm’s length basis. I still believe that there are weaknesses in how we have historically drawn up the corporation tax code that actually make it hard for us to levy charges in some situations. Some effort is needed to modernise our own tax regime before we lecture others too much.
Having done some volunteering in Tajikistan, advising authorities there on how to modernise the tax regime and how to become more effective at collecting tax, I noted that their focus was not on corporation tax. The corporation tax rate is actually vastly lower than ours, and they were genuinely quite willing to enter into quite generous corporation tax agreements to try to attract multinational investment. They were desperate for investment to generate jobs that would trigger the more lucrative payroll taxes.
When debating overseas tax and how to support developing countries, it is not as simple as just corporation tax. We used to have tax rules that meant if a developing country offered a corporation tax incentive, we would charge the tax in the UK instead unless some complicated
tax affairs were in place. Effectively transferring their tax revenue back to the UK Exchequer is not a particularly good way of helping such countries to attract investment. The previous Government stopped that when they stopped taxing dividends from overseas trading companies. It is interesting that the controlled foreign companies rules changes attract criticism, but there is no criticism of the fact that dividends were allowed to come back to the UK completely tax free and we then gave the tax incentives.I cannot support any of the amendments or the new clause, because they do not get to the nub of the problem. There are alternatives that we could and should pursue to put our tax regime right, so that when trying to lead on this debate we lead from a position of strength and transparency, rather than encouraging others to do things that we have not yet chosen to do ourselves.
The Exchequer Secretary to the Treasury (Mr David Gauke): This has been a useful debate in terms of not only the clause before us, but also wider tax issues. It touched on many of the relevant issues from and progress made at the just-completed G8 summit at Lough Erne. I will deal with the various specific points set out during the debate and those in the Opposition’s new clause and amendment, but I must say that it is worth stepping back to see the progress made in the public announcements of the last few days, which is the culmination of much work over many months. The state of play is frankly transformative in terms of exchanging information and greater transparency in the world tax system, which provides an opportunity that will be particularly beneficial to developing countries.
If one looks at the debate about central registries and so on, the UK Government have put that on the international agenda. That debate did not happen in the past at the G8. The UK has set out its action plan, and we will consult later this year on whether it should be public. We deserve considerable credit for that progress. In that context, the agreements that we are entering into require the identification of the beneficiaries of trusts who are UK tax residents, including those in the Crown dependencies and overseas territories. Information on the assets held in trusts is then required to be reported, and that is a key element of the new international standard that we are trying to embed, and I underline the importance of that. If one looks at the arrangements, the level of information that should be available to tax authorities is considerable, and we should welcome that.
The Crown dependencies and overseas territories have all co-operated fully with the UK on our tax transparency agenda. They all meet the current standards and have agreed to go much further by automatically exchanging tax information with the UK and others, as well as producing action plans to improve the availability of beneficial ownership information. We are pleased to have achieved that and we should welcome the fact that the Crown dependencies and overseas territories have committed to joining the multilateral convention as soon as possible. We are working through the necessary processes to extend the UK’s signature to those overseas territories and Crown dependencies. We must acknowledge, however, that recent events represent the biggest ever change in the tax transparency arrangements of Crown dependencies and overseas territories.
Stephen Doughty (Cardiff South and Penarth) (Lab/Co-op): Will the Minister concede that this measure builds on work started by my right hon. Friends the Members for Edinburgh South West (Mr Darling) and for East Ham (Stephen Timms)? Indeed, I worked with the latter on tax information exchange, and they have both done much excellent work on it in recent years. While I welcome any steps the Government are taking on these issues—there are still big holes—these build on work begun under the previous Government.
Mr Gauke: What I would say is that prior to 2010 progress was made in bilateral agreements and tax information exchange agreements. I accept that, but it has become increasingly clear that the automatic exchange of information is needed. If we were debating this matter a year or so ago, few would have thought that we would have reached this point, with agreement on the automatic exchange of information with the UK and with the prospect of that opening up more widely.
I know that the hon. Gentleman has been particularly concerned about the impact on developing countries. It is worth highlighting that the G8 was very clear that we want a new global standard, accessible to all. We are working with developing countries through our capacity-building programmes to ensure that those countries are well placed to benefit from greater information exchange. We welcome that.
Catherine McKinnell (Newcastle upon Tyne North) (Lab): I acknowledge that there has been significant progress and that these are all welcome steps in the right direction. Was the Minister going to comment on the fact that the current statement on the national action plans on beneficial ownership that overseas territories and Crown dependencies will produce will relate to shell companies but not necessarily trusts? That seems to be a gaping hole in what should be beneficial progress towards greater transparency.
Mr Gauke: I did mention a moment or so ago that the agreements we are entering into require the identification of the beneficiaries of trusts in the Crown dependencies and overseas territories. The transparency of trusts is important, but it is worth pointing out that, as the hon. Lady knows, there are differences between trusts and companies, so there is a different solution.
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Automatic exchange of information agreements based on FATCA—the Foreign Account Tax Compliance Act—and of the sort that we want to see become multilateral, include provision for the gathering and exchange of information on the beneficiaries and settlors of trusts. We believe that that is the right solution to this problem.
In the context of developing countries, an issue that is important to the Committee, I turn to reporting by multinational companies. This is partly relevant to the Opposition’s amendment: we believe that the measure set out in the G8 communiqué is an important step forward: a high-level, country by country tool that enables tax authorities to see where profits are allocated and where tax is paid in an easily comprehensible way.
I recall an occasion a few months ago when I visited HMRC staff in Euston tower, which focused on the transfer pricing regime. I asked them what would make it easier for them to assist in identifying cases where a
company was able to abuse the transfer pricing regime, and they said that there are circumstances—usually when a group is not headed by a UK company—in which it would be very useful to know if a lot of profits are ending up in very low-tax jurisdictions. There may be a legitimate reason for that, but they said that access to that information would enable them to focus on that and to ask the right questions, which would make matters apparent to them easily.The country by country tool fits that bill precisely; it would make it much easer for tax authorities to make that assessment of where companies are putting most of their profits and whether they are paying most of their taxes in low-tax jurisdictions, or not paying taxes as the case may be. That is practical, and we have asked the OECD to draw up a template that we can hopefully have as a new international standard accessible to all, so that developing countries may also make use of that tool for multinationals to report information on where profits are earned, because that would also be useful for tax authorities in those countries.
The wider issue of corporate tax reform, particularly focusing on transfer pricing, was dealt with in new clause 6. My hon. Friend the Member for Amber Valley put it well when he said that there can sometimes be confusion in that debate when talking about the abolition of transfer pricing. I will not give a lengthy lecture on transfer pricing rules unless there is strong demand for it, but I would say that, at the urging of my right hon. Friend the Chancellor of the Exchequer, the G20 called on the OECD to review urgently the international tax standards to address situations where the rules were being exploited by some multinational groups to move profits artificially to low-tax jurisdictions.
We are committed to collective action, through the G20 and OECD, to tackle base erosion and profit shifting—BEPS, as it is known. The OECD presented its initial report on addressing BEPS to the G20 meeting of Finance Ministers in Moscow in February. The report identified areas where the international rules have not kept pace with the changing business environment. That work has been taken forward within three working groups of the OECD committee on fiscal affairs. Countering base erosion is chaired by Germany, jurisdiction to tax is chaired by the US and France and transfer pricing is chaired by the United Kingdom.
The aim of the BEPS project is to reform international tax rules so that taxing rights over multinational companies are aligned with the economic activities that give rise to them. The OECD project offers an opportunity to improve the international rules on taxing multinational enterprises in a co-ordinated manner. Unilateral or bilateral action will not address the fundamental problems caused by the existing international tax rules. The BEPS project is making good progress and the OECD will present a comprehensive action plan for tackling these issues to the G20 Finance Ministers next month.
Having set out all those points on the considerable progress that we are making, I hope that I have given as full an account as I can in this short period of time to the Committee. I do not think that either the Opposition’s amendment or their new clause need to be voted upon, and I hope that they will not press them. We should acknowledge the very considerable progress made on these matters in recent days.
Amendments made: 142, in clause 219, page 127, line 23, at end insert—
‘() any arrangements for the exchange of tax information in relation to the United Kingdom and any other territory which make provision corresponding, or substantially similar, to that made by an agreement within paragraph (a) or (b).’.
Amendment 143, in clause 219, page 127, line 30, at end insert—
‘(including obligations to obtain from specified persons details of their place of residence for tax purposes)’.
Amendment 144, in clause 219, page 127, line 36, after ‘agreement’ insert ‘or arrangements’.
Amendment 145, in clause 219, page 127, line 37, after ‘agreement’ insert ‘or arrangements’.
Amendment 146, in clause 219, page 127, line 38, after ‘agreement’ insert ‘or arrangements’.—(Mr Gauke.)
Amendment proposed: 109, in clause 219, page 128, line 8, at end add—
‘(8) Her Majesty’s Revenue and Customs shall review the possibility of bringing forward measures to work in conjunction with other G8 countries and the members of the Organisation for Economic Co-operation and Development, to require multi-national companies to publish a single easily comparable figure for the amount of corporation tax they pay, and within six months of the passage of this Act, place a copy of the review in the House of Commons Library.
(9) The Chancellor of the Exchequer shall review the effects of incorporating a global standard for public registration of ownership of companies and trusts via a convention on tax transparency, including a requirement on companies to publish a single easily comparable figure for the amount of corporation tax they pay in the UK, on Treasury tax receipts within six months of the passage of this Act, and consult with G8 countries on their effectiveness. He shall place a copy of the review in the House of Commons Library.’.—(Catherine McKinnell.)
Question put, That the amendment be made.
The Committee divided: Ayes 9, Noes 16.
AYES
NOES
Question accordingly negatived.
Clause 219, as amended, ordered to stand part of the Bill.
Clause 220
Disclosure of tax avoidance schemes
Catherine McKinnell: I beg to move amendment 147, in clause 220, page 129, line 6, at end add—
‘(2) The Chancellor of the Exchequer shall consider what steps Her Majesty’s Government could take, in co-operation with developing country governments, to assess how UK companies could report their use of tax use schemes that have an impact of developing countries, and how the UK could assist in the recovery of that tax. He shall report on this issue to Parliament within six months of Royal Assent.’.
The Chair: With this it will be convenient to discuss clause stand part.
Catherine McKinnell: Clause 220 relates to the disclosure of tax avoidance schemes—or DOTAS—provisions that were introduced by the then Labour Government in 2004, which are a very welcome tool for HMRC in the battle against tax avoidance and evasion. Committee members will know that DOTAS requires certain persons—normally a scheme promoter—to notify HMRC and provide information about tax avoidance schemes that they are intending to promote or use. That provides HMRC with early warning of new schemes and the opportunity to consider changes in the law to close loopholes or to challenge the scheme if it does not agree with the tax effect claimed.
The clause enhances DOTAS by providing HMRC with additional powers and the ability to request further information. We support the measures, given that the success that DOTAS provisions have had to date. However, as stated during our consideration of clause 75, the total amount of revenue protected by DOTAS had reached £12.5 billion by March 2012 with about 2,200 avoidance schemes having been identified by HMRC.
During our discussions on clause 75, I asked the Minister for an update on the figure. It was not available at the time, but I should be keen to be made aware of it now. Given that we have figures only up to March 2012, it would be useful to have an updated figure at this juncture. As well as benefiting the UK Exchequer, we believe that the disclosure provisions could have a significant impact on developing countries to increase their tax take, as suggested under amendment 147. There would be enough food for everyone if campaigners made it clear that developing countries lose an estimated $106 billion per year due to tax dodging by multinational companies.
Poor countries struggle to access the information that is needed to counteract tax avoidance by foreign nationals and multinational corporations, as information about foreign taxpayers’ overseas assets, income and cross-border transactions is simply unavailable within their jurisdictions. It is clearer that greater disclosure of such information is required, and the United Kingdom could—and, we believe, should—be leading the way by taking steps to help reduce tax avoidance by British companies that operate in developing countries.
As members of the Committee will recall, the Opposition tabled an amendment to the Bill when it was considered in Committee of the whole House. It called on the Government to extend the DOTAS requirements so that they incorporate the use of tax avoidance schemes by UK companies that have an impact not only on UK revenues, but on developing countries. However, along with the response that we have received about the impact of the CFC role changes on developing countries, the Minister gave a similar lacklustre response by saying the answer is that,
“as a matter of practicality it is difficult for HMRC to perform the roles required by the developing countries. That takes us
outside what HMRC can realistically do.—[Official Report, 17 April 2013; Vol. 561, c. 447.]The Opposition have therefore decided to give the hon. Gentleman another opportunity to make the right decision and accept amendment 147. It calls on the Chancellor to consider what steps the Government could take in co-operation with developing country Governments to assess how UK companies could report their tax schemes and have an impact on developing countries, and how the UK could then assist in the recovery of that tax.
Once again, we do not want to hear from the Minister about what is impossible for the Government to do. The issue merits a better response. The Government should therefore think about what they can do rather than what they cannot do, instead of dismissing the suggestion out of hand. I am sure that the amendment would at least enjoy the support of the Liberal Democrat members of the Committee, given that their party’s spring conference passed a motion effectively calling for the same policy. They now have the opportunity to put their money where their mouth is and vote for the amendment to make a real difference, potentially, to developing countries’ ability to protect their tax base.
Stephen Williams (Bristol West) (LD): I assure the Opposition Front Bench that I support the Chancellor’s considering what steps Her Majesty’s Government should take in co-operation with developing country Governments to put effectively into place what was decided at Lough Erne. An amendment is not needed to do that because it is fairly clear from what the Exchequer Secretary said, what the Prime Minister said, what the Chancellor said and what the Deputy Prime Minister has said during the past few days and, indeed, over the past few months as we have built up to what happened at Lough Erne, that the mood music has completely changed in this area.
