My Lords, we are here to debate the annual Finance Bill, introduced in the other place following the Budget on 3 March. My right honourable friend the Chancellor of the Exchequer outlined a Budget with three key objectives: first, to protect jobs and livelihoods and provide additional support to get the British people and British businesses through the pandemic; secondly, to be clear about the need to fix the public finances once we are on the way to recovery and to start that work; thirdly, as we emerge from the pandemic, to lay the groundwork for a robust and resilient future economy. This Finance Bill enacts changes to taxation that support all those objectives.
The House will of course be aware of the severe public health and economic shock caused by the pandemic; at its peak, the economy shrank by 10%, the largest fall in more than 300 years. The Government have responded with an extraordinary package of support for the economy which, taking into account measures introduced in the 2020 Budget, is now estimated at £407 billion for this year and last year. This has been essential. Thanks to it and the rapid rollout of vaccinations, the Office for Budget Responsibility and other independent authorities now expect a swifter recovery than had previously been forecast. Indeed, the OBR expects the UK economy to recover to pre-crisis levels six months earlier than it did previously—in the second, rather than the fourth, quarter of 2022.
Our first objective is protecting jobs and livelihoods. There are positive signals that we are now on the right path, but it is crucial that we continue to support the economy over the coming months and deliver on the Budget’s first aim of protecting jobs and livelihoods. That is why the tax measures outlined in the Bill go further to support the economy. We are extending the 5% reduced VAT rate until 30 September to protect almost 150,000 hard-hit hospitality and tourism businesses which employ over 2.4 million people. To help those businesses manage the transition back to the standard rate, VAT will then increase to an interim rate of 12.5% from October until the end of March.
The Bill ensures that any business that took advantage of the original VAT deferral new payment scheme will be able to pay that deferred VAT in up to 11 equal payments from March 2021, rather than by one larger payment due by 31 March 2021. For those businesses that have been pushed into losses, the trading loss carry-back rule is being extended from the existing one year to three years for losses of up to £2 million. This will deliver a significant cash-flow benefit for eligible businesses.
The Bill also puts into legislation the temporary cut in stamp duty land tax, with a residential stamp duty nil rate band remaining at £500,000 in England and Northern Ireland until the end of June. This will be followed by a phased transition back to the normal rate. From 1 July 2021, it will fall to £250,000 until the end of September, before returning to £125,000 on 1 October. This extension helps buyers and supports jobs which rely on the property industry.
My Lords, I have the honour of chairing the Finance Bill Sub-Committee and I start by thanking all its members, a number of whom I see here today; I look forward to hearing their remarks. I especially thank our excellent clerk and superb special advisers for all their hard work, energy and commitment.
Last December we published a report which scrutinised a range of new powers sought by HMRC and called it New Powers for HMRC: Fair and Proportionate?, with a question mark—an all-important question mark. To answer that question, we identified a number of principles that we believe should apply to any new power given to HMRC. The power must have a clear policy objective and justification, and it must be simple, targeted, proportionate and have appropriate safeguards and sanctions. With those principles in mind, let me focus my remarks on the powers we examined included in this Finance Bill.
The first is the power to tackle promoters and enablers of tax avoidance, under Clauses 121 to 123. These clauses need to be seen against the backdrop of the loan charge, which has ensnared thousands of people—many on low incomes—who entered disguised remuneration schemes, often at the behest of their employers, only to find themselves clobbered years later with enormous tax bills that many now find difficult to pay. Now is not the time for me to go into the loan charge in detail, although our committee remains very focused on it.
Regarding these clauses, of course we support action to clamp down on the hard core of promoters of tax avoidance schemes. But the committee was unconvinced that these plans would be sufficient to tackle that hard core of promoters who continue to promote these schemes, and so the effectiveness of existing measures must be kept under review and all the weapons in HMRC’s arsenal should be brought to bear on them. For example, we reiterated our view, first expressed way back in 2018, that alerting taxpayers to these schemes via HMRC’s spotlights on GOV.UK is not enough. That is especially so given that promoters have been targeting medical professionals returning to the NHS during the pandemic. Given that, we recommended that HMRC focus its attention on employers, employment intermediaries and the umbrella companies using these schemes. Specifically, we said that a first step should be that no public sector bodies should contract with an employment intermediary that operates disguised remuneration schemes.
It is a pleasure to follow the noble Lord, Lord Bridges, who chaired our sub-committee with great competence, and I shall have a word to say about that later. I start in the general area about which he was speaking. As we debate the Finance Bill today, I warmly welcome last week’s agreement by G7 Finance Ministers to work together, to ensure that all countries get their fair share of revenue from multinational corporations. I congratulate the Chancellor of the Exchequer on presiding over this achievement. However, while I do not want to rain on his parade, I cannot agree with him that this shows what the UK can do post Brexit, as he claimed.
To my mind, it shows two different things. The first, somewhat contrary to what the Chancellor claimed, is that international problems, such as the taxation of multinational corporations, can be addressed only by countries working together and by pooling part of their sovereignty. They cannot be solved by individual countries acting independently. The second lesson of the G7 Ministers’ agreement is that nothing happens until the United States decides that it should. This first step could not have been achieved without the United States giving a lead.
I turn now to the report of the Finance Bill Sub-Committee on the new powers of HMRC in the Finance Bill that we are debating today. I comment first on a quirk of our curious constitutional procedures. I joined this sub-committee at a late stage of its work. It seems to me that the report is a useful commentary on the powers in the Finance Bill, but our constitutional procedures prevent your Lordships’ House turning the committee’s conclusion into amendments to the Bill. There really is no reason of Commons financial privilege why the Lords should not be able to pass amendments relating to the fairness and proportionality of HMRC’s administration of the tax system. The only reason is that they happen to be contained in the Finance Bill. As a result, this sub-committee’s report turns into a mere commentary, which may influence the House of Commons if anyone there bothers to read it, but otherwise it is simply the basis of a conversation between the committee and the Government. That can be quite a useful conversation, since the main means by which your Lordships’ House can influence events is by persuading the Government. The committee has persuaded the Government on some of the issues in the report, but it is frustrating that, having debated this report, your Lordships’ House has no option other than to nod the Finance Bill through in the form in which it has reached us.
