Finance Bill passes Lords despite basis period concerns

Baroness Penn opened the second reading debate for the Government. A former Deputy Chief of Staff to Prime Minister Theresa May, Joanna (known as JoJo) Penn is a government whip and has taken over as the Government’s Treasury spokesperson in the House of Lords following the resignation of Lord Agnew.

Penn said that the UK’s economic situation has significantly improved in the past year, the labour market is performing ‘extremely well’ but she acknowledged risks from global supply chain disruption and high energy prices. Credit for the recovery must go to the vaccination programme, said the Baroness, but she played up the last Finance Bill as helping support business and families. The Government has provided support of £20 billion this financial year and next to help families with the cost of living. She worries that debt is still at a historically high level but said the fiscal outlook is improving.

Penn praised the super deduction and extension of the temporary £1 million limit of the AIA again until the end of March 2023 because ‘now is not the time to remove tax breaks on investment’. Measures in the Bill will help to protect ‘our unique culture and heritage’, by making our creative tax reliefs more generous. The cut in the bank levy means banks will continue to pay their fair share of tax, while maintaining the UK’s financial services competitiveness and safeguarding tax revenue, she continued.

On the increase of 1.25 per cent to dividends, the Baroness argued that the generous allowances mean that everyday investors will be ‘entirely unaffected’. On the new residential property developer tax, she said it forms part of the Government’s building safety package, aiming to bring an end to unsafe cladding.

The Bill contains measures that will help tackle economic crime, tax avoidance and tax evasion, all of which undermine efforts to strengthen the UK’s finances and build a stronger economy, she claimed.

Baroness Penn acknowledged that the ‘vast majority’ of tax advisers adhere to high professional standards and are an important source of support for taxpayers. Government action on the rest is working, she said, because the tax gap attributed to marketed tax avoidance has already steadily declined from its peak of £1.5 billion in 2005-06 to £0.5 billion in 2019-20. She said: “We have developed, through continued engagement and consultation with stakeholders, further powers to disrupt avoidance. Measures in this Finance Bill will reduce the scope for promoters to market tax avoidance schemes. They will allow HMRC to clamp down on these schemes by giving it the power to impose penalties on UK entities that enable offshore promoters, freeze promoters’ assets to ensure that penalties they are liable for are paid, and shut down promoters which continue to sidestep the rules.”

The Bill helps to deliver a simpler and more sustainable tax system; for example, by simplifying the rules around basis periods, said Penn, adding these reforms will remove double taxation faced by some businesses in their early years of trading and create a simpler tax environment for many small businesses.

Labour peer Lord Sikka, an unpaid senior adviser to the Tax Justice Network, complained that he has not heard of any big accounting firm that has been investigated, disciplined and fined after the courts declared that the tax-avoiding schemes that it marketed were unlawful. He also accused the Government of ‘fuelling the tax avoidance industry’ because the dividend rate and income tax rates are different and leaving HMRC with the futile task to go and chase down avoidance schemes. There is no difference between earned and unearned income because both augment somebody’s wealth and purchasing power, he argued.

Sikka also complained that little is known about the macroeconomic benefits of handing out vast numbers of tax reliefs. In particular he expressed his outrage that companies that claim video games tax relief get a ‘culturally British accreditation’ kitemark to claim the tax relief even though what they produce has nothing to do with ‘being British’: “The real truth is that this culturally British fig leaf was really designed to get around the EU Commission’s rules on state aid and, in reality, it is costing the taxpayer millions of pounds.”

Turning to R&D credits, Sikka said that for 2019-20, 85,900 claims were made for this tax relief. Some £7.4 billion of tax reliefs were claimed on expenditure of £47.5 billion. But the ONS says the UK’s total R&D spend is only £25.9 billion. No explanation has ever been provided by the Government of why these numbers differ and why foreign entities that have little or no economic link with the UK are able to claim these things, he said. “The tax reliefs are clearly being abused, yet there is no urgency from the Government to investigate.”

The Labour peer called on the Chancellor to publish a complete list of tax credits, what their tax cost is and what the abuses might be, at every Budget, and tell us whether the economic benefits that are claimed actually materialise. He also asked to see some reconciliation from the Government on the relationship between handing out corporate tax reliefs and the commitment to a global minimum tax rate of 15 per cent.