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Not that long ago, discussing tax avoidance was considered dull and boring and something that only dull and boring former chartered tax advisers and Ministers would do together at dark moments in receptions with the Chartered Institute of Taxation or other events that the Exchequer Secretary and I have attended over the last eight years. Suddenly, it has become a mainstream political campaign advocated with passion by Christian Aid and Action Aid and the other people in the IF campaign coalition. The political mood music has completely changed now. I just wish that the Opposition Front Bench could acknowledge that that has happened and could welcome it. This really should not be a silly, party political, bickering game, particularly on the last afternoon of this Bill.
Catherine McKinnell: The hon. Gentleman once again is selectively hearing. I paid tribute to the progress that had been made. I acknowledged that they were steps in the right direction and steps that we all welcomed wholeheartedly. I fundamentally dispute the tone that he is taking towards this. I would also advise him to be cautious in rejoicing at the change in mood music as opposed to concrete action on the ground, which he has the opportunity to put into legislation today.
Stephen Williams: The first thing that needs to happen in politics for any fundamental change to happen, whether it is domestic or international change, is for that mood music to change. There has to be a will in this country to make that change. That will is definitely now in place and it has to be extended abroad by persuasion in all the international forums in which the United Kingdom takes part. We are fortunate as a country to have a seat in many international forums where we can influence the decisions of other Governments, whether it is within the European Union, with the United Nations or where the nitty-gritty of the implementation of a lot of the work that was decided at Lough Erne takes place within the OECD. That is where the dry, technical work will have to be done, thrashing out all the changes to all the treaties, all the bilateral treaties that, yes, I know the last Labour Government set up between some countries.
Stephen Doughty: A moment ago the hon. Gentleman mentioned Action Aid, Christian Aid and many of the other organisations that have been campaigning for these measures. In the last 20 minutes I have received about 20 different tweets and messages from people urging just the sorts of things that are in this amendment. Many are from Action Aid and Christian Aid supporters. I contend that people will judge him and the Tory Government quite harshly for not accepting this reasonable amendment to strengthen the measure, which has already done a lot, as we have discussed.
Stephen Williams: That may sound very clever, but may I say quite gently to the hon. Gentleman, as I do quite like him, that this is a really serious issue. Trying to turn it into a party political, point-scoring exercise when it is supported by constituents who vote for all three main political parties—all four in Wales—and is supported by people who go to church, people who do not go to church and people who support one charity or another, does not show any of us in a good light when there has been fundamental change in this area.
Mr Brooks Newmark (Braintree) (Con): I am not into political point-scoring and I am not even particularly Christian. [ Interruption. ] Yes, that is because I am Jewish. But Christian Aid has a point in what it is saying. There was some pretty strong messaging at the G8. It is important that the Government listen. Some of the language in the new clause is not unreasonable. I hope that when the Minister sums up he will demonstrate that he has listened to groups such as Christian Aid, which makes some valid points, and reflect its concerns and perhaps answer some of them. The G8 has raised the importance of this issue even higher.
Stephen Williams: I entirely agree with what the hon. Member for Braintree said. I was about to say something remarkably similar myself. Lough Erne is a major breakthrough, in particular paragraphs 1 and 4 of the main declaration. Paragraph 1 states:
“Tax authorities across the world should automatically share information to fight the scourge of tax evasion.”
Paragraph 4, which is of particular relevance here, states:
“Developing countries should have the information and capacity to collect the taxes…and other countries have a duty to help them.”
Obviously, the other countries are primarily the original G7 members of the G8, where many of the multinationals are headquartered. Multinational companies are quoted on stock exchanges as having primary relations with those tax authorities. If our country gets from multinational companies a disclosure of their tax avoidance operations in other countries, as well as what they seek to do in this country, that information should automatically be exchanged with developing countries, as paragraph 4 of the Lough Erne agreement states.
A major breakthrough was made at the G8. I was pessimistic in the run-up to the G8. Often for issues on which international co-operation is needed, such as climate change, there is a big campaign, which we all support; we attend rallies outside Parliament, and hope the United Kingdom Government will do the right thing.
Chris Evans (Islwyn) (Lab/Co-op): The hon. Gentleman is a Liberal Democrat; he has never been to a rally.
Stephen Williams: Don’t be daft. But at the summit, either the United States or India pulls the rug from under the international agreement at the last minute—[ Interruption. ] I cannot hear the hon. Gentleman. At the international summit one country is the obstructing force, and everyone else’s hopes are crushed.
That did not happen at Lough Erne. A major breakthrough was made, and the developed countries said that they would take tax evasion and tax avoidance seriously. It is not just about our own selfish interest, important though that is—it is this Committee’s primary duty to defend the UK’s tax base, which we should not forget. Altruistically, we must realise that it is in the interests of a humane world that we help developing countries to protect their own tax bases.
Catherine McKinnell: The hon. Gentleman is making a moving speech about the importance of international co-operation on taxation issues. He certainly seems to be talking the talk. The issue today is that we are calling on the Government to consider action that could be taken domestically by the UK now that would make a difference to developing countries. It is all well and good talking about how it works on an international scale, but this is a UK measure that could make a difference today. The hon. Gentleman has the power to do it.
Stephen Williams: Indeed, I am talking the talk. I have been talking the talk for a long time—longer than some hon. Members who have been shouting at me. Talking the talk is what we do as politicians; it is how we get a consensus among ourselves. We do it in parliamentary Committees such as the International Development Committee, which is chaired by a Liberal Democrat, my right hon. Friend the Member for Gordon (Sir Malcolm Bruce), who has done important work in this area. That is how we get, slowly but surely, to agreement among ourselves. We then persuade our international partners to come on board.
Mr Newmark: I am in uncomfortable territory here, because I am sympathetic to what the hon. Member for Newcastle upon Tyne North said and I disagree with
the language that my hon. Friend used. He said that we had an altruistic reason for doing this, but it is nothing to do with altruism; it is a moral responsibility. If companies deliberately avoid paying taxes that are due to countries that are in a far worse economic condition than ours, we have a moral responsibility to ensure that that money reaches those poor countries. They deserve that money. It comes from those countries, and it should not be transferred by sophisticated accountants through transfer pricing away from them. They sorely need the money that is due to them through taxation.Stephen Williams: I do not disagree with that at all. Altruism and trying to roll out a global, ethical moral tax framework are essentially all about the same thing. That is what we are edging towards.
The double tax treaties that we have talked about so many times were put together by the League of Nations; that shows how old they were. That was an imperial age. As I said to the Prime Minister in response to his statement yesterday, the mentions of forestry, quarrying, and the signatory powers of overseas agents are from a different age, when there was a different moral code and it was considered right that developed countries should exploit other countries. In fact, not only should they exploit other countries’ resources, they should have treaties to ensure that they were not taxed twice in developing countries between the United States and the UK. That is the origin of all these treaties.
We are now changing that expectation and saying that the double tax treaties that have meant in practice that nobody pays tax anywhere—money is siphoned off into tax havens—are not acceptable. Not paying tax is not acceptable in London and it is not acceptable in Washington. It is not acceptable in Berlin, Paris or any of the great former imperial powers that composed the original treaties. It is also unacceptable in the Democratic Republic of the Congo, Ghana and everywhere else.
Catherine McKinnell: The hon. Gentleman is focusing very much on the international taxation system. Will he clarify exactly what it is about amendment 147 that he feels he cannot agree to? It does not look at the international tax system; it looks at our UK tax processes and at a disclosure scheme that is already in place, which we know is incredibly effective in securing UK tax revenues. The amendment asks the Government only to look at how that can be extended to support developing countries. The amendment would not legislate for that to happen, but simply asks the Government to look at the possibility. If the hon. Gentleman could explain what it is about the amendment that he cannot agree to, that would be helpful.
Stephen Williams: I said earlier, either in response to an intervention or in my remarks, that I did not disagree with the sentiment in the amendment at all. However, as I have tried to do over many months and years, I am trying to build a consensus on this issue. I think that the hon. Lady, perhaps guided by forces of darkness outside this room and further away in her own party, is trying to sow division. We should not be divided over this issue. There should not be a dividing line between her party, my party and the Conservative party; this should be something on which we agree. We should be collectively
pleased that our Government have led the way in the international community in getting this issue on to the agenda.The hon. Lady and her colleagues are indulging in parliamentary games. I doubt that anybody in the Committee disagrees with the amendment. We will hear shortly from the Minister, who knows very well that his coalition partners and many of his own colleagues have a high expectation of him. That has now been eloquently expressed twice by the hon. Member for Braintree, who is a very economically dry person—he is probably somewhere different from me on the political spectrum. He, too, expects the Exchequer Secretary to say that the Chancellor and all the Treasury Ministers are seriously considering how to put into practical effect what was negotiated and agreed at Lough Erne.
Chris Evans: I am listening to the hon. Gentleman’s speech, and my mind harks back to the presidential election of 1980, when Ronald Reagan turned to Jimmy Carter and said, “There you go again.” Only a Liberal Democrat can stand up and when for all the world we believe he is going to vote for the amendment, and we know he is going to speak in support of it, he does the exact opposite. I ask the hon. Gentleman for a one-word answer. Does he support the amendment—yes or no? Perhaps then we can cut down his soliloquy a little.
Stephen Williams: I repeat, probably for the third time: I agree with the amendment. That does not necessarily mean—
Chris Evans: Well vote for it then.
Stephen Williams: When the hon. Gentleman has been here a bit longer, he will realise that these are the games that Opposition parties play. I know, because my party probably did it as well, as did our coalition colleagues. The duty of an Opposition is to try to embarrass the Government. I would say that on this issue, it is actually quite hard for the Opposition to embarrass the Government, because the Government have moved so far. The hon. Lady said that she welcomed the steps that had been taken. I would say that these are rather more than steps; these are enormous strides towards a consensus among the big countries that something needs to be done.
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Mr Newmark: I have been listening to the hon. Gentleman, and I have heard the passion with which Members on the Opposition Front Bench have been pushing their point, with which they know I am somewhat sympathetic. But if they had really felt the amendment was important, they would have ensured that more than 50% of their Committee members turned up.
Stephen Williams: I give way, because the hon. Member for Cardiff South and Penarth is getting impatient.
Stephen Doughty: With respect to the hon. Member for Braintree, I believe that a number of members of the Committee are speaking in a debate on the Floor of the House. [Hon. Members: “On Scotland?”] On Scotland. They cannot speak about two important issues at the
same time. I simply do not understand the argument that the hon. Member for Bristol West is making in support of his decision not to vote for the amendment. I say with all sincerity that the amendments were not tabled to play political games. They were tabled to do the job that an Opposition are supposed to do, which is to hold the Government and the governing parties to account for promises that they make at places like the G8 summit.I refer again to the comments made at the G8 summit, where the participants said very clearly that it was about ensuring that
“international and our own tax rules”
were correctly configured to deal with these issues. The amendment is not out of kilter with the G8 declaration, or with principles or policy that have been put forward before; so why not support it? It is being put forward in all sincerity.
Stephen Williams: The hon. Gentleman will know from all the Bill Committees that he serves on that amendments are tabled, whether by Government MPs or Opposition MPs, to get the debate going and to get statements on the record from the Minister. And these words are important. This is how a lot of this agenda was moved forward in last year’s Finance Bill Committee. We are light years away from where we were when we were discussing CFCs in last year’s Bill Committee, and that should be welcomed. The amendments are important to provoke discussion, to get agreement, to get the Minister’s words into Hansard, and I am fairly confident that that is what we will get today.
Sheryll Murray (South East Cornwall) (Con): Given the view of the Opposition, does the hon. Gentleman agree that they had 13 years to get this right?
Stephen Williams: And in that 13 years—to be fair and objective to them because, as I said, I was trying to get consensus on this issue because it should not be the subject of a domestic political divide—they did some good things. For instance, the first Blair Government responded to the Jubilee 2000 campaign and worked internationally to cancel out accumulated debt in many developing countries—at a time, I should point out, when this country had a budget surplus and economic growth. The present Government are almost doubling our overseas aid budget in the Department for International Development and we are in quite a different political position. So both the first Blair Government and this coalition Government have been doing good things. We are doing good things in rather more pressing economic circumstances at home.
I will conclude by saying that there should be a consensus on this issue. The Minister now has the difficult task of trying to build that consensus and give everyone in the Committee full confidence that he and all his ministerial colleagues will live up to the promises made by our country’s leader and other country leaders at Lough Erne, and in particular that we do now recognise, whether for altruistic reasons, ethical reasons or moral reasons, that we should help developing countries to tackle tax avoidance in their countries as well as tackling tax avoidance in our own.
Mr Gauke: Clause 220 is about changes to the disclosure of tax avoidance scheme regime—DOTAS. The clause ensures that the information HMRC receives under DOTAS is accurate and can be more easily matched with the records of individual taxpayers. It also allows HMRC to obtain better information about the user of an avoidance scheme. First, it allows HMRC to get from the users their unique taxpayer reference and national insurance number. Secondly, where a promoter uses an intermediary, it requires the promoter to tell HMRC about users of its scheme sold by that intermediary.
Before turning to the amendment tabled by Opposition Members, which has excited a lengthy debate this afternoon, it may help if I set out some background to the clause. DOTAS requires certain persons, normally the scheme promoter, to provide HMRC with early information about the tax avoidance schemes and their users. It identifies avoidance schemes using certain criteria called hallmarks. Some hallmarks are generic, while others are specific to a particular tax. Hallmarks are updated to reflect trends in avoidance and to improve the information received on avoidance schemes.
As currently designed, DOTAS has been successful. Between its introduction in 2004 and the end of March 2013, it resulted in 2,300 avoidance schemes being disclosed to HMRC. That in turn has led to more than 60 changes in tax law to stop avoidance. It has also contributed to a general reduction in marketed tax avoidance.
However, there is room for improvement, as the Government recognised when we published, “Lifting the Lid on Tax Avoidance Schemes” in July 2012, a document that included proposals for HMRC’s anti-avoidance strategy. The proposals covered a wide range of issues, including the proposals in the clause, many of which we are taking forward separately. The consultation was well received and the means of obtaining the additional information are before us in the clause. Later on this year, regulations will be laid to update the hallmarks.