My Lords, I begin by expressing complete agreement with everything the noble Lord, Lord Butler, has just said, in particular what he said about the officials who supported the sub-committee and about the chairman, my noble friend Lord Bridges. When I asked him to take on the chairmanship of the sub-committee so that I did not have to chair both, I thought it was something of a hospital pass—but he did it absolutely brilliantly and with great distinction in what is a very complex area. We were very grateful to him for the leadership he gave in his indefatigable way. As the noble Lord, Lord Butler, said, we should be grateful that some of the recommendations have been accepted. I am probably the cynic: they were the ones of general principle, rather than the specifics.
I want to focus on this doorstep of a Bill. The papers I am holding are the Finance Bill and the papers that enable us to understand what is in it. I cannot help but ask my friend on the Front Bench: whatever happened to tax simplification? Whatever became of the Government’s declared policy of lower, flatter, fairer, simpler taxes? That policy was grounded in the belief that individuals, families and companies will make better investment decisions than Governments and that wealth creation is essential to the support of key public services such as health, education and social care. We wait with bated breath for the Government’s response to the Economic Affairs Committee on social care and on higher and further education.
We face the biggest financial crisis of our lifetimes—even our lifetimes in this House. It is an enormous challenge facing the Government, but the Covid measures continue to destroy our productive economy. Like a scorpion, the virus leaves behind its sting in the huge backlog of patients requiring serious procedures; the damage done to our young people’s education and career prospects; the impending crisis in housing caused by rent arrears; and the unemployment currently disguised by the furlough scheme continuing. Major industries have haemorrhaged cash on an enormous scale. Substantial debt provided by the Treasury has been taken on and, frankly, will never be repaid. Are we seriously going to take £20 a week from some of the poorest people in the land, just as electricity and food costs are rising? That decision alone is some £6 billion.
My Lords, we understand the difficult job the Chancellor has had of bringing forward this year’s Budget in the unprecedented circumstances in which this nation finds itself. The immediate priority, looking at the economy, must be ensuring that we come out of this pandemic with as many safeguarded jobs and livelihoods as possible. The economic packages, especially the furlough scheme and the help for the self-employed, have been incredible interventions, which have helped stave off the worst ravages of economic depression that may otherwise have occurred. I congratulate the Government, as we all do, on the incredible investment in the vaccine rollout, which has produced stupendous results.
Once again, the benefits of being part of one of the biggest economies in the world has been illustrated for all our citizens through all parts of the United Kingdom. I have to say that I have been reassured somewhat in recent weeks by the feedback from people normally critical of the United Kingdom—even of being part of the United Kingdom—about the way in which this country has responded, with the vaccine rollout in particular but also throughout this pandemic with the economic interventions.
The Chancellor is having to balance the need for immediate actions to counter imminent economic shocks against long-term economic recovery and mounting levels of eye-watering debt. So far, I believe that, generally speaking, the Government’s approach has been the correct one. Some of the measures, which normally no one would ever contemplate, have been necessary to avoid far worse problems. That is not to say that there are not issues that need to be addressed and addressed quickly, and I want to refer to a number of general points before making a specific reference to a particular, discrete issue affecting electricity generation in Northern Ireland.
The hospitality and tourism industries, which the Minister referred to in terms of the VAT relief, have been decimated by the pandemic and the lockdowns. I welcome what the Government have announced in relation to VAT for these sectors—the extension of rate cuts until September and tapering measures until March next year—but it is vital that these sectors are allowed to get back to full working capacity as quickly as possible. They can survive only by full reopening and full working, and I hope that that will happen as quickly as possible—if not on 21 June then as quickly as possible thereafter, conscious of the need to take all necessary health precautions.
My Lords, I join the congratulations to my noble friend Lord Bridges—under the excellent mentoring of my noble friend Lord Forsyth—and his committee on the report, which is most welcome. Of course, I first refer your Lordships to my register of interests.
This is an important debate, as the Finance Bill and the powers of HMRC affect us all. I am therefore somewhat surprised to see how few Peers have put their name down for this debate. While I am delighted to see so many here physically—I think all but one are speaking in the Chamber—I am perplexed by why so few are speaking on this matter today. Of course, we do not have the power to amend the Bill, but this sort of Second Reading is exactly the place where we can interrogate government and, I hope, come up with some ideas which would be of assistance based on our expertise and experience. It also does not help those who argue for a smaller House if we cannot attract a strong number for such an important debate, and it means that people with knowledge and awareness of finance, tax and business should be recruited into the House. The Government do listen to these debates and to Peers’ comments on taxation, as I will elaborate later.
I start my comments on the Bill by congratulating my noble friend the Minister and his colleagues on the 132 clauses originally tabled, as physically displayed by my noble friend Lord Forsyth. They address so much that affects our daily life, from the rates of tax payable to capital incentives—which I believe will encourage greater investment in industrial plants and machinery—some nudging behaviour away from plastic packaging, and even encouraging cycling to work, with cycle equipment being written off. There really is much in here to be commended. I thought I would focus most of my remarks on what is not in the Bill, sometimes with good reason, and some matters which might be considered for future Budgets.
The first, which is not in the Bill, is an increase in the capital gains tax rate. Before the Budget there was a somewhat rogue report from the aforementioned Office of Tax Simplification. It is normally a sensible office producing sensible ideas, but on this occasion it proposed that it would be simpler to equalise income tax and capital gains tax—a somewhat unsophisticated thought, as it does not allow for the essential difference between income or salary and capital gain, which is a return on risk taken. Fortunately, after somewhat of a campaign—in which I confess I played a part—the Chancellor agreed that CGT rates should stay as they are. This Finance Bill does not change them, which is an eminently sensible and pragmatic decision.
Before our UK Budget of 3 March, in February, I attended a virtual meeting with the senior civil servant in India in charge of the budget there, along with the director-general of the Confederation of Indian Industry, the sister organisation of the CBI, of which I am president. They both said categorically that India’s budget did not increase any taxes for two reasons. First, businesses had suffered so much already and, secondly, they did not want to stifle the recovery after the pandemic. After that, I implored our Indian-origin Chancellor, Rishi Sunak, to follow India’s lead and not increase any taxes in our Budget on 3 March. He listened and, on the whole, taxes were not increased. However, he announced that corporation tax would increase from 19% to 25% in 2023. Our businesses drew a huge gasp of breath at taxes going up by almost one-third in one go. With Ireland next door to us with a rate of 12.5%, this was a concern. Of course, in November 2019, we had heard Boris Johnson, the Prime Minister, announce at the CBI annual conference that a reduction in corporation tax in the UK, to 17% from 19%, would no longer go ahead. Inward investment is really important, so this is a worry: will it affect inward investment?
