Basis period and avoidance in spotlight at Finance Bill committee stage

There will be just one day of Committee of Whole House debate this year. The clauses selected for debate here by the Opposition are divided into three groups, listed below along with our commentary on them and the amendments and new clauses tabled so far.

A more detailed commentary, including CIOT/ATT views on the measures, can be read here. (It will be updated on Monday and Tuesday if additional amendments are tabled.) CIOT, ATT and LITRG have also produced a series of briefings for MPs, which are linked to in relevant parts of the commentary below.

Group One – income tax and corporation tax

Includes: clause 4 (dividend income rate); clause 6 (banking surcharge); clauses 7 and 8 and Schedule 1 (basis period); clause 12 (annual investment allowance)

Clause 4 increases the income tax rates charged on dividend income, raising all three rates by 1.25%, in line with the increase in tax on earnings being made through national insurance / the health and social care levy.

Two new clauses have so far been tabled relating to this. New clause 1 (tabled by the Labour frontbench) would require an assessment of what extra revenue would be derived by increasing the rates of tax on dividend income by different amounts (1.25%, 2.5% and 3.75%). New clause 8 (tabled by backbench Labour MP Jon Trickett) would require the Government to (among other things) assess the effects of (a) removing the personal dividend taxation allowance, and (b) amending the dividend income rates of taxation to match the existing rates of taxation of earnings.

Clause 6 of the Bill cuts the corporation tax surcharge on banks from 8% to 3% from 1 April 2023. The effect of this is that while corporation tax for non-banks will rise from 19% to 25% on this date, corporation tax for banks (including the surcharge) will rise from 27% to 28%. At the same time the surcharge allowance, above which the surcharge is charged, will be increased from £25 million to £100 million to help smaller challenger banks.

Labour, the SNP and the Liberal Democrats are opposed to the cut in the surcharge – it was one of just two Budget resolutions they voted against (the other was on basis periods). Labour’s amendment 1 would delete the clause in its entirety. New clause 2, also tabled by the Labour frontbench, would require an assessment of the surcharge in the context of the cost of public support to banks since the financial crisis and an assessment of the risk of the need for further public support in future.

‘Basis period’ rules determine how trading income for unincorporated businesses (self-employed sole traders and partnerships) is allocated to tax years. Clause 7 and schedule 1 would change the allocation so that it will be based on the profits or losses arising in the actual tax year, rather than (as now) in accordance with the accounting period ending in the tax year. (Briefings on this measure have been produced for MPs by CIOT, ATT and LITRG.)

No amendments or new clauses have so far been tabled relating to the basis period, but it is worth noting that, as mentioned above, Labour and the other main opposition parties voted against the resolution covering this part of the Bill, so are likely to oppose it here too. In the Budget debate Shadow Economic Secretary Pat McFadden MP called it “a stealth tax on the self-employed of £1.7billion over the next five years.”

Clause 12 extends the £1 million higher limit of annual investment allowance (AIA) for a further 15 months to 31/3/23. (ATT has produced a briefing on this clause.)

Labour’s new clause 3 would require a review of which companies are benefiting from the AIA, broken down by size, sector, and country of ownership, and an assessment of the merits of the super deduction in light of the AIA.

Group Two – avoidance, profit shifting and economic crime

Includes: clauses 27 and 28 (diverted profits tax); clauses 53 to 66 (economic crime (anti-money laundering) levy); clauses 84 to 92 and schedules 12 and 13 (avoidance and evasion)

This group brings together a number of measures around the compliance area, ranging from a tidying up of legislation to tackle profit-shifting to new measures to combat promoters of tax avoidance schemes to a new levy on financial and professional services firms (among others) to fund anti-money laundering work. Labour want to use this group to debate a global minimum rate of corporation tax, a register of beneficial owners of overseas entities that own UK property and the loan charge.

Clauses 27 and 28 make changes to the rules on Diverted Profits Tax (DPT), both in relation to relief that may be available under double tax treaties and correcting aspects of its interaction with corporation tax. (CIOT has produced a briefing on these clauses.)

The Government has itself tabled two amendments (amendments 2 and 3) to amend clause 28 to prevent the issuance of a closure notice during a DPT review in certain circumstances. We can presume these will be passed.

Labour’s new clause 4 would require an assessment of the income forecast to be raised by the DPT in each of the next three financial years; and the assessment must consider what the impact would be of the OECD-G20 Inclusive Framework package of reforms being implemented, including a global minimum rate of corporation tax being introduced at either 15 or 21 per cent.

Clauses 53-66 put in place an Economic Crime (Anti-Money Laundering) Levy which will be paid by firms regulated for anti-money laundering purposes, including accountancy and law firms, financial institutions, estate agents and casinos; the levy will be a fixed amount based on the firm’s size, ranging from £10,000 to £250,000, with firms whose UK revenue is less than £10.2 million a year exempt. (A joint ATT/CIOT briefing has been produced on this measure.)

Labour’s new clause 5 would require an assessment of the levy every year until a register of beneficial owners of overseas entities that own UK property is in place, as well as an assessment of what impact such a register would have on the effectiveness of the levy.

Clauses 84 to 90 contain measures to tackle promoters of tax avoidance. Clause 84 lets HMRC petition the courts to wind-up businesses promoting and facilitating tax avoidance. Clause 85 will enable HMRC to publish information about schemes and promoters earlier on, helping taxpayers identify and steer clear of schemes. Clauses 86 to 89 allow HMRC to seek a court order freezing the assets of a person are starting proceedings against to charge an ‘avoidance’ penalty. Clause 90 and Schedule 12 introduce a new penalty on UK based entities who facilitate tax avoidance schemes involving non-resident promoters. (CIOT has produced a briefing on these clauses for MPs.)

Labour’s new clause 7 would require the Government to review the impact of measures contained in clause, and as part of that to commission an independent review of the information published by HMRC about disguised remuneration loan schemes. This independent assessment must consider HMRC’s approach to the loan charge scheme and consider recommendations for altering that approach, and the Government would be required to state to the House its response to the recommendations.

Clause 91 and schedule 13 are an anti-tax evasion measure relating to electronic sales suppression penalties. Clause 92 is aimed at tackling evasion of tobacco duty.

Group Three - VAT

Includes: clauses 68 to 71 (value added tax); clause 93 and Schedule 14 (free zones)

The ‘VAT margin scheme’ for second-hand goods lets a business pay VAT at 1/6 of the difference between the price they pay for an item and what they sell that item for. After the UK left the EU, due to the Northern Ireland Protocol, motor vehicle dealers in Northern Ireland became technically unable to use the margin scheme for purchases from Great Britain (though a concession has been granted). Clauses 68 to 70 seek to rectify the position, including the introduction of an interim scheme that permits second-hand car dealers in Northern Ireland to sell certain motor vehicles sourced in GB under the margin scheme.

Clause 71 says false teeth can be imported from GB to Northern Ireland VAT free.

Regulations introduced in October 2021 provide for the zero-rating for VAT of certain supplies of goods and services in free zones (secure customs sites within a Freeport). Clause 93 and schedule 14 put in place an ‘exit charge’ to ensure businesses don’t gain an unintended advantage from the zero rate.

At time of writing no amendments or new clauses have been tabled to this group of clauses.

Public Bill Committee

The remaining clauses of the Bill will be debated by a committee of MPs (public bill committee) in up to eight sessions, in a committee room away from the floor of the House of Commons.

The first two sessions are expected to be on Tuesday 14 December, with the remaining six scheduled for the new year – two on each of Wednesday 5, Tuesday 11 and Thursday 13 January. A further preview will be published ahead of the first sessions.