One area in which we wish to strengthen DOTAS is the information that promoters of tax avoidance schemes have to provide. Currently, when a tax avoidance scheme is notified under DOTAS, HMRC should receive a list of the clients to whom the promoter has sold the scheme, known as the client list. The list includes names and addresses, but sometimes that is not enough to enable HMRC to trace all users of the scheme.
There are various ways in which the information can fall short; for example, there may be more than one person at an address with the same initial and name, or the client may have used a business or c/o address. The changes made by the clause will mean that most if not all users of a scheme will be able to be matched to their tax record. That will be achieved by regulations requiring promoters to provide HMRC with the unique taxpayer reference and national insurance numbers of their clients. In addition, if a promoter has provided information about an intermediary selling its schemes instead of the end user, the clause will require the promoter to tell HMRC about the end users of the scheme.
After Royal Assent, the clause will be supplemented by new hallmark regulations, which will be laid under an existing regulation power. The regulations were consulted on at the same time as the draft clause, and I have provided hon. Members with the current version.
I was asked for an updated breakdown for money on DOTAS. I cannot yet provide an update on the numbers that I have given. Hon. Members will be aware that anti-avoidance measures announced at Budget 2013 raised more than £1 billion by the final year of the scorecard period, but it is not possible as yet to break that down to sums attributed to DOTAS and sums that are not.
Amendment 147 would require the Government to consider the steps they could take to assist developing countries’ efforts against tax avoidance and to help them recover any tax due, essentially by extending the DOTAS regime internationally. We have already debated a number of times our efforts to assist developing countries to strengthen their tax regime. There is no doubt that there is a consensus in the Committee that we should be doing that.
I am able to provide an example. Let me be the first to say that that builds on work that goes back to 2002, so there is cross-party consensus. To build capacity in the Ethiopian Revenue Authority, HMRC has helped to strengthen the accountability, political neutrality and transparency of revenue collection in Ethiopia. From 2002 to 2011, which is the most up-to-date number that I have, tax collected in Ethiopia increased by 700% in absolute terms. That is considerable progress. I could give other examples.
Catherine McKinnell: I apologise if the Minister was going to go on to deal with what I have to say. It is useful to hear about capacity building and other successes, but I have made it clear that they will not be enough to change the fact that developing countries still lose three times more in avoided tax than we give in aid, which includes capacity-building assistance. We tabled the amendment because it would use the tools at the UK’s disposal to make a real difference to developing countries’ tax receipts.
Mr Gauke: I want to be clear, and I hope the whole Committee will accept this, that there is no disagreement over there being a role for the United Kingdom to play in supporting developing countries to reduce tax evasion and tax avoidance. Clearly, strong, effective, competent and honest tax authorities can play a hugely important part in helping developing countries to develop; the difference is over how we go about doing that. I appreciate that nobody is saying that we should not assist with capacity building, but I want to bring it to the Committee’s attention that there is much we can do, in practical terms, to help.
The amendment proposes that DOTAS be extended internationally. The reason for my concern is similar to that which I expressed in my argument on CFC reform. HMRC is not well designed to enforce the tax regimes of other authorities, because it does not have the same understanding of other tax codes as of the UK code. If I may, I will pray in aid Richard Murphy, whom I rarely support. The hon. Member for Newcastle upon Tyne North will be familiar with him. He is close to the NGOs and is a campaigner in this area. It would be fair to say that he and I do not always, or even often, agree on many such matters, and that both of us have been critical of each other. I do not think he will take any particular pleasure from my praying him in aid on this point. His politics are somewhat to the left of those of
the Labour party, of which he is sometimes critical on tax matters. On the specific proposal to extend DOTAS internationally, he wrote on his blog a few days ago:“I admit, I have never seen how extending DOTAS internationally could work. I can’t see how HMRC could know if they got accurate data, or none at all and as such can see no way such a scheme could be enforced in which case I admit I can’t see how it could ever be workable.”
That is the problem. No one doubts the good intentions behind the idea. The IF campaign has called for it, and I take it that that is why the Opposition tabled the amendment, the issue behind which has been raised in the past. However, is extending internationally DOTAS, which is about dealing with tax avoidance schemes under the UK tax system, something that HMRC can deal with effectively? The Government believe the answer is no. When there is consensus between me and Richard Murphy, that is a pretty broad consensus.
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Catherine McKinnell: One might interpret it as a broad consensus, but it might be perceived as mischievous that the Minister disagrees with most of what Richard Murphy says but now says that he speaks eminent sense about one thing. One could question the Minister’s use of him to defend the Government’s position.
Point 4 of the Lough Erne declaration states:
“Developing countries should have the information and capacity to collect the taxes owed them—and other countries have a duty to help them.”
Our amendment merely asks the Government to consider how they could extend the DOTAS scheme to exchange information; it may be only that. On a number of occasions today, the Minister has stated the Government’s commitment to an automatic exchange of information with other G8 countries and, more widely, with developing countries. Are the Government not even prepared to consider the possibility that the DOTAS scheme, perhaps not operating in the same way as in the UK, could be used for the provision of automatic exchange of information for developing countries? The amendment asks the Government to look at how things can be used rather than looking at what cannot be done, which is what the Minister seems to be focusing on.
Mr Gauke: I am not claiming, by any means, that everything Richard Murphy says is correct; I am saying that if even he thinks that such an idea is not workable, there is some reason to doubt that it is workable.
Of course we need to do more to build up the capacity of developing countries so that they have information—I entirely agree with that—but worldwide application of the UK regime on the disclosure of tax avoidance schemes regime is simply not workable. HMRC would not be able to enforce it and, much though we all want to do more to help, in those circumstances it would not help us to deal with the tax gaps in those countries. I fear it would be a bit of a cul-de-sac.
Mr Newmark: I continue to be sympathetic to the comments of the hon. Member for Newcastle upon Tyne North; I say that with all sincerity. We have heard what the Prime Minister is trying to do to create a much
more transparent tax system internationally to help developing countries. It would be helpful if, rather than simply saying what we cannot do and what we are limited by, the Minister accepted the gist of the hon. Lady’s question: is there something we can do to try to help developing countries by creating a much more transparent system internationally? That is what both the Prime Minister and the Chancellor want.Mr Gauke: Indeed. My hon. Friend will be aware that I have set out at some length what we have done to reform the tax system so that there is greater automatic exchange of information. We need to make sure that developing countries can benefit from that, as set out in the Lough Erne declaration. We have taken steps to build up the capacity of developing countries, but we have to remember that the DOTAS regime is not about exchanging information. There are other ways in which we can do that, and in recent days we have made progress on automatic exchange of information and on making sure that developing countries have tax authorities that can make use of that information. There is more work to be done; to be honest, we must work much more widely, to ensure that those countries have tax authorities that can collect tax. I have made it clear that the Government strongly support that.
The difficulty here is not the motivation behind the amendment or the desire to deal with tax avoidance in developing countries. It is right that we try to do that and it is good that we have had this debate. However, as a matter of practicality, tax experts from the left have accepted that to extend the UK DOTAS regime internationally would not be the right way to act. For those reasons I request that the amendment is withdrawn and that hon. Members do not support it. I do not feel that the amendment would help developing countries do what we all want them to be able to do, namely to collect taxes.
Catherine McKinnell: Will the Minister confirm whether HMRC and the Treasury have already fully considered the possibility of extending DOTAS to disclose information to developing countries—beyond its current UK remit—and discounted it, following a thorough review?
Mr Gauke: It would be fair to say that we are evaluating the use of DOTAS more generally, but the system is essentially for the UK tax system and there are real problems with extending enforceability to developing countries’ tax regimes. If enforceability could be addressed, it is not a theological point. As a pure matter of practicality, we do not believe that DOTAS is the right route.
That is not to say that there are not other routes—I will conclude on this point—because there are of course things that we can do in developing countries, such as the treaties that we have agreed and encouraged others to participate in. We have put beneficial ownership on the international agenda. We are assisting developing countries in building their capacity and encouraging others to take that approach as well. All those things are significant, but on the narrow point of whether DOTAS is the right route, we do not see that as enforceable or workable. Rather than devoting a lot of time and effort to that, tying up resource that could instead be used on capacity building and on ensuring that we can provide some practical help to developing countries, I urge the hon. Lady to withdraw her amendment.
Catherine McKinnell: We have had an interesting and lively debate. There seems to be a fair amount of consensus on the principle that we are debating, but the sticking point is the commitment to look properly at it. The Minister did not respond to my question, which was: have the Government fully considered whether and how the scheme could be extended, for the purposes that we all agree may have a beneficial impact for developing countries? Had he given me a clear reply, we would no longer require the amendment, but I am not convinced that the Government have fully considered the issue. There is no transparency or public record to show that the Government have given full consideration to how DOTAS could be extended in line with the principles and action plan set out following the Lough Erne agreement at the G8.
An English proverb sprang to the mind of my hon. Friend the Member for Nottingham East: “Fine words butter no parsnips.” I think that is very apt. We all express our intentions to make a difference on this matter for developing countries, but we have to walk the walk and commit in legislation to undertake a review on how DOTAS could be used in a way that many people believe would be beneficial. The Government should be transparent about whether they have fully considered that and how that extension could be dealt with. We should stop focusing on what we cannot do and start focusing on what we can do as a country to make a serious difference to developing countries. We will press the amendment to a vote.
Question put, That the amendment be made.
The Committee divided: Ayes 10, Noes 14.
AYES
NOES
Question accordingly negatived.
Clause 220 ordered to stand part of the Bill.
Clause 221
Powers under Proceeds of Crime Act 2002
Question proposed, That the clause stand part of the Bill.
The Chair: With this it will be convenient to discuss the following:
That schedule 46 to be the Forty-Sixth schedule to the Bill.
Chris Leslie (Nottingham East) (Lab/Co-op): Several clauses are grouped together in respect of the powers that HMRC officers need to have. They seem to be a cluster of reasonably sensible changes, the first of which is clause 221. It relates to a situation in which criminal assets recovery by HMRC can take place only when a police officer is present at the search. However, as HMRC officers also have certain powers, there is clearly no need for there to be both a police officer and the enforcement HMRC officer duplicating the role in personnel terms. Ensuring that we move away from that anomaly under the law makes good sense. I do not therefore have any questions for the Minister about the clause.
Clause 222 covers the definition of “goods”—not “goods” as opposed to “bads”, but goods as opposed to services, and whether HMRC officers, because of peculiarities under the tax law, have the power to search, examine and require information for all classes of goods in a container. The measure eradicates some of those drafting anomalies and again we fully support it.
Clause 223 gives sensible new powers to HMRC officers to detain goods. The operational tax implementation note from the Treasury focused specifically on certain types of goods, but I want to know about alcohol and tobacco strategies. The note says that the
“loss to the Revenue of non-payment of duty on beer and spirits was estimated to have an upper limit of £5 billion over a five year period.”
However, there does not seem to be a reference in the tax implementation note to the loss to the Revenue of the non-payment of duty on tobacco specifically. Will the Minister update the Committee on that particular figure? Beyond that, I do not have questions or queries about what seems to be a welcome clarification of the definition of “goods” under the Bill.
Clause 224 is also sensible. Apparently, the level of financial penalty that can be imposed by HMRC on registered large ships of 250 tonnes or more has not been updated since 1952. The sum was £500, and obviously it needs to be modernised. I think that the Minister is increasing it to £10,000. Believe it or not, that is the equivalent to what £500 was worth in 1952, which I am sure was long before the Minister was born. However, my question to the hon. Gentleman is, should there not be an automated upgrading mechanism under the Bill, so that such fines can keep pace with real prices, rather than having to return and grade the figures under primary legislation? It is a bit daft that nobody has spotted it since 1952. It is therefore quite welcome that it is here. Those are a few questions. We have to make some progress and those are my only observations.
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The Economic Secretary to the Treasury (Sajid Javid): I welcome you to the Chair, Mr Amess, and to our last Committee meeting, and I thank the hon. Gentleman for what I take to be his broad support for all four of these clauses.
Clause 221 makes changes to allow HMRC officers to exercise Proceeds of Crime Act asset recovery powers when making criminal investigations into suspected former Inland Revenue offences. HMRC already has
criminal asset recovery powers under POCA, but those are only available for criminal investigations into former customs and excise offences, such as those relating to VAT and excise duty. When HMRC is investigating a former Inland Revenue offence the police must currently be called in to exercise those POCA powers. The clause aims to correct that anomaly by bringing those powers in house. The changes that the clause will make are that an HMRC officer when undertaking criminal investigations into Inland Revenue offences will be able to seize cash where there is a suspicion that the cash derives from a direct tax evasion or tax credit fraud and exercise POCA criminal asset recovery orders and warrants. HMRC officers will no longer have to liaise with police officers or potentially miss out on a criminal asset recovery if the police are for some reason not available.Clause 222 makes changes to better define the term “goods” in customs law. It means that officers can search, examine and obtain information about goods, including commercial documents and empty parcels and packages, without the fear of a legal charge. The term “goods” is currently defined in the Customs and Excise Management Act 1979 as “including stores and baggage”. The changes made by clause 222 put it beyond doubt that the term “goods” includes containers and anything in them. That will give officers greater certainty in their powers to carry out examinations. It will contribute to our overall aims of reducing the tax gap and securing our borders.
Clause 223 makes changes to ensure that customs officers can detain things that they have reasonable grounds to suspect may be liable to forfeiture. The clause makes a number of changes to the Customs and Excise Management Act 1979. It will strengthen and make explicit our power to detain goods on reasonable grounds while we investigate their duty status. It will provide statutory safeguards including a maximum initial period of detention of 30 days and it will introduce a civil penalty for the removal of detained goods. This clause will clarify the law so that HMRC can continue to detain goods on reasonable grounds. It will also support the alcohol and tobacco strategies. The loss to the Revenue of non-payment of duty on beer and spirits was estimated to have an upper limit of £5 billion over a five-year period. The changes are expected to have a minimal cost for compliant businesses and will minimise disruption. The hon. Gentleman asked me for information on the tobacco gap. I do not have the number to hand but I will see if I can get it. I will most certainly write to him about it.