Fortunately, the Government seem to have resisted the suggestion by the Office of Tax Simplification to equate capital gains tax with income taxes. To do this would be suicide. It would deter investment, entrepreneurship and risk-taking. We need to encourage wealth creation. The UK is the second or third-largest recipient of inward investment in the world. We have a Minister responsible for inward investment at the DIT—our colleague, the noble Lord, Lord Grimstone. We need to be a magnet for inward investment, as we have been. We have left the EU but, of course, as I always say, we will never leave Europe. When we were in the EU, we were seen as a gateway for investment into the EU. Today we should be seen as a gateway to Europe for investment. So we must resist equating CGT with income tax. That will deter inward investment and domestic investment, there would be capital flight, and it would deter entrepreneurship and risk-taking, as I said earlier. It would be hugely damaging to listen to the OTS regarding CGT. Does the Minister agree?
My Lords, I draw attention to my entry in the register of interests. I am an unpaid adviser to Tax Justice Network. Tax justice is the theme of my remarks today.
A key requirement for building a just and sustainable society is for people to have good purchasing power with which to buy goods and services and to stimulate the economy. This simple truth is neglected not just in this Finance Bill but in many previous Bills. The Bill depresses people’s purchasing power. The current tax-free personal allowance of £12,570 has been frozen until 2026, as have income tax thresholds. The net effect is that one in 10 adults will pay a higher rate of income tax, with the poorest ending up paying a higher proportion of their income in tax. This measure alone removes some £19 billion of spending power from households. It will condemn many to a great deal of insecurity and difficulty.
Regressive taxation has been normalised in each year’s Finance Bill. The TaxPayers’ Alliance estimates that the poorest 10% of UK households now pay 47.6% of their income in direct and indirect taxes. This compares with 33.5% by the richest 10% of households. Because of wage and benefit freezes, zero hours contracts and job insecurity, this gap is now much bigger than in 2010. The Government need to examine why their policies continue to hurt the poorest in our society. They increased VAT to 20%; this is a regressive tax which hits the poorest hardest. There is no proposal for reform in the Finance Bill.
Council tax is regressive. This year, it has increased in the range 3% to 5%. Virtually the same council tax is paid on a property worth £3 million as on one worth £350,000, without any regard for any ability to pay. The poorest tenth of our population pays 80% of their income in council tax, while the next 50% pay 4% to 5% and the richest 40% only pay 2% to 3%.
There is no reform of national insurance contributions —another regressive tax. Employees generally pay 12% of their monthly incomes between £797 and £4,189 in contributions. Above that, the rate is an additional 2%. Inevitably, the rich pay a lower proportion of their total income in national insurance, compared to the poor.
20 of 35 shown
As well as protecting jobs and livelihoods, the Bill takes important steps to deliver on the second of the Budget’s key objectives: to strengthen public finances as we emerge from the pandemic. The coronavirus response, as we all know, created unprecedented challenges for the Exchequer. The first outturn estimates from the Office for National Statistics show borrowing for last year is estimated to have totalled £300 billion, or 14.3% of GDP. As we continue our response to this crisis, borrowing is forecast by the Office for Budget Responsibility to be £234 billion this year, which is 10.3% of GDP. This means we are forecast to borrow more this year than during the financial crisis, an amount so large it has only one rival in recent history—last year. The Government need to balance this enormous support provided to the economy in the short term with the need to start to fix the public finances in the longer term. The Bill takes forward a number of measures to do this responsibly.
First, the income tax personal allowance will rise with the consumer prices index, as planned, to £12,570 from this month. This level will then be maintained until April 2026. The higher rate threshold also rises to £50,270 from this month and will then be maintained at this level until April 2026. These changes are a fair and progressive way to meet the fiscal challenge presented by the pandemic. For example, it is worth noting that the 20% highest-income households will contribute 15 times that of the 20% lowest-income households.
Secondly, the inheritance tax thresholds, the pensions lifetime allowance and the annual exempt amount in capital gains tax will be maintained at their 2020-21 levels until April 2026. Maintaining the pensions lifetime allowance at current levels affects only those with the largest pensions—those worth more than £1 million.
Thirdly, the Bill legislates for the rate of corporation tax paid on company profits to increase to 25% from 2023. Businesses have been provided with over £100 billion of support to get through this pandemic, so it is only fair to ask them to contribute to the overall recovery. Of course, since corporation tax is charged only on company profits, businesses that may be struggling will, by definition, be unaffected. The increase will not take effect until two years’ time, well after the point when the OBR expects the economy to have recovered. This measure protects small businesses with profits of £50,000 or less by including a small profits rate, maintained at the current rate of 19%. The effect of this is that 70% of companies, or 1.4 million businesses, will not see an increase in their tax rate.
The third goal of the Budget was to lay the foundations of our future economy as we emerge from the pandemic. This requires that the Government encourage business investment now, to help spur growth and drive productivity in the coming years. That is why the Bill contains the innovative new super-deduction measure. In most cases, this measure will allow companies to reduce their taxable profits by 130% of the cost of investment they make, equivalent to a tax cut of up to 25p for every pound they invest. It is expected to lift the net present value of the UK’s plant and machinery allowances from 30th among the countries of the OECD to first. This will bring forward investment; the OBR has said that, at its peak in the financial year 2022-23, the super-deduction will incentivise an additional £20 billion of business investment.
The Bill also contains clauses that will enable the creation of free-port tax sites. In these sites, businesses will be able to benefit from a number of tax reliefs, including a stamp duty land tax relief, an enhanced structures and buildings allowance and an enhanced capital allowance for plant and machinery. This tax offer will be combined with simpler import procedures and duty benefits in customs sites to help businesses trade, along with planning changes to give a green light to much-needed development and spending to invest in infrastructure. This comprehensive package will allow free ports to play a significant role in boosting trade, attracting inward investment and driving productive activity.
