Finance Bill 2021-22 committee stage preview

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. This preview was updated Tuesday 30 November to reflect additional amendments and new clauses tabled since the first draft (Thursday 25 November).

Group One – income tax and corporation tax

Clause 4 (dividend income rate); clause 6 (banking surcharge); clauses 7 and 8 and Schedule 1 (attribution of trade and property business profits etc for a tax year); clause 12 (annual investment allowance)

CIOT, our Low Incomes Tax Reform Group (LITRG) and our sister body the Association of Taxation Technicians (ATT) have produced the following briefings for this group:
Clauses 7-8 Schedule 1: Basis Period Reform (CIOT briefing)
Clause 7 Schedule 1: Abolition of basis periods (ATT briefing)
Abolition of Basis Periods (LITRG briefing)
Clause 12: Extension of temporary increase in annual investment allowance (ATT Briefing)

Group Two – avoidance, profit shifting and economic crime

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)

CIOT, LITRG and ATT have produced the following briefings for this group:
Clause 27-28 Diverted Profits Tax (CIOT briefing)
Clause 53-66: Economic Crime (Anti-Money Laundering) Levy (joint ATT/CIOT briefing)
Clauses 84-90 Schedule 12: Tackling Tax Avoidance (CIOT briefing)

Group Three - VAT

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

Our commentary on each group of clauses, including notes on the amendments and new clauses tabled so far, follows.

Group One – income tax and corporation tax

• Clause 4 (increase in rates of tax on dividend income)
• Clause 6 (rate of banking surcharge and surcharge allowance)
• Clauses 7 and 8 and Schedule 1 (attribution of trade and property business profits etc for a tax year)
• Clause 12 (capital allowances: extension of temporary increase in annual investment allowance)

Commentary

This group covers a range of clauses relating to both income tax and corporation tax.

Clause 4 increases the income tax rates charged on dividend income, raising all three rates by 1.25%, in line with the 1.25% increase in tax on earnings being made through national insurance / the health and social care levy. This has effect for the tax year 2022-23 and subsequent tax years.

Three 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 report on the fiscal and economic effects of the changes made by clause 4 to the rates of taxation of dividend income, and also to 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. New clause 16 (tabled by Labour backbencher Richard Burgon) would similarly require an assessment of the effects on tax revenues of increasing the dividend tax rates to the rates of income tax.

CIOT and ATT haven’t offered a view on this change as we don’t generally comment on where rates should be set, regarding this as a political call. However we have observed that by increasing rates of dividend tax by 1.25% alongside the health and social care levy / national insurance increase, the Government are ensuring the tax advantages of incorporation (and taking your income in the form of a dividend) do not increase further.

 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. (NB. The surcharge should not be confused with the bank levy, which is a separate charge on banks’ UK balance sheets.)

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). New clause 2, tabled by the Labour frontbench, would require an assessment of the banking 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. 

Labour’s amendment 1 which would have deleted the clause in its entirety was not selected for debate (but the clause can in any case be voted against at clause stand part). The SNP’s new clause 9 has also not been selected for debate, presumably because it goes beyond the scope of the Bill. This would have required the government to publish an assessment of the revenue raised by the surcharge and bank levy since its introduction, and information relating to state support for the banking sector since the financial crisis and about risks in the banking sector.

CIOT and ATT haven’t offered a view on this change as we don’t generally comment on where rates should be set.

Currently ‘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. The new ‘tax year basis’ will apply from the tax year 2024-25, in anticipation of the start of Making Tax Digital for income tax self-assessment in April 2024, with a transition to the new regime in the tax year 2023-24. The measure will only affect businesses which draw up annual accounts to a date other than 31 March or 5 April.

Clause 8 is linked to clause 7. It allows property businesses to treat profits of a year to a date near to the end of the tax year (31 Mar – 4 Apr) as being equivalent to the profits of the tax year. This means they will no longer have to apportion small proportions of their profits between tax years for income tax purposes. It applies for the tax year 2023-24 onwards.

This change will mean that affected businesses will pay tax on profits for more than a 12-month period in the tax year 2023 to 2024 as they transition into the new ‘tax year basis’. Whilst it will be possible to spread any excess profits over five tax years, the Exchequer Impact of the change is significant.  Between 2024-25 and 2026-27 it is expected to raise an extra £1.715bn. There will be further impacts over the following two years so the overall impact could be over £2bn.

The only new clause or amendment relating to basis periods comes from the Lib Dems. New clause 17 would require a report on the effects of the abolition of basis periods on particular sectors, including farming and other seasonal businesses, sole traders and partnerships

As mentioned above, Labour and the other main opposition parties voted against the resolution covering this part of the Bill, so it seems likely they will oppose the clauses 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.”