Finally, clause 224 increases the maximum fines on shipping lines and responsible officers of ships of more than 250 tonnes for smuggling by their crew. As we heard, the current maximum fine is £500; that was set in place in 1952 and has been eroded by inflation. Clause 224 increases the maximum level to £10,000, the current equivalent of £500 in 1952. I can reassure the hon. Gentleman that this measure provides for uprating by secondary legislation.
Clause 221 accordingly ordered to stand part of the Bill .
Clauses 222 to 224 ordered to stand part of the Bill.
Clause 225
Data-gathering from merchant acquirers etc
Question proposed , That the clause stand part of the Bill.
Chris Leslie: I am conscious of time, so I will be brief. Members will be familiar with the concept of merchant acquirers. They are organisations that process credit and debit card payments for merchants and retailers. The Treasury has deemed that there is a problem with ensuring modernised data-gathering powers for HMRC to obtain third-party data from a specified range of data holders subject to appeal, with penalties for non-compliance.
There are some sensible proposals in the clause, and I have no particular difficulty with tightening up HMRC’s powers, but I want the Minister to dwell for a moment on an issue that we tried to raise through an amendment—amendment 52—that you, Mr Amess, deemed in your wisdom not to be in order.
The amendment relates to some of the difficulties faced with merchant acquirers, and it relates in particular to the data issue, because it is to do with the regulation of merchant acquirers generally. Some individuals are finding that the merchant acquirers—the companies that provide businesses with debit and credit card payments, two of which are RBS and Lloyds—are now assessing those businesses they perceive to be more risky and taking the extreme action of removing their payment facilities. Many small firms have voiced anxieties. The action is causing them concern, especially those that do not have the ability to accept card payments and are therefore at risk of going under.
The removal of the merchant acquirer facilities has been of concern for some time now, to travel agency businesses in particular. Is the Minister able to find time to say that he is aware of some of the issues that have arisen from the merchant acquirers’ heavy-handed approach to withdrawing facilities—often from sole traders that have been deemed, en bloc, not to be trustworthy or capable? That action can really affect small firms, particularly as so many transactions are now electronic and relate to debit and credit card payments. I know that the Minister will want to spend a moment hearing the small enterprise sector’s complaints about that matter.
James Duddridge (Rochford and Southend East) (Con): For my sins, I run an acquiring business and an issuing business. Has not the marketplace moved on somewhat, with most of those things now done online? When the hon. Gentleman refers to acquiring, is that acquiring without a terminal as well as with one?
Chris Leslie: I would not want to have technical exchanges with the hon. Gentleman about the nature of a debit or credit card payment to a sole trader or a retailer. The point is that I have heard that many such businesses have been told by the merchant acquirers, “That’s it. You can no longer have the Visa—or Mastercard —facility.” They now rely, therefore, very much on cash transactions, which can be inappropriate for travel agents.
We were looking to see whether there was a way of having a review of the impact of some of those withdrawals of merchant acquirer facilities. We do not have the opportunity to raise that matter in the context of the Bill, but I just wanted to flag it up to the Minister.
The Chair: Order. That was a most ingenious way of discussing an amendment that was not selected.
Mr Gauke: Clause 225 enables Her Majesty’s Revenue and Customs to gather data from a new source. Merchant acquirers process credit and debit card payments on behalf of retailers. Aggregated data about those payments will allow HMRC to get independent verification of the sales figures that businesses declare on their tax returns.
A data holder can appeal against a notice to a business that processes card payments if the notice is unduly onerous. Regulations will specify the data to be collected. The information is limited to identifying businesses and their card sales; the regulations will not permit HMRC to get information about individual card holders. HMRC has been discussing the provision of these data with the major merchant acquirers. The cost of this change for merchant acquirers is expected to be minimal, and it will not affect retailers whose tax affairs are in order.
As you say, Mr Amess, the hon. Gentleman’s comments were an ingenious attempt to debate an amendment that has not been selected. I suspect there is a reason why it was not selected: it takes us outside the scope of the Bill.
Chris Leslie: Will the Minister give way?
Mr Gauke: I have been in the hon. Gentleman’s position. One takes one’s chance when one can.
Merchant acquirers are free to choose who they provide their facilities to, as with any commercial transaction. With regard to the clause, we are debating the data that HMRC will obtain from businesses that receive such facilities. It is part of the wide range of tools that HMRC has. The hon. Gentleman has put his concerns on the record. There is not much more I can say on that matter.
Chris Leslie: Will the Minister give way?
Mr Gauke: The hon. Gentleman is going to press me in an intervention.
Chris Leslie: It might be more politic to conduct this exchange on another occasion, so perhaps the Minister will draw this matter to the attention of the most relevant of his ministerial colleagues, either in the Department for Business, Innovation and Skills or elsewhere, to see if he can generate an answer to this point. He can supply it in writing; that is quite satisfactory, as far as I am concerned.
Mr Gauke: I will make sure the hon. Gentleman’s comments are seen by the appropriate Minister. I am willing to do that, albeit that it is somewhat outside the scope of our Finance Bill deliberations. With those comments, I hope the clause will stand part of the Bill.
Clause 225 accordingly ordered to stand part of the Bill.
Clause 226
Corporation tax: deferral of payment of exit charge
Question proposed , That the clause stand part of the Bill.
The Chair: With this it will be convenient to discuss that schedule 47 be the Forty-seventh schedule to the Bill.
Chris Leslie: This is a complicated question, which essentially relates to the UK Government’s implementation of an issue that caused some EU legislation. It is about making the UK EU compliant; I do not wish to throw petrol on the flames of the Government Benches so that they perk up and listen and elongate this debate.
The Minister, in particular, will know that there is some doubt about whether the solution set out in the clause and schedule absolutely implements the spirit of the judgment made in that case. A number of concerns have been voiced by the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales about whether, for example, the proposal to grant a maximum deferral of 10 years is the right one, and whether it properly addresses the problem that was highlighted by that case.
If the Minister has copies of the representations from the Chartered Institute of Taxation and the Institute of Chartered Accountants, I am quite content for him to review those and share with the Committee how their objections are being addressed by the Treasury. That would be sufficient from my point of view. Those are my only questions.
Mr Gauke: Let me deal directly with those questions. The hon. Gentleman asked about the 10-year maximum deferral period—whether that amounts to an unjustified restriction on companies’ treaty rights—and the concern about whether the clause goes far enough to comply with EU law. We believe that it does; the 10-year deferral period allows business sufficient time to manage issues of cash flow while providing HMRC with certainty and stability in the collection of taxes. The changes are appropriate and proportionate to the objective recognised by the European Court of safeguarding the balanced allocation of powers of taxation between the member states.
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We listened carefully to the views of interested parties over the course of the consultation and took on board their recommendations where appropriate. I hope that hon. Members are reassured by that response.
Clause 226 accordingly ordered to stand part of the Bill.
Clause 227
Penalties: late filing, late payment and errors
Question proposed , That the clause stand part of the Bill.
The Chair: With this it will be convenient to discuss that schedule 48 be the Forty-eighth schedule to the Bill.
Chris Leslie: We are now on to issues relating to the way in which HMRC plans to implement what is known as real-time information as part of the changes to the pay-as-you-earn returns procedure. I assume that that is driven by the onset of universal credit among other changes. That is clearly one of the biggest changes to the PAYE system in 70 years, which, in broad terms, obliges all employers to submit online a return to HMRC on or before making any payment to an employee and/or a return in respect of every tax month, and a final return within two weeks of the end of the tax year.
This issue may not hit the headlines frequently, but it is a significant change for many employers, particularly small firms. Quite naturally, there are concerns about the changeover: whether the IT systems are adequate and whether small firms in particular can cope.
On 12 June, HMRC announced that 1.4 million employers are now reporting under RTI. Of course, the Institute of Chartered Accountants pointed out that while that may be an impressive statistic, it means that over half a million employers still have not begun to implement RTI reporting. It expressed concerns that many small employers will face problems with the requirement to report payments to employees on or before the date that they are made. It stated:
“This requirement will in our view impact disproportionately on the smallest employers, adding to their compliance burdens.”
Even with the relaxation to allow reporting within seven days of payments in some limited situations, which was announced back in November, this measure could significantly increase the number of times that employers have to run their payrolls, an arduous process—potentially from 12 times a year to 52 times a year. Equally, that might increase the chance that mistakes will be made, because sometimes mistakes are made in those runs when small firms have a number of employees who have a change in circumstances that does not necessarily fit in line with the tax year.
My questions for the Minister are driven by representations. The Low Incomes Tax Reform Group has expressed concerns about the late-filing penalties that the Minister seeks through the clause. It wonders whether it would be unreasonable to force employers to prioritise the timely submission of returns over their accuracy. There is a trade-off here: timely submission is one thing, but accuracy matters as well because trying to undo a complicated mistake can compound the bureaucracy headache for those companies affected.
My questions are about whether Minister has properly taken into account the enormity of the change. Will he outline how the new penalty regime will work in practice? It is not entirely clear how a monthly penalty for a late submission will be calculated if, for example, there is more than one late submission in the month. If there are a different number of employees for each submission,
which late submission will the penalty be based on—the first one or an average? Legislation states that the late filing penalty will be calculated in accordance with regulations made, presumably, by HMRC commissioners. Will he make the regulations available for consultation before they are published so that people can at least see how the process will work?James Duddridge: I want briefly to raise a broader point regarding late payment, particularly with regard to PAYE. The Minister will be aware, through correspondence, of Unitruck Ltd, a business based in Shoebury that employs 80 people in my constituency. Historically, when it has paid a few days late it has not been subject to a late payment penalty, but with the change in the rules it found itself with an £11,646 penalty at short notice. The change in how the late payment penalty was going to be applied was placed on the internet but not notified to the client. Late payments and fines for PAYE are a historical issue in this sector. I am concerned about this as we move forward. I urge the Minister to ask HMRC to be lenient during the transition period. I understand that rules have to be applied. However, I would gently say to him that I was somewhat disappointed that the amount could not be refunded to the company I mentioned, particularly as it was worried about the principle rather than the actual sum and was prepared to donate the money to the Southend Fund, an organisation in my constituency and yours, Mr Amess.
Mr Gauke: I fear that you may scrutinise my answers to these questions even more carefully than usual, Mr Amess.
Clause 227 and schedule 48 will introduce new penalties for real-time information. Those penalties are designed to encourage employers to comply with the information and payment obligations set out in the PAYE regulations while ensuring those who do not comply do not gain an advantage. Most employers will be expected to report PAYE in real time by October 2013. Employers operating PAYE in real time are required to tell HMRC details of the sums paid and deductions made on or before the date they pay an employee. New late filing penalties are needed, as the existing penalties for PAYE are designed for annual returns and would not be effective for RTI, where employers are required to file more frequently—daily, weekly or monthly. The latter would perhaps be the most common.
Schedule 48 will make changes to inaccuracy, late filing and late payment penalties to cater for RTI. Where there is an inaccuracy on a return, the new legislation will treat the whole tax year, rather than each return, as an assessment period. That means that one penalty notice can be issued to an employer to cover all errors in the year, rather than a separate notice being required for each error on each return. The schedule also includes new late filing penalties for RTI. There will be one late filing penalty each month based on the size of the employer’s PAYE scheme, with penalties being charged each quarter. The model includes one annual unpenalised default, so a penalty is not payable for the first tax month each year in which an employer fails to make a return on time. There will also be a short penalty-free period for new employers. That is designed to give them some time to set up their PAYE scheme and become accustomed to the “on or before” filing
requirement before late filing penalties begin. The schedule also makes some changes to the current late payment penalties so that they can be charged in-year rather than after the end of the tax year.There is a new provision for a payment tolerance to be set in regulations. That is designed to ensure that late payment penalties will not arise where there is a small difference in the sums paid over by the employer in a tax period compared with the sums shown as due on the returns received for the same period. The changes to the late filing and late payment penalties will take effect from April 2014. That date is designed to strike a balance between underlining the existence of the new information obligation and giving employers time to get used to it.
I was asked whether there is a risk that these penalties may encourage employers to file inaccurate returns rather than risk a late filing penalty. We do not believe so. Returns will be checked for accuracy and error penalties will be applied in appropriate cases, so it is important that employers take reasonable care to get their returns right. The incorrect return penalty is potentially much higher than the late filing penalty—up to 100% of the tax lost—if underlying behaviour is deliberate. The new filing requirement has been designed to fit with employers’ payroll processes, so compliance should be quick and simple for the majority of employers. I would emphasise that point as a whole with regard to RTI. This is essentially about the integration of normal payroll processes with the returning of information relating to tax to HMRC.
I was asked when the secondary legislation will be published for consultation. In accordance with the tax consultation framework, it will be published later this year to give time for comments to be taken into account before the changes are introduced in April 2014. The late filing penalty is based on the latest information regarding the size of the employer.
I do not want to be drawn too much into the individual case raised by my hon. Friend the Member for Rochford and Southend East. As he says, we have corresponded on the matter. He will be aware that HMRC is independent in operational matters, and it is therefore not possible for me, as a Minister, to direct it in such cases. There is a well-established regime in place. This is an attempt to ensure that taxpayers provide information in a timely manner and that penalties are applied fairly. He said that the company he mentioned was not aware of the change in approach. I do not want to go into too much detail now, but I am happy to discuss it with him further.
Schedule 48 makes changes to the existing penalties legislation to cater for real-time information. The new penalties have been developed in conjunction with employers and their representatives and framed in a way which responds to their feedback, and they are an important part of HMRC’s overall compliance package. I therefore commend them to the Committee and hope that the clause and schedule can stand part of the Bill.
Clause 227 accordingly ordered to stand part of the Bill.
Clause 228
Overpayment relief: generally prevailing practice exclusion and EU law
Question proposed, That the clause stand part of the Bill.
Chris Leslie: On a point of order, Mr Amess. If we were able to deal with clause 229 simultaneously, I would be content, given that both clauses relate to similar matters.
The Chair: I get the sense that that would be perfectly acceptable.