I have talked about how this legislation delivers on the core objectives of the Chancellor’s Budget. However, as might be expected in the annual Finance Bill, it also takes forward a number of other measures to progress the Government’s long-term aims to ensure a flexible, resilient and fair tax system. As part of the United Kingdom’s commitment to be a global leader on tax transparency, the Bill allows for the implementation of OECD reporting rules for digital platforms. This will help taxpayers in the sharing and gig economies get their tax right and help HMRC detect and tackle non-compliance. It will enable the extension of Making Tax Digital requirements to smaller VAT businesses from April next year, building on the successful introduction of Making Tax Digital for VAT businesses.
It implements reforms to the penalty regime for VAT and income tax self-assessment to make it fairer and more consistent, and harmonises interest for VAT and income tax. It tackles promoters of tax avoidance through strengthening existing anti-avoidance regimes and tightening rules. Importantly, it introduces an exemption from income tax for financial support payments for potential victims of modern slavery and human trafficking made by the UK Government and devolved Administrations.
I turn to how the Bill helps us deliver the important commitments the Government have made on the environment and carbon reduction. The new plastic packaging tax will encourage the use of recycled plastic instead of new plastic in packaging. For plastic packaging that contains less than 30% recycled plastic content, the rate of the tax will be £200 per tonne. This will transform the economics of sustainable packaging. To help tackle climate change and improve the UK’s air quality, the Bill reforms the entitlement to use red diesel from April next year. This will help ensure that the tax system incentivises users of polluting fuels such as diesel to invest in cleaner vehicles and machinery, or just to use less fuel.
To conclude, the coronavirus pandemic has presented an immense challenge to this country and delivered a dramatic shock to our economy. The Government have met that shock with a determined and sustained response, but the work is not yet done. This Finance Bill continues to support the lives and livelihoods of families and businesses. As we emerge from the pandemic, it will set the ground for an investment-led recovery and for strong public finances in the coming years. The Bill delivers a number of measures for a fairer and more sustainable tax system in support of the work needed to tackle climate change. For these reasons, I commend it to the House.
In light of all this, I have some questions for my noble friend the Minister. If he cannot answer when he winds up, perhaps he could answer in writing. First, could he tell us how many of these hardcore promoters still exist? Secondly, in 2019-20, HMRC doubled its resources in this area. What will be spent on this agenda in future—in this financial year? Thirdly, a new communications campaign targeted at contractors was launched in November 2020. How is that progressing and how is success being measured?
Finally, on umbrella companies, a recent “File on 4” BBC investigation revealed that around 48,000 mini umbrella companies have been formed in the last five years, fronted by 40,000 people in the Philippines to exploit the employment allowance scheme. Meanwhile, the implementation of IR35 and the impact of the pandemic has reportedly led to a surge in the use of such companies by contractors. One survey found that 71% of workers deemed inside IR35 were moved under an umbrella company ahead of the off-payroll working rules extension into the private sector in April. Given all that, can the Minister tell us whether there are any plans to regulate umbrella companies?
Let me move on to the second topic the committee focused on, which related to the civil information powers in Clause 126. These will allow HMRC to obtain information about taxpayers from financial institutions to charge the right amount of tax and enforce payment. There are two safeguards in HMRC’s current power: the need for tax tribunal approval before information can be required and a right of appeal for financial institutions where provision of information is unduly onerous. These have been discarded on the basis that the process takes too long which, according to the Government and HMRC, means delays in meeting information requests from other countries.
Our committee expressed concerns about the Government’s approach when it was first proposed back in 2018. In this recent inquiry, we concluded that the removal of safeguards was unjustified as cases involving international information requests were only a very small minority—less than 15% of the total—and the tribunal referral does not significantly add to the timescale. I will not ask my noble friend the Minister any questions on this, but simply note that the committee recommended that the safeguards be restored as their removal is wrong in principle and not supported by the evidence in practice.
The third topic our committee looked at was the
“New tax checks on licence renewal applications”
in Clause 125. This measure will make the renewal of licenses for running taxi and private hire services and for scrap metal traders conditional on being tax compliant. It therefore introduces a new concept of conditionality into our system. Our committee questioned how effective this proposal was likely to be, since those non-compliant for tax might also be non-compliant for licensing and tax checks might drive more to be non-compliant for licensing. The result could be mainly to impose additional burdens on the already compliant rather than to tackle non-compliance. The Government have failed to produce evidence to support applying conditionality in these instances. Furthermore, the condition is to apply to all applications for licenses, not just those applying for the first time as was proposed in the original consultation.
Taking a step back, these three measures are at best, in my mind, a mixed bag. One can draw from them some general lessons, which our report highlighted. Existing powers should be used properly before new ones are requested. Focus should be put on non-legislative action. The tax policy consultation framework should be observed. There should be clear evidence to support the need for a new power. Powers must be proportionate and targeted, with adequate safeguards. Those are all principles that should always be abided by.
That brings me to an issue that our committee has not yet focused on: Clause 129, which covers reporting rules for digital platforms. What I am about to say is my view and not that of the committee. I am sure we would all agree that our tax system, rooted in the analogue age, needs a reboot to meet the challenges of the digital era. Digital platforms must pay the taxes they owe in the countries where they operate. Likewise, sellers of goods and services on those platforms should also pay the taxes they owe. Clause 129 will give HMRC the power to require certain UK digital platforms to report information to HMRC about the income of sellers of services on those platforms. The platforms in questions are taxi and private hire services, food delivery services, freelance work—a very broad term—and the letting of short-term accommodation. We may all agree with the objective of ensuring that businesses pay the tax they owe on services they sell online, but I draw your Lordships’ attention to this, because Parliament is going to give the Treasury power to make these regulations, despite the fact there has been no consultation at all. It has yet to begin, despite the fact that, according to the Government, this power could affect up to 5 million businesses which provide their services via digital platforms. We are giving this power, despite the fact that the cost of the regulations is unknown. Although the impact for each seller is expected to be small, the Government states that it
“is expected to have a significant combined impact.”
Here is why:
“Data, including bank account information if the platform holds that information, will be collected and provided to HMRC, and exchanged with other tax authorities when appropriate. This information will be used to identify and risk assess the individual or company.”
The policy paper also states:
“This measure is likely to significantly increase customer costs for some of the businesses affected.”
Note this: it says that sellers of goods
“may be affected at a later stage, subject to consultation.”
Digitising our tax system is laudable. It is a necessity, but this is no way to proceed. It is the way mistakes are made, and the Government would do well, I suggest, to heed the words of the playwright Sheridan, who wrote over 200 years ago:
“First there comes the act imposing the tax; next comes an act to amend the act for imposing the tax; then comes an act to explain the act that amended the act, and next an act to remedy the defects of the act for explaining the act that amended the act.”