We are pleased that the government has deferred the start date for basis period reform by one year, something we had called for. However, we remain concerned that changes are being rushed through. For those businesses affected, basis period reform will exchange largely one-off complexities for ongoing ones and will not provide the desired simplification if these businesses are unable to change their accounting date to 31 March / 5 April. There are numerous knock-on effects in the transitional period which also need addressing to prevent unfair outcomes.

Our comments are set out in more details in the following briefings:
Clauses 7-8 Schedule 1: Basis Period Reform (CIOT briefing)
Clause 7 Schedule 1: Abolition of basis periods (ATT briefing)
Draft Finance Bill 2021-22 – Abolition of Basis Periods (LITRG briefing)

We see clause 8 as a sensible measure aimed at reducing admin burdens on those who draw up accounts to 31 March. But see our criticisms of clause 7 and schedule 1.

Clause 12 relates to the annual investment allowance (AIA). The AIA is a 100% capital allowance available for the cost of most plant and machinery incurred by most businesses up to a specified annual amount. Unlike the super-deduction which can only be used by incorporated businesses to reduce corporation tax, the AIA is available to individuals, companies or partnerships so long as they are carrying on a qualifying activity. From 1/1/16 the annual amount was permanently set at £200,000. It was increased temporarily to £1 million from 1/1/19 for two years to incentivize businesses to increase or bring forward their investment in plant and machinery. Finance Act 2021 extended the temporary £1 million limit for a further year, to 31/12/21. This clause extends it until 31/3/23.

The ATT has produced a briefing on this clause:
Clause 12: Extension of temporary increase in annual investment allowance (ATT Briefing)

It notes that the extension is good news for the businesses able to take advantage of it, but the timing of the AIA’s reversion to its permanent level of £200,000 on 1 April 2023 will now coincide with the abolition of basis periods, which will further exacerbate the arithmetic complexities and potential traps already inherent in the transitional provisions which apply when there is a change in the AIA limit. This can result in a business having its effective AIA limit restricted for a time to significantly less than either of the limits being transitioned between. ATT suggests an amendment to rectify this, which has been tabled by the SNP as amendment 7. See the briefing for more details.

The SNP have also tabled amendments 5 and 6 would restrict access to the extended temporary increase in AIA to businesses that support transition to “net-zero” (amendment 5) and that do not have a history of tax avoidance (amendment 6). New clause 10 (also SNP) would require an assessment of the effects of the extension on GDP in different Brexit scenarios, while new clause 11 (another one from the SNP) would require an assessment of the take-up and impact of the temporary increase in the AIA, including the size and location of companies claiming the allowance.

Plaid Cymru’s amendment 4 would require the government to analyse the impact of extending the temporary increase to AIA in terms of impact on the economy and geographical reach and on efforts to mitigate climate change.

Labour’s new clause 3 would require a review of which companies have benefited from the AIA in 2022-23, broken down by size, sector, and country of ownership, and an assessment of the merits of the superdeduction in light of the AIA.

Group Two – avoidance, profit shifting and economic crime

• Clauses 27 and 28 (diverted profits tax: mutual agreement procedure and closure notices etc)
• Clauses 53 to 66 (economic crime (anti-money laundering) levy)
• Clauses 84 to 92 and Schedules 12 and 13 (avoidance)

Commentary

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.

The Diverted Profits Tax (DPT) was introduced in Finance Act 2015 to counteract contrived arrangements used by large groups (typically multinational enterprises) to reduce their UK tax bill either by arranging their affairs so as to avoid having a UK permanent establishment, or by making payments which lack economic substance or end up in a low tax company that lacks economic substance. A punitive rate of tax (currently 25%, 31% from April 2023) is levied on profits deemed to have been diverted.

These clauses make changes to the rules on DPT, both in relation to relief that may be available under double tax treaties and correcting aspects of its interaction with corporation tax.

Clause 27 allows relief against DPT to be given where necessary to give effect to a decision reached under a tax treaty’s Mutual Agreement Procedure.

Clause 28 ensures the functioning of the interaction of the DPT review period and the closure of a corporation tax enquiry. Specifically it allows taxpayers to continue to make use of the relieving provisions in FA 2015 to amend their company tax returns and bring taxable diverted profits into charge to corporation tax during the DPT review period.

The Government has itself tabled two amendments (amendments 2 and 3) to amend clause 28 to prevent the issuance, during a DPT review period of a foreign company, of a closure notice in respect of a company tax return of an entity carrying on trading activity in the UK where that return is capable of being amended to bring into account amounts that would otherwise be taxable diverted profits of the foreign company.