Chris Leslie: Clauses 228 and 229 are fairly straightforward. As every member of the Committee undoubtedly knows, overpayment relief provisions provide relief when tax has been paid, or a person is liable to tax, as a result of an assessment or determination that the taxpayer believes is not correct, meaning that the tax is not due. The provisions apply to income tax, capital gains, corporation tax, petroleum revenue tax and stamp duty land tax. The case law of the European Court of Justice confirms that EU member states should provide remedies, subject to reasonable time limits, for tax charges that are contrary to EU law. At present, that can be dealt with either in general non-legislative rights, such as under common-law remedies, or through legislation. If legislation is provided and includes reasonable time limits, general non-legislative case law arrangements are usually not accepted by the courts.
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Clause 228 amends existing legislation to confirm that when a tax was levied contrary to EU law, overpayment relief will not be affected by any prevailing common-law practices. Clause 229 amends the four-year time limit for overpayment relief claims to make it clear that the four years run from the period to which the mistakes relate.
Will the Minister explain why the measures will have effect for claims received on and after the end of the six-month period following Royal Assent? I assume that that is because, under EU law, notice must be given when a relief is curtailed. Secondly, will he explain the time difference? While there is provision regarding a four-year period from the end of the relevant tax year, the residual rights for taxpayers to reclaim overpaid tax via their general non-legislative rights are slightly more generous, in that there is typically a time limit of six years from the discovery of the mistake. Why is there an anomaly in the time frames?
My questions are very specific, and I am sorry to fire them at the Minister, but I am sure that he knows the answers.
Mr Gauke: I am grateful to the hon. Gentleman for his specific questions, but before I deal with them, I shall provide some brief background to the measures.
Clause 228 ensures that legislation provides for a consistent approach to claims for overpaid tax and the application of overpayment. Clause 229 makes a small
technical amendment to overpayment relief provisions to ensure that there is a consistent time limit for overpayment relief claims.Overpayment relief is intended to provide a final opportunity for taxpayers to reclaim overpaid tax. A general restriction within overpayment relief means that relief is not available when a return was submitted in accordance with the practice generally prevailing at the time that return was made. In cases when overpayments are claimed in relation to EU law, it is a general principle that member states must allow an effective means of restitution. A recent judgment of the Supreme Court, while not dealing directly with overpayment relief, suggested that the application of practice generally prevailing could mean that overpayment relief does not provide an effective means of restitution under EU law. That could lead to claimants seeking common-law restitution in the case of such EU law claims, which would undermine the purpose of the legislation of providing a single remedy that would apply to all taxpayers. In addition, common-law claims may have much longer time limits than claims for overpayment relief and could result in substantially larger amounts being repaid, which would introduce inconsistency and unfairness between taxpayers.
The changes made by clause 228 will ensure that overpayment relief applies to all repayment claims, whether or not the overpayment arises as a result of EU law, which achieves the original policy intention. That will be done by removing the “practice generally prevailing” restriction in cases when the claim relates to tax paid contrary to EU law. The change will put on a statutory footing HMRC’s current practice of disapplying the “practice generally prevailing” restriction. Clause 229 ensures that the time limit for claims for overpayment relief following a mistake in a return runs in every case from the return year. That change is likely to be relevant to only a small number of businesses.
The hon. Member for Nottingham East asks why there is a transitional element. The answer is that we want to be consistent with EU law. He also asked about the anomaly in the time limits for claims. The time limit for overpayment relief is four years. Six years is the limit for common-law claims. Tax law allows for only four years, and we want to put that matter beyond doubt, so I hope that that provides clarity. I hope that the Committee will agree to clauses 228 and 229.
Clause 228 accordingly ordered to stand part of the Bill.
Clause 229 ordered to stand part of the Bill.
Clause 230
Self assessment: withdrawal of notice to file etc
Question proposed, That the clause stand part of the Bill.
The Chair: With this it will be convenient to consider that schedule 49 be the Forty-ninth schedule to the Bill.
Chris Leslie: We now come to one of the Bill’s final substantive clauses. I know that that fact will disappoint many members of the Committee, and they might be even more disappointed to hear me say that the Government are proposing quite a common-sense change. I am surprised that such a measure did not already exist, but apparently HMRC needs to clarify that it has a power to withdraw a notice to file a self-assessment tax return for individuals, partnerships or trustees when it agrees that the return is not required. I am surprised that there has to be legislative provision for such action.
The clause is perfectly sensible, and I do not have any qualms about it, but it gives rise to one question. The Minister might not have the figures at his disposal, but he will recall that the Government are making changes to child benefit for higher rate taxpayers, involving a sliding scale for income up to £60,000. One of the complicated ways in which that has been implemented is to require individuals either to opt out of child benefit, or to register for self-assessment. A lot of people will not have registered for self-assessment. Some might forget to do so, but I think that there is a point at which they must register or be prone to penalties. Will the Minister update the Committee on how many individuals or families have—in the middle of June 2013—registered for self-assessment? If he does not have the figure to hand, it would be helpful if he would write to us about it.
Mr Gauke: I am grateful for the hon. Gentleman’s support. He asks whether legislation is really needed. HMRC is already using its discretionary powers of collection and management to deal with such matters, but that is a temporary expedient. A statutory provision will put such an approach on a sustainable, long-term footing, and that was welcomed in the consultation process.
The hon. Gentleman also raises the broader issue of child benefit. He can correct me if I am wrong, but I understand that the Labour party now supports our belief that child benefit should be targeted at those who need it most.
Chris Leslie: The Minister is so eager that when he sees a comment that recognises that such a provision will be an unfortunate change to the tax system, he reads into it that we wholeheartedly support the policy. I do not like the way in which the Government have gone about the particular change to child benefit, but we have to be realistic. We cannot wave a magic wand and promise to undo it straightaway, which was unfortunately how the Conservative party worked when it was in opposition.
Mr Gauke: Perhaps the Labour party is finally recognising some of our arguments on this point. I am grateful for the hon. Gentleman’s confirmation. I fully understand the position of the Labour party. When there is a deficit to bring down, paying child benefit to our respective families should not be a priority, and I am glad that that has finally been recognised.
The hon. Gentleman is right that we are using the tax system to ensure that resources are focused on where they are most needed. He is also right to say that there are, essentially, two options available: people can opt
out of receiving child benefit, or the high earner can ensure that he or she is in the self-assessment system and declare the information. He is right that a number of people will need to register for self-assessment, the deadline for which is October. I cannot give him any numbers this afternoon, as I am sure he would expect, given that we had no notice of the question. We will set out the numbers of people who have registered for self-assessment as a consequence of the policy in due course, but our estimate is about 350,000. We anticipate that most of those will register in the run-up to the October deadline. I assure him that HMRC will take a number of steps to publicise the requirement. There was a considerable amount of publicity earlier in the year, when people were informed about the need either to opt out of child benefit, which many did, or to register for self-assessment, but further steps will be taken to publicise that in due course.Catherine McKinnell: The Minister is helpfully setting out the number of people who will be brought into the self-assessment system as a result of the policy. Can he also tell us the cost associated with that?
Mr Gauke: I do not have the numbers to hand. We have been open about the cost of administering the policy, which is a small fraction of the money that will be saved as a consequence of it. Our estimate of the cost has fallen over time because more people opted out of receiving child benefit than we had originally anticipated. That number is certainly available on the public record. Rather than hazard citing a number that might be incorrect, I shall simply say that it is publicly available and I have not had any updates on it since the matter was discussed previously.
Chris Leslie: Will the Minister give way?
Mr Gauke: I was going to conclude my contribution, because I have been drawn into an area that is not strictly relevant to the clause, but I will give way, once again, to the hon. Gentleman.
Chris Leslie: I just want to button down the point. The Minister says that the figures are in the public domain or will be released in due course, but will he write to us to put them on record so that we can take a snapshot of the situation now—in June?
Mr Gauke: I am quite happy to let the hon. Gentleman know the most up-to-date numbers, but I am not aware of any changes since the previous time he asked me that question. In due course, we will make available information on the number of people who have registered for self-assessment so far. I am not sure that we have all the information we need at present, but I assure him that we will make the figures available.
Clause 230 accordingly ordered to stand part of the Bill.
Clauses 231 and 232 ordered to stand part of the Bill.
New Clause 4
Contribution allowances: plant and machinery
‘(1) Section 538 of CAA 2001 (contribution allowances: plant and machinery) is amended as follows.
(2) In subsection (1), omit the “and” at the end of paragraph (a) and after that paragraph insert—
“(aa) C’s contribution is to expenditure on the provision of plant or machinery, and”.
(3) In subsection (2)—
(a) in paragraph (a), for “asset provided by means of C’s contribution” substitute “plant or machinery”,
(b) in paragraph (b), for “asset” substitute “plant or machinery”, and
(c) in paragraph (c)—
(i) for “asset” substitute “plant or machinery”, and
(ii) after “times” insert “plant or machinery”.
(4) The amendments made by this section have effect in relation to expenditure pooled, and to claims made, on or after 29 May 2013 (“the commencement date”).
(5) In relation to such expenditure and claims, when determining for the purposes of section 536(3)(a) of CAA 2001 whether an allowance can be made under Chapter 2 of Part 11 of that Act, the amendments made by this section are to be treated as always having had effect.
(6) Nothing in this section applies to a claim by a person for a contribution allowance under Part 2 of CAA 2001 in respect of a contribution made before the commencement date.
(7) Subsection (8) applies if—
(a) expenditure which a person has been regarded as having incurred (despite section 532(1) of CAA 2001) by virtue of section 536(1) has been pooled by virtue of section 53—
(i) on or after 1 January 2013 but before the commencement date, or
(ii) before 1 January 2013 in circumstances where no claim was made in respect of the expenditure before that date, and
(b) had the amendments made by this section had effect at the time the expenditure was incurred, that person would not have been regarded as having incurred that expenditure (“the relevant expenditure”).
(8) Part 2 of CAA 2001 has effect as if an event had occurred as a result of which the person is required to bring into account as a disposal receipt under that Part, for the chargeable period in which the commencement date falls, a disposal value of an amount equal to E-A.
(9) For the purposes of subsection (8)—
E is the amount of the relevant expenditure, and
A is the total amount of writing-down allowances made in respect of the relevant expenditure.
(10) For the purpose of calculating A, the total amount of writing-down allowances made in respect of expenditure on an item of plant or machinery is to be determined as if that item were the only item of plant or machinery in relation to which Chapter 5 of Part 2 of CAA 2001 had effect.
(11) The event mentioned in subsection (8) is not to be regarded as a disposal event for the purposes of section 60(3) of CAA 2001.’.—(Mr Gauke.)
Brought up, and read the First time.
Mr Gauke: I beg to move, That the clause be read a Second time.
New clause 4 amends the Capital Allowances Act 2001 to put it beyond any doubt that existing rules on the treatment of contributions from another business towards capital expenditure on plant or machinery operate
as intended. The effect of the new clause is to confirm that the rules governing the treatment of expenditure covered by contributions from other businesses operate in the same way as the gas and electricity companies have previously applied them.Specifically, the measure confirms that contribution allowances under part 2 are available in relation to a contribution of a capital sum to capital expenditure on the provision of plant or machinery in the recipient’s hands. That ensures that where one business makes a contribution to another’s expenditure on plant or machinery, it is the contributor, not the recipient, who can claim capital allowances. The measure stops potential claims covering about £4 billion of historical expenditure by gas and electricity companies for which they did not bear the economic cost and did not expect to obtain allowances. Also, the measure prevents any risk of double claims for allowances: once by the contributor and a second time by the recipient of the contribution.
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The Government have a wider commitment to providing business with a high level of certainty on business taxation, so the measure will not apply to capital allowances claims made prior to the announcement of the measure, but HMRC will be challenging robustly those claims already made, as it does not consider that the claims qualify under the existing rules.
The measure is precautionary. It is designed to nip in the bud a new potential risk to the Exchequer by putting the operation of the existing tax rules beyond any doubt. Also, it ensures that the gas and electricity distribution companies pay their fair share of tax. I hope that the new clause will be added to the Bill.
Chris Leslie: We understand why the Government are making this change and I do not particularly want to get into challenging that, but I have a specific question about why there was a difference between the explanations of the effect of the new clause. The Treasury’s press release said that the tax loss to the Exchequer would be £900 million if this change was not made. Then, when the tax information and impact note was published, it suggested that there would be a nil impact on the Exchequer as a result of new clause 4. Perhaps I am missing something in the way this has been described, but that is obviously quite a large figure and I would not want the Minister to lose any more millions, given that the deficit has already stalled totally, so could he just explain how the £900 million figure in the press release was reached? Over what period was he talking? How many companies and what sort of potential claims does it relate to? It would be very helpful if he could clarify that anomaly.
Mr Gauke: To answer the hon. Gentleman’s question, it might be helpful if I provide a little background. In the second half of March this year, some gas and electricity distribution companies made new capital allowances claims for past expenditure to install gas or electricity supplies for businesses, despite the expenditure being covered by contributions from those business customers. Under practice dating back many decades, the gas and electricity companies have always excluded
such expenditure from their capital allowances claims. About £900 million of current and future tax revenues was potentially at risk from claims for that historical expenditure. To protect the Exchequer, the Government announced on 29 May an intention to introduce legislation effective from that date. The provisions in this new clause give effect to that announcement, which was made under the published protocol on unscheduled announcements.Let me reconcile the numbers that the hon. Gentleman cites. I have just referred to a figure of £900 million. This is an Exchequer protection measure. As I said, it is protecting nearly £900 million of revenue that was potentially at risk. However, as I also said in my opening remarks, HMRC will challenge robustly the claims that have been made. It is HMRC’s belief that such claims will fail, but we want to put that beyond doubt. Accepting HMRC’s analysis that ultimately it would succeed in litigation, we cannot announce a yield for that. This is about revenue protection. From time to time in our debates, we have to distinguish between revenue protection and yield. This is a revenue protection measure that I am sure the whole Committee will support.
New clause 4 accordingly read a Second time, and added to the Bill.
New Clause 1
Abolition of retrospective application of section 58(4) of the Finance Act 2008
‘(1) Section 58 of the Finance Act 2008 (UK residents and foreign partnerships) is amended as follows.