This is a horrible, familiar process that we are all too well aware of in this House. I would just gently say to my noble friend the Minister that he needs to justify why HMRC is being given this power without proper consultation. How can he justify taking a power, the cost and impact of which is unknown? Once again, HMRC’s remit appears to be growing, without consultation, without evidence, without real scrutiny. Is it fair? Is it proportionate? We do not know.
It was a privilege to serve on this sub-committee, which was superbly chaired by the noble Lord, Lord Bridges, and benefited from the participation of the chairman of the main Economic Affairs Committee, the noble Lord, Lord Forsyth. As the noble Lord, Lord Bridges, has said, the committee was very well served by the excellence of its clerks. We also had good co-operation from the Financial Secretary to the Treasury, Jesse Norman MP, senior members of HMRC, and representatives of professional associations affected by the Bill’s provisions.
On rereading the report, I feel that it perhaps comes across entirely as an indictment of HMRC. That may be inevitable, because the report concentrates on those powers in the Finance Bill that seem to the sub-committee excessive or not fully thought through. Speaking for myself—I speak with a Treasury background—I have considerable sympathy with HMRC, particularly in its task of dealing with schemes of tax avoidance and evasion, which are like a many-headed Hydra—as soon as HMRC hits one of the heads another pops up. Yet it is not difficult to feel that HMRC has been more zealous and effective in pursuing often innocent taxpayers, rather than those who have made a fortune from promoting avoidance schemes.
There have also been ongoing deficiencies in HMRC’s dealings with taxpayers, some of which HMRC acknowledges. The sub-committee received distressing evidence from victims of the loan charge to which the noble Lord, Lord Bridges, referred, not least about delays or failures in getting a response from HMRC when taxpayers have sought to achieve a settlement of their affairs.
A compelling account of the distress caused by HMRC’s handling of the loan charge was given in the BBC Radio 4 programme “File on 4”, to which the noble Lord, Lord Bridges, referred, and which I commend on its investigations into these issues. A recent edition of the programme dealt with a further scheme with some similarities to the loan charge, to which the noble Lord, Lord Bridges, also referred: the recruitment of staff through umbrella companies, which offer to save employers overheads in the form of national insurance contributions, holiday pay and employment regulations by offering recruitment in penny numbers, each too small to incur those overheads.
I know that IR35 has recently come into effect as a means of distinguishing between general and useful recruitment agencies and those set up for avoidance, but I echo the noble Lord, Lord Bridges, in asking the Minister whether there are signs that it is preventing the offering of services for avoidance purposes by umbrella companies with overseas directors who are difficult to pursue. It would be a tragedy if another version of the loan charge were to become established, which could cause distress for its victims for many years to come.
I end by commending HMRC and the Government on the detailed response the sub-committee received to the report we are debating. The Government’s response is that out of 24 main recommendations in the report, nine were accepted, six were partially accepted and nine were rejected—you might call it a score draw. A sceptic might say that it was the recommendations of general principle that tended to be accepted by the Government and the specific recommendations that were rejected. Nevertheless, there is evidence that the report served a useful purpose in challenging HMRC, and it was an honour to take part in preparing it.
What is the Government’s strategy for facing this challenge? Tax and spend is not the answer. Nor can we continue selling IOUs to ourselves, which is given the name “quantitative easing”—a subject the main committee is about to report on. Inflation is already coming down the track, with the costs of raw materials soaring and pressure on wages rising because of labour shortages at a time when the Government are maintaining employment for many people through the taxpayer.
The Bank of England’s reassuring messages that there is nothing to see here and nothing to worry about, and that it will delay interest rates as soon as there is inflation—which will be a short-term effect—worry me. I remember, when I was a young man first engaging in politics, how quickly inflation got out of control, as people started pricing for anticipated rates of inflation. It ended in inflation of over 20%, interest rates of 15% and a lot of pain faced by the Conservative Party in government and the country as a whole. Inflation may be convenient for Governments with big debts but, as Jim Callaghan put it, inflation is the father and mother of unemployment.
The only way we can get through this crisis is by getting our economy growing again. That means recognising that the current long-term growth projections of just under 2% from the Government’s own statisticians are wholly inadequate and not acceptable. We need to change our strategy.
Increasing corporation tax—here I disagree with the noble Lord, Lord Butler—is the opposite of what is needed if we want to see more investment, growth and employment. Entering a cartel to set a minimum level of corporation tax may be good news for the United States, with revenues from its increasingly overmighty tech companies, but what happened to that vision of global Britain—the place to invest and create jobs and prosperity? The thinking embodied in the Chancellor’s welcome vision for free ports needs to be applied to the nation as a whole. If we believe in competition as the way to secure innovation and prosperity, why are we suddenly abandoning competition in taxation? “Take back control” was as much about setting our own taxes and laws as about regulation. It should be for the other place to decide tax matters and tax policy, not the President of the United States, and not by international treaty. It is the other place’s duty to vote means of supply, and it is wrong for the Executive to circumvent that in this way.
I fear that, as the President of the United States now appears to want to opine on the Northern Ireland protocol, it may be time for Boris Johnson to have his “Love Actually” moment and not just make the speech but unleash the talents of the British people. That means supporting the self-employed and encouraging outsourcing. While it is commendable that HMRC tackles tax dodgers and abusers, this should not be at the expense of struggling self-employed businesses by imposing additional costs. The self-employed are not the same as those on PAYE. There is no statutory sick pay for them and no holiday entitlement, and the next penny depends on identifying the next job. IR35 is having a severe impact and will discourage others to set up on their own. I talked to someone in exactly that position just over the weekend. These small and medium-sized businesses are the seed corn of our future growth, and the Government should honour their long-standing promise to bring forward a new status for self-employment following the Taylor report, as my noble friend Lord Bridges indicated in his excellent speech a few minutes ago. This was also a manifesto commitment; I cannot remember how many manifestos ago it was, but it was certainly a clear commitment from this Government.