Lib Dem Lord Razzall questioned whether a NICs rise is a good idea when there is a cost-of-living squeeze in the UK, whether the Chancellor’s plan to reduce fuel bills will help hard-pressed families and whether the recent cut to universal credit was ‘fair, just and necessary’. He complained that the White Paper on ‘levelling up’ contains no details of costs, payments or how levelling up will be funded.

Razzall remarked that economic growth has come primarily from a one-off increase in public expenditure because of the pandemic, and the private sector has been ‘noticeably flat’. It remains the case that the OBR said last year that UK economy will be four per cent smaller each year because of Brexit, contrasted with only one per cent because of the pandemic.

Lord Bilimoria, a crossbench peer who is also the current President of the CBI, said the UK has a very fragile recovery. Bilimoria said a government should have low taxes but also fiscal discipline and dynamic regulation, when today ‘we have high spending, high taxes and low growth – a vicious cycle’. A lot of the reason UK is 11^th most competitive country in the OECD is to do with the ‘super deduction’, he said, asking whether the Government was happy that when this ends in April 2023 and corporation tax increases from 19 per cent to 25 per cent in one swoop, UK will fall to 31st place? The UK’s property tax is ‘eyewatering’, one of the highest in the OECD, and what is the point in a VAT relief when for the past two years, restaurants, pubs and hotels have been shut, he asked.

Bilimoria said he supports the CBI view that, when the super-deduction ends in March 2023, the Government should replace it with a permanent investment deduction – a 100 per cent tax deduction for capital spending. This could trigger a £40 billion a year boost for UK business investment, he claimed. He wants the apprenticeship levy to be more flexible to allow businesses, for example, to buy training modules and have greater flexibility in types of training. He complained that UK business rates are four times higher than those in Germany and three times higher than the OECD average. The UK invests just 1.7 per cent of GDP in innovation and R&D, compared with 3.2 per cent in Germany and 3.1 per cent in the USA.

Baroness Bennett of Manor Castle, a Green Party peer, asked why the logic of former Prime Minister Margaret Thatcher, who introduced the first windfall tax on the banks whose profits had leapt by economic accident following a rise in interest rates, is considered different to today’s situation with oil and gas. Bennett opined that investment in the North Sea contributes very little to the UK’s energy security. Conversely, if we, say, had that windfall tax and spent it on a massive programme of energy-efficiency measures, particularly for private homes, which is something that could not be exported, it could not be lost and could be directed towards the poorest in society.

Bennett said she was disappointed at the failure of efforts in the Commons to introduce reports on the progress of establishing a register of overseas beneficial owners of UK property and a review of HMRC’s publication of tax avoidance schemes. She complained about the lack of information given to MPs to accompany the health and social care levy (HSCL).

Lord Butler of Brockwell, a former senior civil servant who sits in the Lords as a crossbencher, drew on his experience as a member of the House of Lords Finance Bill Sub-Committee to raise concerns relating to basis period reform and uncertain tax treatment. He said that given their complexity for both HMRC and taxpayers both measures did not seem properly thought through. Their introduction was not given sufficient time, he said, which has led to both sets of proposals being postponed for a year. Even now doubts remain about their practicability and the resources needed to successfully implement them, he suggested.

Some of these proposals could have been surfaced with more notice and been subject to earlier consultation, the former Cabinet Secretary said. “The resources of HMRC are already under great pressure and these reforms will add to that pressure, at least in the short term. They will also add costs to the taxpayers affected by them. There is a question mark over whether the return in terms of extra revenue will be worth the resources devoted to them.”

Following a short break for a statement and responses on the situation in Ukraine, the three frontbench speakers made their wind-up speeches.

The first of these was from Baroness Kramer, for the Lib Dems. She contrasted the NICs rise on working people with the Governor of the Bank of England discouraging workers from asking for pay rises to get a grip of inflation, and with the cut in the bank levy when banks are reporting good profits and paying bonuses to staff.

Referring to measures in the National Insurance Contributions Bill, Kramer said freeports are a lure for criminal activity and money laundering because the normal disclosures which are made through customs and tax are not available. The Lib Dem spokesperson wants the Government to ask freeports to have registers of beneficial ownership and make those public. She also lamented that provisions to make a public register of the beneficial ownership of property in the UK, ‘which has been promised over and over’ have not been included in this Bill.