Labour’s new clause 4 has not been selected, presumably because it goes beyond the scope of the Bill. It would have required an assessment of the income forecast to be raised by the diverted profits tax in each of the next three financial years; and the assessment would have to have considered 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.

HMRC considers DPT to have been a success in countering the diversion of profits from the UK and in raising tax yield both directly (through charging of DPT) and indirectly (driving behaviour change that leads to higher revenues of other taxes). While revenue from DPT itself has fallen away in recent years HMRC assess that it has led (as intended) to significant increases in revenue from corporation tax and VAT.

CIOT members we have spoken to share HMRC’s assessment that DPT has had a significant impact on the behaviour of multinational businesses and that a significant number have changed their arrangements because they considered themselves to be at risk of falling within the scope of DPT. This scope has been wider than expected. At the time DPT was introduced, it was dubbed ‘the Google tax’ and said to be aimed at a small group of aggressive tax avoiders. It has been used much more widely, effectively as a new framework for transfer pricing enquiries. HMRC no longer separate out additional corporation tax due to DPT-related behavioural change but the total figure for revenue from transfer pricing compliance activity in 2019-20 (the latest year available) is estimated to be £1.454 billion.

More of CIOT’s comments on these clauses and DPT as a whole can be found in:
Clause 27-28 Diverted Profits Tax (CIOT briefing)

Clauses 53-66 constitute the whole of Part 3 of the Bill. This puts 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.

Labour’s new clause 5 would put into law the Government’s commitment to undertake a review of the levy by the end of 2027, and require them to publish an assessment 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, and progress toward the register being established.

The SNP’s new clause 12 would require an assessment of the impact of the levy on the tax gap and on opportunities for tax avoidance, evasion and other economic crimes.

New clause 15 is tabled by a cross-party group of MPs, many of them associated with the All Party Parliamentary Group on Anti-Corruption and Responsible Tax (the lead sponsors are Dame Margaret Hodge (Labour) and Andrew Mitchell (Conservative), chair and co-chair of the group respectively). The new clause would require the Government to assess the effectiveness of the proposed levy rates and of levy rates twice and three times as high.

The CIOT and ATT strongly support the UK’s drive to combat money laundering and terrorist financing and recognise that funding is required to ensure that there can be an effective policy in place to reduce levels of financial crime. We support the exemption of small firms from the levy and the decision to make HMRC the collection authority.

We supervise some of our members for anti-money laundering purposes, but, despite frequent requests, we and they receive very little granular feedback on the impact their reports make. We believe better feedback and wider publicity around successes could help AML-regulated firms to see the value and importance of work in this area more clearly, keeping it at the forefront of their minds.

More of our comments on this measure can be found in our joint CIOT/ATT briefing on the levy:
Clause 53-66: Economic Crime (Anti-Money Laundering) Levy (joint ATT/CIOT briefing)

Clauses 84 to 90 contain measures to tackle promoters of tax avoidance. We support the government taking a robust approach to people who are still devising and promoting tax avoidance schemes and in general support the measures in these clauses, albeit we have a few concerns which we set out below, and in more detail in our briefing:
Clauses 84-90 Schedule 12: Tackling Tax Avoidance (CIOT briefing)

Clause 84 lets HMRC petition the courts to wind-up businesses promoting and facilitating tax avoidance. Currently HMRC can only take action against a promoter under insolvency legislation where there is a tax debt. This seems a reasonable proposal to us, although it is not an area which is normally dealt with by tax advisers so it is not one we would claim to be experts in.

Clause 85 will enable HMRC to publish information about schemes and promoters earlier on, helping taxpayers identify and steer clear of schemes. We support this measure though we do have a few concerns, including how wide the definition of ‘promoter’ is, what happens if someone is named by mistake and, crucially, how effective HMRC will be in reaching a wide audience. We’ve offered to work with them on ideas for the best way to get the information out to the public.

Labour’s new clause 7 would require the Government to review the impact of measures contained in clause 85 of the Bill, 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.

The SNP’s new clause 14 would require an assessment of the impact of the provisions of clause 85, and consideration of the impact of publishing a register of overseas property ownership.

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. Currently, HMRC can only apply for a freezing order in more limited situations such as where there is an enforceable tax debt.

Again we have no objections to this measure, though freezing orders are really the territory of lawyers rather than tax advisers so we are probably not the best placed to assess this measure.  We do wonder how effective it will be – what is the risk that a promoter will already have dissipated / hidden their assets?