It now seems every Finance Bill brings forward new powers for HMRC, even before the review of the use of existing powers is completed. This Bill is no exception, taking away the right of appeal to a tribunal for financial institutions to provide specific information about a taxpayer. The disgraceful and effectively retrospective treatment of loan charge victims, such as local authority and health service workers placed in schemes by their employers without full understanding of what they meant, has not been matched with the same zeal in pursuing those responsible for marketing those schemes, now languishing on their superyachts with their ill-gotten gains. I am disappointed that the Government have refused to apply measures retrospectively to these promoters, as recommended by the Finance Bill Sub-Committee, but I welcome the proposals for tougher action that are currently subject to consultation. It is beyond belief that these schemes are still being promoted, and some are targeting workers returning to the NHS. HMRC itself has been using firms that use these schemes.
To conclude, we need a clear vision from the Prime Minister and the Chancellor and a strategy to get our economy going again if we are to meet our duty to secure a safety net for those most vulnerable and disadvantaged in our country. Higher taxes, more bureaucracy and continuing uncertainty are anathema to achieving that, for, as the Book of Proverbs reminds us,
“Where there is no vision, the people perish.”
I also want to mention the issue of air passenger duty. We have some of the highest rates anywhere in the world. Peripheral parts of the United Kingdom are very dependent on air connectivity. Rail options do not exist for places such as Northern Ireland to reach other places in the United Kingdom. I ask the Government to keep under review measures that will alleviate the burden on businesses and families of air passenger duty on internal United Kingdom flights.
It would be impossible to participate in a debate like this and not make reference to the burdens that are being placed on the Northern Ireland economy and Northern Ireland businesses, and our communities more generally, by the Northern Ireland protocol. I am disappointed that there is little, apart from provisions in relation to the steel industry, that will alleviate those burdens, particularly in relation to customs requirements.
However, I do look forward to the Government introducing two new measures—in the near future, I hope—that will address the underlying problems of the protocol and do away with the incredible situation whereby, if the grace periods that are currently in force are not extended or a permanent solution not found, as many if not more checks will be done on foodstuffs and other materials coming from Great Britain to Northern Ireland as are done on those entering the entirety of the European Union from the rest of the world. That is an amazing, incredible and scandalous situation which must be remedied by the Government. I hope that those measures will be comprehensive and far-reaching.
I want to turn to the aspect of the Bill I mentioned and explore it in more detail. I believe it is something that perhaps is an unintended consequence of what is otherwise a reasonable provision: it is do with the prohibition on power plants putting rebated fuel—red diesel—through electricity generators after 1 April 2022. I fully understand, and electricity generators also appreciate, the policy objective of helping meet climate change and air quality targets by removing the tax advantage of red diesel, thus encouraging end-users to use more expensive white diesel, which is taxed at a rate that reflects the impact of the emissions that they produce.
However, the Bill will have a particular, unique and unintended detrimental consequence for electricity generators in Northern Ireland. Kilroot and Ballylumford power stations in Northern Ireland have a historical licence obligation to maintain stocks of red diesel as part of the Northern Ireland Fuel Security Code obligations. The licensing obligation for Northern Ireland electricity generators requires back-up fuel—red diesel—to be held for security of power supply purposes in the event of gas supply interruption. The Bill requires the disposal of all existing red diesel stocks before 1 April 2022. There is in fact major uncertainty about whether that timetable could be met. There will be significant additional costs of doing this to both Ballylumford and Kilroot, estimated at £14 million for one and £1.6 million for the other. That includes all the logistical problems as well as the replacement of the fuel itself.
There is, however, a major competitive commercial disadvantage for Northern Ireland power generators vis-à-vis others within the competitive integrated single market and vis-à-vis the Great Britain market. There is no equivalent requirement to hold reserves of what the Irish equivalent of red diesel is in the Irish Republic, and the requirement to hold back-up fuel is applicable only to Northern Ireland power generators and does not apply to gas-fired power generators in Great Britain. One of the perverse impacts of the requirement of the provision in the legislation, if it is not remedied, is that it will lead to additional and higher CO2 emissions in Northern Ireland that would otherwise be avoided: having to use up the fuel in generating electricity will cause much greater emissions. It will be costly for the consumer; the extra cost is estimated at £60 million based on commodity prices, as of 1 May 2021. Then there is the risk of security of supply for Northern Ireland in the period between getting rid of one fuel and replacing it.
I welcome discussions which have taken place between power generators, Ministers and officials in Her Majesty’s Treasury. It is vital that the Bill’s unintended consequences are addressed. I understand that progress has been made, but I would like the Minister, in responding to the debate, to put on the record how he understands the way forward. Will he confirm that HM Treasury is looking at fixing this problem, that guidance will be issued relating to the Bill or that there will be secondary legislation to address the issue? Could he confirm that there will not be a requirement placed on Northern Ireland power generators to rid themselves of existing stocks of reserved fuels by the prescribed date, with all the detrimental impacts that I have outlined? I hope the Minister will be in a position to respond positively, because this would be good news for the plants themselves, for consumers and for the environment.
My first question to my noble friend is, given all this wasted noise, effort and focus against raising CGT and that the Chancellor has clearly researched the subject and reached a conclusion, can we avoid all this palaver at every future Budget of this Government by announcing that the rate will stay fixed, as has been done for other taxes in the Conservative Party manifesto? This will provide much greater certainty to entrepreneurs, investors and businesspeople for the next few years. The cynic might argue that the Chancellor likes the uncertainty as it encourages people to realise assets when they would not otherwise do so, and thus send money to the Exchequer ahead of the anticipated date. However, we all know on this side of the House that the Chancellor is not that type of politician and is instead focused on making life easier and more predictable for taxpayers. By the way, the retention of the current rates proves my earlier point that the Government listen to people in this House and elsewhere and consider their arguments carefully.
In the debate on the Motion to Take Note of the Budget Statement in this Chamber, I asked my noble friend the following:
“I would be grateful if the Minister could tell us to what extent this Budget complies with pillar 1, and in particular pillar 2. What steps will HM Treasury be taking to ensure that we fully comply with pillar 2?”—[Official Report, 12/3/21; col. 1919.]
There were many speakers on that occasion, so I assumed that I did not get an answer because of other priorities. It turns out that the reason I did not get an answer was because the Government were busy hatching a plan with world leaders to do just that. This is another matter not in the Finance Bill, but I hope the Minister will allow me to comment on the historic announcement as it will fundamentally affect corporate taxation and is thus very germane to this Bill.