(2) In subsection (4), delete “always having had effect” and insert “having effect from 12 March 2008.”.’.—(Steve Baker.)
Brought up, and read the First time.
Steve Baker: I beg to move, That the clause be read a Second time.
I am grateful to the Government for allowing so much time for us to discuss the new clause. My hon. Friend the Member for Amber Valley did not have so much time last year, and other hon. Members’ speeches were cut short, so I am grateful that we have time to debate it properly. I am also grateful to the Minister for entering into considerable detail in all his correspondence with me and for the time he allocated to our meeting.
Having done the research and having considered the current state of the debate on tax avoidance in particular, I am struck by how dreadful a business politics can be when high principle runs on to the rocks of low reality. In this mother of Parliaments, it ought not to be necessary to have to move an amendment to defend that most fundamental of our institutions, the rule of law, but that is the essence of the new clause.
New clause 1 amends section 58(4) of the Finance Act 2008 to remove retrospection by replacing the words “always having had effect” with
“having effect from 12 March 2008”,
which is the date of the relevant announcement. Its practical effect would be to leave in place measures to close down what was clearly an abusive scheme and, by repealing retrospection, to leave HMRC to test that scheme in the courts under the law as it stood at the
time. If the new clause is not agreed, the effect will be to expose people to financial ruin at the hands of the state for conduct that they genuinely thought was lawful at the time. I will come back to that point.I do not want to detain the Committee with the history in detail, not least because it is contested—the best place to contest that detail would be in a court of law after this clause is accepted—but the story begins with something that contemporary Governments of all parties do not well understand. That is the drive for people to be independent and not to enter into what, in effect, is a master-servant relationship of employment, but instead to be paid for what they produce—not to be directed in how or when they produce it, but to produce what others value and be paid for doing so as an independent freelance contractor.
I say that with some feeling, because I spent several years doing so in my career before coming here. I, too, was worried about IR35, because it created ambiguity. Without wishing to be self-righteous, my answer was to ensure that I always had an additional client and had sufficient freedom to make it clear that I was independent. Nevertheless, when I worked at Lehman Brothers—I will say, for the benefit of the Committee, that it was not my fault—I observed that many people there did not have an option to become an employee. Interestingly, other people were in a very different position from me, but I was an IT contractor, and I never engaged in the scheme. I have a vague recollection of seeing it marketed and realising that it was not for me: it had a certain whiff about it.
This is about that drive to be independent. I know that Governments of all parties want people to be pay-as-you-earn taxpayers, but some of us would rather be independent—I am sure the Whips Office would attest to that.
Stephen Williams: I have listened carefully to my hon. Friend. I was in practice when IR35 was introduced, some time ago, specifically to block people from avoiding national insurance by trading in such a way. I have some sympathy when he says that people should be free to structure their economic activity in a way that suits them, but I think this scheme diverted money via the Isle of Man—he has omitted to say that so far—which most people would not consider normal.
Steve Baker: I am grateful to my hon. Friend, but I was just coming to that point.
Section 58(4) of the 2008 Act closed loopholes that were predominantly marketed to freelance, consultant and contractor communities, following the introduction of IR35, and it supposedly offered certainty about whether IR35 applied and therefore about future tax liabilities. Tax liabilities were minimised through the use of offshore trusts and double-taxation treaties. The scheme was based around an Isle of Man partnership, and it resulted in subscribers paying an effective rate of approximately 5% on their earned income. The obvious absurdity of that figure should have told subscribers that something was up, because a lesson that we should have all learnt in life is that when something seems too good to be true, it certainly is. In a fully developed 21st-century welfare state, one would think that people realised that they would not be allowed to get away with 5% tax.
The scheme makes a mockery of the tax system and of pay-as-you-earn taxpayers, and it especially makes a mockery of the poor souls who are pursued by HMRC without mercy, it seems, for the repayment of tax credits. I have, therefore, little sympathy with the scheme, but about 1,900 individuals are affected and about £230 million of tax is at stake. I am told, particularly in correspondence with subscribers, that until 2008 they were under the impression that the scheme was registered with HMRC and that it was entirely legal and transparent. By introducing section 58(4) of the 2008 Act, the then Government changed the law so that not only were the arrangements shut down but legislation was implemented retrospectively—the clauses are treated as having always had effect.
I want to say something further about the subscribers and promoters, and I suspect that the people who asked me to table the new clause would rather I did not say this. I accept that many subscribers to the scheme will have relied on professional advice, and will have done so in a great deal of good faith. I have in mind a man who has not yet told his wife that they stand to lose their home, should HMRC collect aggressively. People have been placed under enormous stress, and for those who entered into the schemes in good faith, thinking them to be lawful, the essence of the problem is that the rule of law is supposed to avoid tyranny. Tyranny is when the sand shifts under someone’s feet and conduct they thought lawful is suddenly punished. That is a point I will come back to.
Mike Thornton (Eastleigh) (LD): The hon. Gentleman keeps referring to people “thinking” that the scheme was lawful. My understanding is that it was lawful until the retrospective legislation was put in place. If they were doing something lawful rather than just thinking they were doing something lawful, that puts them in a different position.
Steve Baker: I am grateful to the hon. Gentleman. He has anticipated some of my further remarks. One of the key points is that the situation needs to be tested in the courts, without the benefit of retrospective legislation.
Mr Newmark: I want to build on the point that my hon. Friend just made, about the difference between thinking something is lawful and its not being lawful. Those of us who have worked by ourselves know that if someone is a good technical engineer they are not necessarily a financial expert, and they rely on those with such expertise to give them the best advice. When retrospectively the law is changed, surely the responsibility lies as much with the financial adviser as with the individual who received the advice.
Steve Baker: It does, and I will adjust my remarks slightly to deal with that point straight away. The promoters of such schemes are left distinctly culpable. What angers me most is that promoters have relied on the Governments sticking to the principle of the rule of law and not acting retrospectively, to get away with selling one scheme after another. They have drawn people in, and allowed them to over-optimistically believe that they can continue to avoid tax and opt out of the tax system. When schemes are prospectively shut down, the promoters
move on. That is wrong, and it has led both Labour and Conservative Governments into doing things that undermine the rule of law.Sheryll Murray: May I highlight the case of a constituent who has asked me to raise his personal circumstances here today? Mr Jonathan Woolgar refers to a “legitimate tax planning arrangement”, and goes on to say:
“I do hope you will raise my personal circumstances during the Finance Bill Committee debate so the Minister can understand the devastating consequences of this unannounced and punitive retrospective change to tax law”.
That clearly demonstrates what my hon. Friend the Member for Wycombe was trying to say.
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The Chair: Order. I think that was an intervention.
Steve Baker: A gentleman who is also facing devastating consequences wrote to me. He is of an age at which he is unlikely to go back to work. A point he made gave the game away somewhat. He said that he entered into the scheme thinking it was registered and transparent and that he was behaving within the rules. He thought that HMRC would shut it down prospectively, and that retrospective action was therefore a kind of entrapment. I imagine that there was a conversation in HMRC, when it was watching all those games going on with promoters of aggressive and abusive tax avoidance schemes, in which somebody said, “Retrospection is going to be the only language they understand.”
There is a great cycle here. The Government, through the welfare state, have a voracious appetite for income, so tax rates go up to a high level that a lot of people are not prepared to pay. Tax complexity is introduced to ensure that tax is paid, which often creates opportunities for further avoidance. That, as we have seen during the passage of the Bill, engenders greater complexity. Finally, we end up where we are today. Some will see HMRC’s and the previous Government’s actions in setting this law retrospectively as somewhat vengeful.
I speak as a Cornishman, and there is a long tradition of smuggling in Cornwall—you will appreciate, Mr Amess, that I have never engaged in it—so there is an atmosphere in which people fear the customs man. I have always thought that the customs man was more aggressive in the use of power than the Revenue. I wonder whether, post merger, there is a different atmosphere in HMRC.
How do we escape the cycle? I suggest that it would be better if people who believe sincerely that lower taxes are in the general interest, instead of trying to opt out of taxation—thereby chopping people such as me off at the knees by undermining the kind of coalition I want to build for lower taxes in the general interest—pay their taxes and participate in the political process. We could all try to create a better political economy. I do not wish to develop that point too much further, because I have been accused of being idealistic at least once already in this Committee.
The questions before the Committee are important and worth considering. On the clause, the question is not whether subscribers were right to use the scheme.
Virtually anyone would say that they were not. The question is not whether the promoters were right to promote the scheme. In doing so, they undermined a fundamental principle of our society: the rule of law. To me, that is close to unforgivable.The only question that matters is, what price are we prepared to pay to preserve and extend the rule of law? In the past—in particular, the past 100 years—the price we have been prepared to pay to do that has been very high indeed. Indeed, I could get quite teary-eyed when I think not just of the treasure that has been paid, but the blood that has been spilled, to preserve the rule of law. I would have the clause enacted and I would let the Government test the law in the courts as it stood at the time that the schemes were engaged in.
Nigel Mills: Does my hon. Friend agree that although this noxious scheme should have been closed down many years before it was—and it was a terrible error of judgment that that was not done—it is not right to use the power of the state in a draconian way to turn back time and pretend the scheme had been closed down at the start? That is the mistake here. We should admit it should have been closed down earlier, and close it down prospectively but not retrospectively.
Steve Baker: I am grateful to my hon. Friend. I do agree. I hope the Minister will address the question of why it was not shut down sooner. I have looked into this issue, and clearly it is a bone of contention. I have not yet found out the extent to which the scheme was successfully concealed from HMRC so it could not be shut down. Quite clearly, people believed it was a legitimate scheme that was tolerated by HMRC, and that is partly why so many people engaged in it.
The Government’s response, in the context of both the desperate need for revenue and the behaviour of promoters, is fairly easy to understand. I believe we cannot afford to undermine the fundamental principle that people in this country do not suffer at the hands of the authorities for conduct which was lawful at the time. On Tuesday I asked the Minister about this point of lawfulness. He said:
“The word ‘lawful’ can lead to a degree of ambiguity. When people say it is not lawful, is it criminal? There is no criminal offence that one can see here.”––[Official Report, Finance Public Bill Committee, 18 June 2013; c. 587.]
I do not want to get too deep into a semantic argument. But this is the point. We have people now today who, even if the tax collection regime is relatively gentle, will fear losing their home and being bankrupted. It is a realistic fear. It is a consequence of having engaged in schemes which, at the time, they had a realistic expectation would be accepted by HMRC. So the ground has shifted under their feet. As a result, the plans they made have been swept away from them. Without getting too carried away, it is a hallmark of despotism to have these things happen to people. They ought not to happen.
I have some questions for the Minister. He is well aware of what he said about this measure and what my right hon. Friends the Chancellor, the Prime Minister and, indeed, the Business Secretary said about it when in opposition. It seemed that we were prepared to repeal the retrospective nature of the legislation. Could he explain what has changed? Could he also deal with the point about lawfulness? That is the crucial test. People’s
behaviour should be tested in the courts: was it lawful? If it was lawful, people should be left alone. If it was unlawful, clearly they face consequences.Catherine McKinnell: The hon. Gentleman is making a reasonable argument. My ears pricked up at the word “despotism”. Has he considered the judicial review that was heard in the High Court relating to the retrospective action that the Government took in relation to enacting section 58? The argument that it was contrary to human rights was dismissed on the grounds that although it was retrospective the legislation was in the relevant circumstances proportionate and compatible with that right. I appreciate that the European Court of Human Rights is not the most comfortable of concepts for the hon. Gentleman and his Conservative colleagues but it would seem to go some way towards alleviating some of those concerns about a despotic state.
Steve Baker: The hon. Lady’s point is well made. I am a big supporter of the substance of the European convention on human rights. The problem is the case law that has emerged from it and the way it has been applied. The substance of what she said is quite right. We have some fundamental questions to ask ourselves about the effect of having a massive need for revenue on the way we live our lives. When I used the word “despotic”, I qualified it by saying I would not wish to get too carried away. Over the course of a couple of hundred years, our willingness to stick to absolute principle has changed substantially. On the way into the Commons I often pause at the statue of John Hampden who was a resident of the region I represent. Members should look at his plaque. It says that
“he was a militant Puritan committed to the Rule of Law”.
John Hampden might have looked at a measure like this and disapproved very strongly.
Without going too far into history, I need to know where the Government stand on this crucial principle of lawfulness and the way that our behaviour is judged in a free society. Where do they stand on retrospectivity? How do they intend to treat subscribers if the amendment is not accepted? Will they be given sufficient time to pay so that there is a degree of compassion and people are not put out of their homes unnecessarily? Will the Government ensure a proper clampdown on these promoters? They have used the phrase “cowboy promoters”. Will they ensure that cowboy promoters have no more opportunities to drag people, who often will have been innocent, into these schemes, which end up making a mockery of the tax system and dragging people into these disasters?
In conclusion, I can do not better than quote what my hon. Friend the Member for North East Somerset (Jacob Rees-Mogg) said last year when extremely short of time. He encapsulated all that needs to be understood about this situation and this clause. He said:
“Retrospection is wrong. It undermines the rule of law and if this House does not stand for the rule of law it stands for nothing.”––[Official Report, Finance Public Bill Committee, 26 June 2012; c. 684.]
Much has been said about developing countries today. The best example we could give them is to demonstrate that parliamentary democracy and the rule of law are upheld in this, their birth place.
Mark Menzies (Fylde) (Con): I want to speak briefly; I promise to talk for no more than half an hour on the subject—[ Laughter. ]
I thank my hon. Friend the Member for Wycombe for tabling new clause 1, because the issue it deals with has been raised with me by several constituents. I am in no way defending tax evasion. I would also like to put on record my sincere thanks for the detailed replies that I have always received from my hon. Friend the Exchequer Secretary whenever I have corresponded with him on the matter.
I want to focus on the actions of the people who sought to promote tax evasion vehicles. It is important to note that if something looks too good to be true, it probably is, as my hon. Friend the Member for Wycombe identified.