Clause 90 and Schedule 12 introduce a new penalty on UK based entities who facilitate tax avoidance schemes involving non-resident promoters. The government is doing this to try to tackle the problem of offshore promoters operating in the UK via a network of UK based associates and collaborators.

We are aware of the problems being caused by promoters based offshore and support this measure. Given the size of the possible penalties, HMRC must publicise the measure as widely as possible so UK entities potentially affected are aware of it and can take appropriate lawful action to minimise their risk of a penalty (ie by disengaging from the activity concerned and/or severing ties with the offshore entity concerned).

In summary, we support the government’s robust approach to people who are still devising and promoting tax avoidance schemes. There are only 20 to 30 promoters still in the market according to HMRC, but they are proving remarkably hard to shut down. We wonder if a review is needed of how effective HMRC’s avoidance arsenal is? We recommend that a review of this avoidance legislation, and HMRC’s powers in relation to it, should take place in about three to five years’ time.

Clause 91 and schedule 13 relate to electronic sales suppression penalties. This is an anti-tax evasion measure. Electronic sales suppression (ESS) is where businesses manipulate electronic records of sales data to hide or reduce the value of individual transactions in order to evade tax. This clause and schedule introduce penalties for the possession, making, supplying or promotion of tools which facilitate ESS.

CIOT strongly supports HMRC’s efforts to deal with tax evasion, including ESS. However, it is not clear when HMRC will use this new power instead of existing criminal offences (which appear to us to already cover this ground). We are concerned that the UK’s tax code is becoming overloaded with the introduction of more and more legislation, particularly where it is not altogether clear why existing provisions are inadequate to deal with the problem identified. We therefore recommend that a formal review of this new legislation should take place in about two to three years’ time in order to measure its effectiveness, and that HMRC publish on an annual basis the number of times it is used.

Clause 92 is aimed at tackling evasion of tobacco duty. The Tobacco Track and Trace system was introduced in the UK in 2019, as part of an EU wide traceability system. This clause grants the power to make future regulations linked to the system and details the sanctions that can be included in those regulations.

The SNP’s new clause 13 would require an assessment of the impact of the provisions in clauses 84 to 92 on the tax gap.

Group Three - VAT

• Clauses 68 to 71 (value added tax)
• Clause 93 and Schedule 14 (free zones)

Commentary

The clauses in this group all relate to VAT and all are really a consequence of Brexit.

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 were still able to use the second-hand margin scheme to account for VAT for qualifying purchases from EU suppliers; however, they were technically unable to use the margin scheme for purchases from Great Britain, as it was outside of the EU which would mean that VAT was due based on the full sales price, rather than only the profit margin. However, a concession was granted and on 14 January 2021, HMRC published guidance allowing the continued use of the margin scheme limited to second hand motor vehicle purchases from GB suppliers from 1 January 2021.

Clause 68 introduces an interim scheme that permits second-hand car dealers in Northern Ireland to sell certain motor vehicles sourced in GB or Isle of Man (and removed to Northern Ireland) under the second-hand margin schemes. A more permanent scheme will be introduced at which time this scheme will come to an end.

Clause 69 enables the Treasury to make an order to introduce a VAT-related payment scheme. As the second-hand margin scheme no longer applies to goods that have been removed to Northern Ireland from GB, this arrangement will ensure that traders will remain in a comparable position to those that use the margin scheme in the rest of the UK. The measure also provides for the Treasury to include exports in the scheme.

Clause 70 disapplies the zero rate of VAT for goods exported from GB and for goods removed from GB to Northern Ireland where the goods are being sold under a second-hand margin scheme. This will ensure that traders will remain in a comparable position to those that use the margin scheme in the rest of the UK.

We think that clauses 68-70 achieve their objectives, subject to the content of future regulations. 

Clause 71 says false teeth can be imported from GB to Northern Ireland VAT free. There is already a VAT exemption for these supplies but this will extend it to imports. It is a response to the impact of the Northern Ireland Protocol which would means false teeth supplied from GB to Northern Ireland would otherwise be subject to VAT.

Again, we think that this legislation achieves its objectives and have no further comments.

Clause 93 and schedule 14 relate to the treatment of goods in free zones. A free zone is a secure customs site within a wider Freeport area. Regulations introduced in Oct 2021 provide for the zero-rating for VAT of certain supplies of goods and services in free zones. This clause put in place an ‘exit charge’ to ensure businesses don’t gain an unintended advantage from the zero rate.

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.

We will preview the public bill committee clauses ahead of the first sessions.

George Crozier, Head of External Relations, Chartered Institute of Taxation