The Red Book estimates that only £40 billion will come from corporation tax this year but that the new rates proposed in the Bill will increase that by £2.3 billion in 2022-23, £11.9 billion the following year and £16 billion the year after that—those are just the increases—so a lot is riding on corporation tax yield increasing as the rates move up. Accordingly, it is very important that corporations pay their fair share. I have tracked the OECD proposals on base erosion and profit shifting for some time. Indeed, it was the subject of my maiden speech in 2013. I hope the Minister will allow this as an acceptable forum to raise this related issue, not least as no other forum other than today’s PNQ has been offered to Peers to discuss the OECD announcements —although, of course, he may want to answer some of my questions in writing at a later date. The UK really needs a deal on pillar 1, as much as we are seeing progress on pillar 2. At the moment, the details are somewhat vague. It is all very well for profits which are diverted into tax havens to be transferred into the HQ country, but the minimum rate of tax—be it 15% or 21%—does not of itself affect the amount of tax the FAANG or others will pay in the UK.
DST—digital services tax, which I will come on to again in a minute—was put in place to ensure that profits generated from UK customers were taxed here. Clearly, future tax should be based on user bases rather than sales made—not just customers, but user bases. As we know, sales to UK customers are currently often based in places such as Ireland, but the goods are delivered here. DST seeks to achieve proper taxation on this, but we need to know how pillar 1 will do so likewise, as the expectation is that DST will be dropped at some point. Perhaps the Minister can assure us on that point.
Meanwhile, the pillar 2 proposals are encouraging, but I urge some caution. The IPPR issued a report estimating that with a global minimum rate of 21%, our take could be £14.7 billion. That would be nice, but at a global rate of 15% now being suggested, our share would be much lower. Let us not forget that we already have controlled foreign corporation legislation in place—I think it may have been introduced by my noble and learned friend Lord Clarke, but it may have been before his time—and that this legislation seeks to equalise UK-headquartered corporations’ tax take. I am indebted to Glyn Fullelove, formerly president of the Chartered Institute of Taxation, for sharing with me his calculations, which suggest that a figure nearer to £2 billion or £3 billion could be the amount raised by the pillar 1 and 2 proposals. Perhaps HM Treasury could share its estimates with us at some point.
We introduced the digital services tax so that companies such as Amazon would pay their fair share. Unfortunately, it is not working as well as it should. First, Amazon, which clearly has monopoly-type power, has simply told its suppliers to pay. Secondly, it applies only to marketplace fees, not to direct sales. This is a very important difference. It is another area I was disappointed not to see mentioned in the Finance Bill, as we now have the situation where DST has made it harder for SME retailers to compete with Amazon.
The current DST legislation is defective in not taxing the user-created value arising from sales made by marketplace providers on their own account. Additionally, the application of DST to marketplace fees and commissions charged to third parties, without a corresponding charge arising on the value created when the provider uses the platform to make sales on its own account, is a distortion to competition. I and a number of others have proposed that the scope of DST be extended, so that when a marketplace provider uses the marketplace for its own sales—or uses a similar platform alongside the marketplace—an amount of digital services revenue, which can be taxed, arises.
As the Minister might be aware, I have discussed these ideas with the Financial Secretary, who is resistant to changing DST at this point. As a result, there is nothing in the Bill on this issue. I hope, however, that the Government will reconsider this matter, as we are quite a way from a final deal on a pillar 1 and 2 agreement and, in the interim, we are losing a very large amount of revenue.
Finally, on the enterprise initiative scheme, or EIS, Brexit gives us a chance to look again at restrictions placed on HM Treasury to avoid accusations of state aid. EU laws restrict the ability of the SEIS and EIS to provide entrepreneurs’ start-up capital quite dramatically. Will my noble friend the Minister agree to revisit this area?
The Chancellor listened and has not done this so far. Entrepreneurs’ relief has been cut by the Government, which was not a good step if it was meant to encourage entrepreneurship. On the other hand, the super deduction was a masterstroke by the Chancellor and the Treasury: to encourage investment by giving relief of 130% instead of 18%, to have 25% off your tax bill, and to encourage investment—wow! The Government are doing the right thing, but they have announced that this will be taken away in two years’ time, just at the time when corporation tax will go up. Should not the Government consider continuing with the super deduction? Will the Minister give us his opinion?
At the CBI, of which I am president, we welcome measures such as the super deduction, supporting business investment, the extended loss reliefs and supporting business cash flow. We hope that the current cap on carried-forward losses can be temporarily lifted to allow the many viable and vibrant businesses in the UK even greater flexibility in how they use their exceptional Covid-related losses, along with other policy measures already in place. This will help to support businesses of all sizes to recover and grow after the pandemic.
The CBI is also calling for a tax road map. We were disappointed, as was the Treasury Committee, that the Government have not yet consulted on producing this. We believe that the relative success of, for example, the corporation tax road map, demonstrates the value to businesses and people alike of laying out the direction of travel of the tax system and how the Government will use taxes to achieve their manifesto policy goals.
On green taxes, there is very little in the Budget about net zero and tax. We would like to see much more leadership on this from the Government, particularly leading up to COP 26. The CBI has produced a paper on greening the tax system that aims to start a discussion between the Government and business about how tax can best support net zero. This is a once-in-a-generation platform to boost climate-progressive industries, associated skills and innovation, to show that the UK can lead the world in the technologies of the future and accelerate our response to climate change. Devising suitable regulatory frameworks will be key, given the pressures on public finances, but fiscal measures, including environmental taxes and tax incentives, will also be an important lever in driving change. Does the Minister agree?
The £400 billion invested by the Government in supporting our economy and our businesses has been phenomenal. Whether in absolute terms or in per capita terms, it is one of the highest sums in the world. I was privileged to chair the B7 last month, which fed into the G7 this week. Dr Gita Gopinath, chief economist of the IMF, spoke to us, saying that in the global economy there will be a two-track recovery. Some economies, such as ours, have been fantastic with their vaccination programmes. Full credit goes to Nadhim Zahawi, our Vaccinations Minister, who has achieved a vaccination rate of 75%, with double doses at 50%. This is tremendous. Likewise, America is doing very well. With our huge £400 billion of support, we will be able to bounce back very quickly. Andy Haldane, chief economist of the Bank of England, has likened our economy to a coiled spring. On the other hand, sadly, many economies in the world have hardly vaccinated their citizens and have hardly been able to provide any support to them.