People are faced with demands for money—in some cases crippling demands—causing them deep and personal distress. If possible, will HMRC approach the scheduling of payments with an element of sympathy?
We have to take a ruthless approach to tackle tax avoidance vehicles. On that, I disagree with my hon. Friend the Member for Wycombe. Retrospection may well be the only mechanism at HMRC’s disposal to ensure that tax avoidance cowboys—people who perpetrate such tax avoidance vehicles—are forced out of business and cannot seek to short-change the taxpayer.
My hon. Friend also said that such people were overwhelmingly top rate taxpayers. They should have been paying their taxes; that was money not going to support things that are important to all our constituents, whether that is health, defence or education. That money must be repaid. However, I urge the Minister to see whether that can be done in a way that minimises the personal distress to families.
Mr Newmark: I will be even briefer. I am raising the issue on behalf of a constituent of mine who has been affected by the measure. I wholeheartedly agree with pretty much everything that my hon. Friend the Member for Wycombe said.
I will focus on the basic principle that retrospective taxation is wrong by definition. I appreciate that there is no such thing as a free lunch in life, but my constituent, who does not wish to be named here, had held an honest belief. He is not a financial services person at all. He took what he viewed was the best advice on the scheme and was under the impression that the scheme had been, in his words, “registered” with HMRC and was entirely legal. That is why he entered into it.
We cannot make retrospective laws. If something is legal and people do something that they believe is perfectly legitimate, and a loophole is then discovered, we should ensure that people do not take advantage of it. Retrospective taxation would end up hurting people who believe that they had done something perfectly legal.
My constituent asked me to quote him to the Minister. He said:
“I would like to take the opportunity to remind you that in my case this will result in a retrospective tax bill and accrued interest in excess of £200,000. For me, this will no doubt mean losing our family home and being made bankrupt, effectively ruining my livelihood.”
Those people may well have been top rate taxpayers, but the measure is hurting people who believed they were doing something perfectly legitimate.
I end by reminding the Exchequer Secretary of his own words:
“I am more convinced than ever that the retrospective nature of the clause is unacceptable.”––[Official Report, Finance Public Bill Committee, 22 May 2008; c. 382.]
If he believed that in 2008, I hope he still believes it in 2013.
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Catherine McKinnell: As the hon. Member for Wycombe has outlined, new clause 1 seeks to abolish the retrospective application of section 58(4) of the Finance Act 2008. The matter has been discussed at length by more than one Finance Bill Committee, and I know how strongly those affected feel. I have at least one constituent who has been affected by the measure, and I met the No to Retro Tax campaign yesterday to listen to its concerns in full.
I know that the retrospective nature of the measure was strongly criticised when it was enacted, not just by those affected but by representative bodies such as the Chartered Institute of Taxation and the Institute of Chartered Accountants, because it appears to go against the long-standing practice—often referred to as the Rees rules—that any taxation change usually takes effect only from the date of announcement or thereafter.
The then Financial Secretary to the Treasury, in her response to the Chartered Institute of Taxation, outlined:
“The users of this scheme have embarked on a highly aggressive piece of tax avoidance. It has no commercial purpose and is deliberately designed as an attempt to frustrate the clear intention both of the UK’s double tax treaties and Parliament’s 1987 legislation. The Government takes the view that retrospective clarification of the 1987 legislation to deal with such schemes is both proportionate and justified in the public interest as these schemes are unfair to the vast majority of taxpayers who pay their fair share of tax.”
She goes on, but I will not keep the Committee any longer than necessary.
As members of the Committee know—I mentioned this in my intervention on the hon. Member for Wycombe— a claim for judicial review was heard in the High Court in January 2010 on the grounds that the retrospective nature of section 58 is contrary to the European convention on human rights, specifically the right to peaceful enjoyment of possessions. However, the case was dismissed on the grounds that, although retrospective, the legislation is
“in the relevant circumstances proportionate and compatible”
with that right. The judgment was upheld at the Court of Appeal in 2011, and an application for the case to be heard by the Supreme Court was refused in February 2012.
During last year’s Finance Bill Committee, the Exchequer Secretary suggested that the scheme affected by section 58 was “egregious” and would have resulted in individuals paying income tax at less than 5%, as the hon. Member for Wycombe outlined in his speech. The Exchequer Secretary went on to clarify, as I am sure he will clarify again today, that most of the people affected are in the top 5% of earners, with a substantial proportion receiving
an annual income of more than £100,000. He stated that people advised by professional tax consultants were aware that HMRC was challenging the scheme and, as such,“its users should have taken reasonable precautions…to meet their liabilities. HMRC is not free to distinguish in principle between an individual who spent the money that should have been paid in tax and one who has not.”––[Official Report, Finance Public Bill Committee, 26 June 2012; c. 684.]
Of course, the balance of not introducing retrospective legislation must always be weighed against the tax revenue that may have been deliberately circumvented by the avoidance scheme in question. I understand that HMRC’s estimate put the figure at some £200 million, which is a significant sum, particularly in these straitened times. I would be grateful if the Minister could update the Committee on the amount currently thought to be at stake.
Given that section 58 was introduced as clarification of
“indefinitely retrospective legislation introduced in 1987 to counter double taxation treaty avoidance schemes”,
will the Minister confirm the practical impact of the deletion of the troublesome phrase
“always having had that effect”
from section 58? New clause 1 seeks to replace that phrase with
“having effect from 12 March 2008”,
but would those currently affected by section 58 still be caught by the legislation introduced in 1987? I ask that question, because I am sure that the Minister is aware of the strong concerns expressed by those involved in the No to Retro Tax campaign that the 1987 legislation was not as clear as suggested both in 2008 and since. In July 1987, the then Financial Secretary to the Treasury, now Lord Lamont, referred to the Padmore case, in which the man in question was unsuccessfully litigated against in 1986 by the Inland Revenue, which ultimately alerted people to a series of three tax exemptions that could be exploited, and therefore resulted in the 1987 legislation.
The then Financial Secretary stated:
“As the professional press has pointed out, leaving the clause unamended would lead to loopholes that would be much exploited. However, I appreciate that that is not the Committee’s main concern.”––[Official Report, Finance Public Bill Committee, 15 July 1987; c. 1180.]
The No to Retro Tax campaign contends that that clause was not amended and therefore only dealt with the one loophole that Mr Padmore had been challenged on, leaving two loopholes still open. With the Minister pointing out the loopholes at the time, but no action being taken to close them, the campaign’s position is that Parliament tacitly gave a signal that it was unconcerned about their use.
I will therefore be grateful if the Minister addresses my concerns in his remarks. Introducing retrospective legislation is clearly a very serious step and one that Parliament must seek to do only in the most necessary of circumstances. We need it to be clear that the reasons given for the introduction of the retrospective legislation in 2008 were the right ones, particularly in light of the several thousand people affected by the change.
Mr Gauke: In speaking to new clause 1, my hon. Friend the Member for Wycombe raises concerns about the use of retrospective legislation. We have also heard
concerns expressed on behalf of constituents who used the avoidance scheme. I will respond to both points, but I would first like to provide some context for the Committee against which the new clause can be considered.Section 58 was introduced in response to a highly aggressive tax avoidance scheme. To be clear, it was not tax planning, but a wholly artificial scheme sold to users for a fee by promoters and advisers. The scheme had no commercial purpose and was deliberately designed to frustrate the clear intention both of the UK’s double tax treaties and Parliament’s 1987 legislation. The Committee may be aware that the scheme is included in the general anti-abuse rule guidance as an example of the sort of abusive scheme at which the GAAR is aimed.
Shortly after the legislation was introduced, users of the scheme initiated a challenge to the retrospective aspect of section 58 by judicial review. I will say more about the review, but I will simply say now that, in one of the cases considered, the scheme purported to produce an effective tax rate of 3.5%. The way that the scheme was intended to work, however, was that the higher the income, the lower the effective rate. In at least one case, the alleged effective rate was around 0.1%. Those being offered the scheme by promoters and advisers should perhaps have seen it as too good to be true—a phrase used by a couple of hon. Members this afternoon—because that is exactly what it was.
The legislation was introduced in 1987 to restore the generally accepted and fundamentally important tax principle that the UK must be able to tax the UK income of its own residents. The Government have made it clear that legislation would be introduced in order to restore that important principle. More significantly still, while recognising that retrospective legislation is always controversial, the Government considered it reasonable for the legislation to be fully retrospective. As with section 58, it was also the subject of a full and challenging debate in 1987. That legislation was clarified by section 58. I will come to the courts’ case in a moment, but it is fair to say that their view was that the use of retrospective legislation on the earlier occasion sent a clear signal to taxpayers. Parliament saw such tax avoidance as having serious public policy implications, and so would give serious consideration to taking similar retrospective action should similar schemes be used in future. That is of course exactly what happened with section 58.
By tabling his new clause, my hon. Friend the Member for Wycombe seeks to remind me of my interest in the use of retrospective legislation, as indeed does my hon. Friend the Member for Braintree. It is the case that I challenged the introduction of section 58 on the same terms as provided by the wording of the new clause. The challenge I made in 2008 reflected several concerns about the introduction of section 58: first, whether the actions of HMRC had led to the users of the scheme gaining a legitimate expectation that the scheme worked; and, secondly, whether the measure was compatible with EU law. Both those concerns were considered in depth as part of the judicial reviews. I was reassured by the courts’ finding that the users of the scheme had no legitimate expectation in relation to the use of the retrospective legislation, and that the legislation was
compatible with the EU freedom of movement of capital. My final concern was about the effect of retrospection on the certainty and stability of the UK tax system.Since taking office, the Government have introduced a new approach to policy making founded on open consultation and more measured policy development. The contribution that this makes to greater predictability and stability in the Government’s development of tax policy has been widely welcomed. Action is sometimes necessary, however, to protect the UK tax base. The priorities of reducing the deficit and ensuring a level playing field for all require firm action in tackling avoidance. Our approach was set out in the protocol on unscheduled announcements of changes in tax law, in Budget 2011, in the document entitled “Tackling tax avoidance”.
The protocol makes it clear that fully retrospective legislation will be “wholly exceptional”. The announcements on retrospection made since then, on 27 February 2012, and in respect of SDLT this year, set out some of the criteria that in the appropriate circumstances the Government believe are “wholly exceptional” and therefore appropriate for retrospective action. The criteria include a significant amount of tax is at stake; there is a history of abuse of this area of the legislation, with both criteria being met in the avoidance scheme closed in the financial sector in 2012; there has been a clear statement of policy in the area; and a clear warning has been given that retrospective action would be taken if abuse of specific legislation continued, such as the Chancellor gave at Budget 2012 in respect of stamp duty land tax.
The criteria will give taxpayers and their advisers some sense of when we believe retrospection is appropriate. We will keep the criteria under review, as it is right that we must also be flexible enough to ensure that we can act when circumstances demand. The previous Government reached the conclusion that retrospective clarification was warranted in respect of the wholly artificial scheme targeted by section 58. For the reasons I have explained, there is no reason to disturb that decision. Indeed, to do so would be unfair on the vast majority who comply with the UK’s tax rules and quite reasonably expect others to do the same.
We have heard that some users of this avoidance scheme are concerned about their ability to pay the tax that they owe, and their views of the consequences should they not be able to do so. It is important to be clear that that is a separate issue from that of retrospection. HMRC’s clear view is that the change introduced by section 58 was a clarification and that, although potentially more protracted and costly, litigation on the basis of the pre-section 58 legislation would ultimately show that the scheme failed. Whichever legislative route is involved, the tax avoided and the amount outstanding would be the same. An individual who expresses concerns about their ability to pay will be no more able to pay if the scheme fails under the pre-section 58 law than as a result of the clarification.
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There is a wider issue here, about the consequences of assuming that a tax avoidance scheme will always work. HMRC is successful in defeating avoidance schemes in the courts. Scheme users need to understand and accept the consequences of relying on a scheme that turns out to be too good to be true.
It is also important to keep the matter in context. I remind the Committee that, as I explained in a debate during the passage of the Finance Act 2012, most of the people affected by section 58 were in the top 5% of earners, with a substantial proportion receiving an annual income of over £100,000. The scheme users were professionally advised, and in challenging their use of the scheme HMRC recommended that users make payments on account.
HMRC has identified around 2,200 individuals who used the arrangements on which section 58 is focused. I am aware that the campaign group seeking repeal of the retrospective aspect of section 58 invited campaign members to complete a questionnaire detailing the effect on them of their use of the scheme; it was explained to members that the information would be used in discussions with the Treasury, the Public Accounts Committee and the Treasury Committee. Around 150 members responded, which represents about 7% of the people identified by HMRC as scheme users. There is no evidence to suggest that the views expressed by that small proportion of scheme users represent anything other than those of the individuals concerned.
The issue of bankruptcy for individual scheme users has been raised. I can understand such concerns, and have previously explained that HMRC will always have regard to cases of genuine hardship in seeking payment of outstanding tax liabilities. HMRC’s time-to-pay arrangements are considered on a case-by-case basis. Until scheme users who have such concerns have agreed their outstanding liabilities with HMRC and entered into discussions with it, any attempt to predict the outcome is speculative.
The role of promoters has also been touched upon, not least by my hon. Friend the Member for Wycombe. We are greatly concerned about the behaviour of certain promoters of avoidance schemes. It is not only the Government who are concerned; senior figures in the industry—for example, Michael Izza of the Institute of Chartered Accountants in England and Wales—have confirmed that there is no place in the profession for those involved in egregious schemes. The Solicitors Regulation Authority has warned specifically about stamp duty land tax avoidance.
Last summer, we consulted on proposals for specific legislation to require promoters whose behaviour was unacceptable to disclose their schemes to HMRC. The idea received substantial support from mainstream tax advisers and representative bodies. We announced in the autumn statement and the Budget our intention to continue to work and consult on the issue. I am pleased to say that we will be publishing, in the near future, a consultation document aimed at tackling high-risk promoters.
The new clause has provided an opportunity to debate the role of retrospective legislation. I understand and appreciate the concerns expressed. I believe that Government should use retrospection only after very careful consideration, even where the change does no more than clarify law or put its meaning beyond doubt. However, we must reserve the right to use retrospection in wholly exceptional circumstances, in line with the protocol we have introduced.