How will we pay for this £400 billion? How will we pay for the nearly 10% drop in our GDP, the worst performance in 300 years? I get asked this question a lot, and I believe that the way we pay for it is by generating growth and with the support the Government have given—for example, the furlough scheme, which has saved millions of jobs and businesses, and the 100% guaranteed loans. The British Business Bank, which had a loan book of £8 billion in February last year, today has a loan book of £80 billion. Hats off to it for giving these loans, which have saved so many businesses.
What about unemployment? In February last year, it was at 3.5%, one of its lowest levels; it is now at 4.8% because of all the measures that have been taken. We have to prevent unemployment, and youth unemployment in particular. Young people have suffered so much during this crisis. Some 50% of jobs lost, sadly, were among young people. If this coiled spring is to work, the supply side measures which encourage economic growth must be there. It means creating jobs. This will be the best way to pay for the £400 billion. It means not increasing taxes. We need to encourage inward investment as well as domestic investment. We need to create growth. This will create jobs which, in turn, will create the PAYE and the NI that make up the biggest proportion of taxes. The people who get those jobs will spend and that will generate VAT—which will be far more than the relatively small proportion generated by corporation tax. I give full credit to the Chancellor for leading the agreement by the G7 for the 15% minimum global tax rate. We have always said that, if there is to be a minimum tax rate, it must be agreed globally. Let us see what happens at the G20. However, we still need to encourage businesses to locate in the UK. We need to get the Amazons and the Googles to come here to create the thousands of jobs that will create the taxes.
At the CBI, we have a new director-general, Tony Danker. Six months into his role, we published Seize the Moment, our economic strategy for the United Kingdom during the next decade to 2030. It contains six pillars: a decarbonised and an innovative economy; science and technology; research, development and innovation; universities and businesses working together, and a globalised economy with the UK as a trading powerhouse. It encourages levelling up around the country in clusters such as between Cambridge University and AstraZeneca. We have also launched An Inclusive Economy to change the race ratio and promote ethnic minority diversity and inclusion across all businesses. McKinsey has shown that companies which embrace diversity and inclusion are more profitable; Deloitte has shown that they are more innovative.
Finally, we are promoting a healthier nation, including mental health and well-being, within an action plan that includes a long-term tax road map for the United Kingdom. To enable all this and for Andy Haldane’s coiled spring to happen, we need the supply side to be there. The United Kingdom needs a competitive tax system that will encourage investment and job creation—one which is globally competitive and super-effective.
Unlike the noble Lords, Lord Leigh of Hurley and Lord Bilimoria, I cannot support the capital gains tax regime. Why on earth do the rich need a special tax regime? Capital gains are taxed at marginal rates of between 10% and 28%, whereas earned income is taxed at marginal rates of between 20% and 45%. Both increase somebody’s welfare and purchasing power. I can see no rationale whatever for taxing capital gains at a lower rate than earned income.
The Government’s policies on capital gains are also a bonanza for the tax avoidance industry. Armies of accountants and lawyers are busy converting income to capital gains so that their clients end up paying lower taxes. By taxing capital gains in the same way as earned income, the Government could raise around £14 billion a year. This could help the less well off by making the £20 a week universal credit permanent; the Government could also easily double it by this one simple reform.
There is tax relief of around £40 billion a year on contributions to pension schemes. Just 10% of high earners receive 50% of tax relief. There are 1.3 million individuals who pay into pension schemes but receive no tax relief and zero government support. This is because their income is less than the tax-free personal allowance. Again, the poor are being punished, for putting a little away for their retirement income.
I hope the Minister will explain why the Government insist on hurting the poorest with regressive tax policies. Just in case he is tempted to defend government policies by claiming that, in recent years, they have increased tax-free personal allowances, I remind the House that this has not changed the burden of tax on the poorest. Increasing the personal allowance has done nothing for 18.4 million individuals whose annual income is less than the personal allowance. We need a rethink if we want a just society.
The report, New Powers for HMRC: Fair and Proportionate? is very impressive, but I cannot help wondering whether the committee has not been hoodwinked by the Government and the tax avoidance industry. On page 3, the report states:
“On the proposals for tackling promoters of mass-marketed tax avoidance schemes, we welcome the Government’s intention to take further tough action against the known ‘hard core’ of promoters, but urge it to redouble its efforts in this respect, and to take further measures to combat the continued proliferation of new schemes.”
Where exactly is the evidence for tough action? There is an enormous difference between the law on the books and the law in practice. The Government have been soft on the tax avoidance industry. Big accounting firms have long raided the public purse through complex tax avoidance schemes. Occasionally HMRC goes to court, but the Government do not take any action against the firms.
Let me give some examples. The UK Supreme Court heard the case of HMRC v Pendragon plc and others. The case related to a VAT avoidance scheme marketed by KPMG, which would have enabled car retailing companies to recover VAT input tax paid while avoiding the payment of output tax. The court declared the scheme to be unlawful and the judge said:
“In my opinion the KPMG scheme was an abuse of law.”
That is a very strong conclusion. To this day, no action has been taken by any regulator or accountancy trade association against KPMG.
The court judgment in Development Securities plc and others v HMRC threw out a complex PwC scheme designed to shift apparent management control of some UK entities to Jersey to gain tax advantages by claiming that the entities were not liable to the UK taxes. The scheme was declared to be unlawful by the courts, but no action was taken against PwC.
An Ernst & Young scheme involved loans between companies in the same group, and the ultimate aim was to enable a company making the interest payment to claim tax relief on the expense while enabling the company receiving the interest to avoid tax. That scheme was sold to Greene King. After a prolonged legal battle, the scheme was declared to be unlawful. No action was taken against Ernst & Young.
Deloitte promoted a scheme to enable companies to generate deductible tax losses through complex financial transactions. The scheme was sold to Ladbrokes, but it gambled incorrectly and the court said that the scheme was unlawful. No action of any kind whatever was taken against Deloitte.
Big accounting firms have been peddling unlawful tax avoidance schemes and are not investigated, fined or disciplined but are given government contracts and seats on HMRC’s boards. The advisory panel on the general anti-abuse rule, GARR, is also dominated by the same people. Amazingly, none of the GARR panel’s rulings relate to any of its clients.
In sum, I question the claim that tough action against accounting firms for selling tax avoidance schemes has been taken. I invite the Minister to explain why big accounting firms peddling unlawful tax avoidance schemes have not so far been investigated, fined disciplined or prosecuted.