In this specific case, it is worth pointing out that HMRC never accepted that the scheme worked, and the scheme promoters told users that HMRC was likely to
challenge it and that the scheme was not guaranteed to work. The previous Government took action to put it beyond doubt that the rules worked as Parliament intended. Since then the courts have looked at this matter on issues relating to legitimate expectation, and found that the action was reasonable.The Government are having to make some very difficult decisions in order to restore public finances. I cannot believe that the vast majority who pay tax in accordance with the law would understand if we repealed legislation that responded in a targeted and proportionate way to an aggressive and artificial tax avoidance scheme. My hon. Friend the Member for Wycombe has raised an important matter, but I hope that on reflection he will agree to withdraw the new clause.
Steve Baker: I have listened extremely carefully to my hon. Friend, and I know how seriously he takes this question. I am particularly grateful to him for dealing with the issues that have changed since the question previously came up. Everybody engaged in tax avoidance should listen very carefully to what the Minister has said. Those on both Front Benches have given a stark warning to everybody involved about the intentions of all parties. I do not want to force my colleagues to challenge the Minister on this question. He has explained in very good faith where he is coming from, and I respect his decision. I beg to ask leave to withdraw the motion.
New Clause 2
Stamp duty and stamp duty reserve tax: unit trusts
‘(1) The Chancellor shall, within six months of Royal Assent, publish and lay before the House of Commons a report detailing the distributional impact of any changes to or abolition of Schedule 19 to the Finance Act 1999.
(2) No amendment may be made to Schedule 19 to the Finance Act 1999 within two years of Royal Assent, unless the report set out in subsection (1) has been published and laid before the House of Commons.’.—(Chris Leslie.)
Brought up, and read the First time.
Chris Leslie: I beg to move, That the clause be read a Second time.
I will be brief. The new clause seeks to ensure that, within six months of Royal Assent, the Chancellor will publish a report that sets out the distributional impact of the abolition of what is known as schedule 19 to the Finance Act 1999. What exactly is that? It refers to the abolition of the stamp duty reserve tax that is charged on unit trusts and open-ended investment companies. The proposal was announced in March. The Chancellor did not dwell on it, but he plans to introduce it in the next Finance Bill in 2014—hon. Members can barely wait for that Finance Bill Committee to convene.
The stamp duty reserve tax requires asset managers to pay 50 basis points—half a percentage point—when investors sell units in their funds. The rationale for its abolition is apparently that it will boost the competitiveness of British funds. It is levied on managers of UK-domiciled unit trusts. The new clause has been tabled to highlight—and
so that I can ask the Minister about—this tax cut for the City. It is essentially a tax cut for those investment managers.We should pause to ask a few questions about that at a time when ordinary people and families are suffering, and when life is getting harder for most people. The Government are of course failing to tackle the deficit, which is not going anywhere. Deficit reduction has stalled; it has stopped.
Will the Minister confirm that the Chancellor’s decision will give away £145 million of taxpayers’ money to those investment managers in the year in which the change comes into effect? My hon. Friends will be interested to know that, over the four years projected in the Red Book, the tax cut to the City is apparently of about £600 million.
The problem is that when those things are described in such archaic and obscure terms—stamp duty reserve tax, schedule 19—unsurprisingly, people glaze over. Therein lies our problem, so I want the Minister to be absolutely straight with the Committee. He is giving a very significant tax cut to the City and fund managers now, so I want him to justify on the record what is going on. Who will benefit? Will hedge funds benefit? What sort of individuals will benefit? That is the purpose of tabling the new clause. He knows that the public are generally very sceptical about the Government’s largesse to the wealthiest in society, especially after the millionaires’ tax cut. Will he come clean, give us the figures and tell us why this change is a priority when life is getting harder for so many people?
Sajid Javid: I thank the hon. Gentleman for his comments. I hope to persuade him that, with respect, his assessment of the potential effects of removing the schedule 19 tax is somewhat flawed.
Let me explain that the schedule 19 special stamp duty reserve tax is charged on the funds industry. It acts as a proxy for the principal stamp duty tax charge on the purchase of shares. The reason why the tax exists is that there is a 0.5% stamp duty charge when an individual purchases shares, but there is not necessarily an exchange of shares in the usual sense when they purchase UK-domiciled funds, because many funds try to match sellers with buyers. That is why it is referred to as a proxy tax and charged in lieu of the tax that would have taken place had there been an exchange of shares rather than matching.
As we heard, the Government announced in Budget 2013 that they would abolish this tax as part of their investment management strategy to improve competitiveness. There are two broad reasons why the hon. Gentleman should consider withdrawing his amendment. First, the Government have committed to publishing a tax information and impact note for the measure just as they do for a majority of measures which are included in any Finance Bill. This note will be published alongside the draft clauses of the Finance Bill 2014 that will abolish schedule 19. In common with all such notes, it will set out what the new legislation seeks to achieve and why the Government are undertaking the change, together with a summary of the expected changes and their impact. It will include the Exchequer impact, the impact on households, equalities impacts, business and third sector impacts, and impacts on the public sector as well as other impacts that may be
relevant. It will, as always, be a detailed note and when the information is published there will be an opportunity for hon. Members to discuss this in more detail.The other reason why the hon. Gentleman may be flawed in his assessment is that this is not a tax break in any way for the City. This is a tax break that ultimately feeds through to the investors who invest in these funds. Schedule 19 only applies to UK-based funds. So investors can even today choose not to pay this tax if they invest in a non-UK fund instead. That might be managed by a UK fund manager, but if they choose a fund that is domiciled offshore, such as a Luxembourg SICAV entity or an Irish CCF entity, they can get exposure to exactly the same asset class but avoid this tax. The end result means that the fund is domiciled offshore, which has an impact on the UK-based fund industry.
Chris Leslie: What planet is the Minister living on? He may have oodles of constituents coming to him saying, “If only I could invest my open-ended investment company domestically rather than in Europe”. Opposition surgeries are filled with constituents struggling with the bedroom tax and other crippling changes that affect many people in the real economy, yet his priority seems to be this £145 million cut. Can he confirm that figure? Will he at least put it on record that this is a tax cut of £145 million, as it says in the Red Book? That should be a simple thing for him to do.
Sajid Javid: One thing I can confirm is that the assessment of the OBR at this point is that it is approximately £145 million. But as I have said, when a further impact note is published there will be more detail on that. One thing that the hon. Gentleman may not be taking into account, possibly unintentionally, is that a fund management directive is currently going through the European Union. Once that goes through—it will be implemented very shortly by the UK, as by other EU members—it will be far easier for UK investors, including his constituents and mine, to access foreign-domiciled funds. If we do not make this change it will make UK-domiciled funds far less competitive and it will damage jobs and investor returns in Britain. The hon. Gentleman may want to take it into account that around 40% of investments in UK-domiciled funds is by British pension funds. Another 25% is by insurance companies. This tax cut will feed through ultimately to investors and make UK fund management far more competitive versus international competitors.
Rory Stewart (Penrith and The Border) (Con): Does the Minister agree that the distinction being implied by the Opposition between what they call a real economy and an unreal economy and between constituents at surgeries and other people is misleading as a description of the British economy? Highly specialised elements of the economy can contribute enormously to the wealth of the whole country. Such divisive language and distinctions between real and unreal simply do not contribute to growth in national wealth.
5 pm
The Chair: Order. I must now bring proceedings on the Bill to a close.
Question put, That the clause be read a Second time.
The Committee divided: Ayes 9, Noes 15.
AYES
NOES
Question accordingly negatived.
Chris Leslie: On a point of order, Mr Amess. I simply wish to mark the occasion.
I thank hon. Members who served on the Committee and the officials who have been in and out of here; I do not know quite how many officials came in and out over the course of the many, many sittings that we have had. Running through a Finance Bill is hard business at the best of times, and this has been a particularly hefty Bill.
I wish to put on record our thanks to the Clerks and to Hansard for keeping track of some complex issues. I also thank the Whips, who managed to ensure that our business was kept to good order. I particularly pay tribute to my hon. Friends on the Committee for bearing with us and for making their own contributions, particularly my hon. Friends on the Front Bench, the Members for Newcastle upon Tyne North and for Kilmarnock and Loudoun. It is a difficult task for the Opposition to fulfil.
I also thank Ministers for their courtesy and diligence in replying to our points, even though we disagreed with them, often vehemently. Finally, I thank you, Mr Amess, and Mr Crausby, who chaired the Committee. We are grateful.
Chris Evans: Further to that point of order, Mr Amess. Does the Economic Secretary remember that he promised to buy us all a pint of beer? Will he keep that promise today?
Stephen Williams: Further to that point of order, Mr Amess, I, too, thank you and Mr Crausby for your chairmanship. I thank everyone for their collegiality and friendly interventions, especially from the hon. Member for Islwyn.
Veterans of Finance Bill Committees will know that it is one of my pleasant duties to host the annual reception of the Chartered Institute of Taxation. It is an exciting occasion that comes with drinks and canapés. This year it will be on Tuesday 2 July at 7 pm in the Terrace Pavilion. I would imagine that by that stage, as usual, people will be having withdrawal symptoms from listening to the Exchequer Secretary, whom I am sure will be speaking to us. I want to hear him again. There will be free food and drinks from the institute. Everyone on the Committee would be welcome.
Mr Gauke: Further to the point of order, the hon. Member for Nottingham East made more rapid progress with the points of order than I was expecting—that was a first for the Committee—but I wish to make a few closing remarks.
As the hon. Member for Nottingham East and I noted in our opening comments to the Committee, we both enthusiastically anticipated first-rate scrutiny by all members of the Bill Committee, which is what we have had. Over the past few months, the Committee has examined the Bill in great depth. We had an extensive debate on income tax, considering it for more than five hours. We had an imaginative discussion on creative industries and the tax relief that the Government are introducing. We even had a debate on the comparable attractiveness of being Dr Who or a member of the Select Committee on Scottish Affairs, one of which deals with power-crazed alien monsters—the other is a Select Committee. We also had a number of debates on anti-avoidance and the practical action taken by the Government against such behaviour. We have not quite considered every sub-paragraph, although it has sometimes felt like that.
I thank the hon. Member for Newcastle upon Tyne North for her many probing contributions, in particular related to the debate on the annual tax on enveloped dwellings—ATED. In a lengthy speech, she managed to refrain from any bad puns about taxes being ’ated and, in fact, no one has made that mistake until now. I also believe that she asked 39 questions, which is an average for her speech of one question per minute and a half—a level of productivity only to be praised. I was delighted, with a certain amount of help, to be able to answer a fair proportion of those questions.
The Bill has received good-natured and thorough scrutiny—it is all the better for it—not only from those in Committee but from the representative bodies and other interested parties providing support. That is right, because consultation is fundamental to the tax policy-making process, which we are committed to, as the Bill demonstrates. I therefore thank all the representative bodies that made contributions.
I thank all hon. Members on the Committee for their contributions. Some were made with great passion, such as the one by my hon. Friend the Member for Braintree on seed enterprise investment schemes, or the one by my hon. Friend the Member for Bristol West on tobacco. I am sure that many hon. Members who were present over recent months are already looking forward to next year’s Finance Bill.
Again, I thank the shadow Minister and the Opposition Members for their many insightful contributions. They have worked extremely hard in scrutinising the Bill, and that should be recognised. We must not forget the work of the hon. Member for Leicester South and my hon. Friend the Member for Chelsea and Fulham in ensuring that we have nearly got to the end of the road.
I thank the Economic Secretary to the Treasury, my hon. Friend the Member for Bromsgrove, who made but one mistake in the entire time, which was to offer every member of the Committee a pint of Sajid’s Choice, which is currently available in Strangers Bar. If anyone would like to join us, we will be there later.
I must also mention my hon. Friend the Member for Warrington South, who has been a tremendous conduit for inspiration. I feel terrible that while delivering a speech
and being passed a note, one cannot break off to say thank you on every occasion, so I have felt terribly rude over the past few months, not saying thank you as he has handed me various notes of inspiration—although, frankly, I have not always been grateful, but there we go.I thank you, Mr Amess, and Mr Crausby for your guidance and wisdom throughout our deliberations, in particular for smoothly guiding us through the potential constitutional crisis that might have occurred as a consequence of confusion over votes regarding the amendments tabled by my hon. Friend the Member for Amber Valley. I hope that there will not be a repetition, but I will leave it ambiguous as to whether I mean of the confusion or of his amendments. It has, nevertheless, been a great pleasure to serve under your chairmanship, Mr Amess.
I thank, as always, Mr Patrick, and I understand that after four years this might be his final Finance Bill before he moves on to other things. I thank him for his service, not only this year but in previous years. I also thank the Hansard Reporters and the Doorkeepers who have ensured the smooth running of the Committee. Finally, I thank the HMRC and Treasury officials, and parliamentary counsel. I make special mention of Elizabeth Gardiner from the Office of Parliamentary Counsel, who this week was honoured for her services to the preparation of legislation and was made a Companion of the Order of the Bath—a well-deserved honour.
As the Committee stage concludes, I very much look forward to Report and to the other final stages of the Bill. I thank all those who have made the experience what it has been.
The Chair: In the interests of avoiding repetition, I thank all hon. Members for their kind and generous remarks. Mr Crausby and I have found chairing the Committee a great pleasure, not least because of the good-natured spirit in which it has been conducted. I also thank hon. Members for being understanding of my Freudian slips, whether it be “the warm being roomed”, miscalling amendments, getting hon. Members’ names wrong or, indeed, having some confusion over a vote. At all times, however, my voice has been heard and I am grateful for that.
I thank the Doorkeepers, the Attendants and the officials for the way in which they have supported the Committee, and most of all I thank our inscrutable Clerk, who has ensured that wise counsel has prevailed during our proceedings. We wish him a happy retirement after his four years’ service on the Committee, and wish him well in his new post.
Order and, in a real sense of the word, order.
Bill, as amended, to be reported.