On basis period reform, Kramer – who like Lord Butler sat on the Finance Bill Sub-Committee – complained of a flawed consultation, rushed proposals, and the fact that a compelling case was not made that this was either simplification or a prerequisite for Making Tax Digital. On the related risk of overlap relief, she urged HMRC to help companies by locating or reconstructing data that it holds, which the companies may have lost. The Baroness said she is most concerned about the permanent impact of requiring a sizeable number of companies in the UK to use a tax year end that makes no sense for their business cycle. “I just do not understand why… when technology would allow us to deal easily with variable tax year ends, the Government have made the decision to push everybody into this very narrow 31 March to 5 April band… The only thing I can think is that they hope through these various measures to up-front a whole series of tax payments because of that transitional year to give them a buffer ahead of the next election.”

Kramer also questioned the worth of the uncertain tax treatments policy, speculating that the companies that intend to take risks will make ‘very little effort and will probably get away with it’.

The Baroness also called for improvements to the CEST tool for IR35 and for significantly increasing the small business employment allowance to help with staff retention.

Lord Tunnicliffe, Labour’s spokesperson, praised Lord Butler for presenting the work of the Finance Bill Sub-Committee: “While the sub-committee’s report focused on just two measures in the Bill, its observations were all too familiar: this is a Government who rush ahead, irrespective of evidence base and without regard to reputational impact.” He suggested the Sub-Committee’s work “creates an almost democratic dilemma. An enormous amount of effort goes into the presentation of these reports, and the depth they go into is really powerful, yet it has so little impact on what actually happens.” Somehow or other, we must find a way of engaging these talents, he argued.

Turning to broader issues, Tunnicliffe said the Bill does nothing to make the tax system fairer, it facilitates tax reliefs for ‘experimental’ freeports and lowers the banking surcharge as the tax burden is due to hit its highest level in 70 years. The hit to family finances comes alongside inflation that has hit 5.5 per cent. He welcomed the economic crime levy but remarked that monitoring and enforcement agencies have been warning central government for years that they are being outrun and outwitted by criminal gangs.

On energy prices, the peer said the Chancellor has offered only “a glorified buy now, pay later scheme”. Why has he not imposed a windfall tax on the very energy companies which have recently announced billions in profits, share buybacks and dividend payment, he asked.

In conclusion, the Labour spokesperson said his party do not see the Bill as credible. “It is yet another example of the Government’s failure to adequately address the cost of living crisis, economic crime and other pressing issues. It increasingly feels like the Chancellor is simply going through the motions, rather than steering the economy in the right direction.”

Responding to the debate, Baroness Penn told Lord Sikka that the Bill increases dividend tax rates for all bands to ensure that those with dividend income contribute to the health and social care spending settlement, as well as those with earned income. She added that dividend income is paid out of corporate profits, which are usually also subject to corporation tax. On video games relief, she said this is available only to productions that pass the British cultural test. The production is considered against a range of criteria and not just where it is set but where it is made, and the nationality of the personnel involved in making it. She also told him that an external evaluation of the video games tax relief was published in 2017, and a review of film and TV reliefs is currently under way.

On the health and social care levy, the government spokesperson argued that the highest earning 15 per cent will pay over half the revenues and 6.1 million people earning less than the primary threshold and lower profits limit will not pay the levy. The levy also applies to businesses: ‘as those businesses benefit from having a healthy workforce, it is only fair that they contribute’.

On calls for a windfall tax on energy companies, the Baroness said the UK Government do place additional taxes on the extraction of oil and gas. Indeed, the headline tax rate charged on the profits from UK oil and gas production at 40 per cent is currently more than double that charged on company profits in most other areas of the economy, she said.

The Government has delayed basis period reform in response to consultation feedback, giving businesses and accountants more time to prepare, said Penn. She added that the transition to the new tax year basis needs to take place before Making Tax Digital is introduced, to avoid ‘hard-coding complexity’ into the new Making Tax Digital systems. She said the spending review process had considered demands on HMRC, including on both customer service and policy development, to arrive at an agreed spending settlement “that ensures that HMRC has sufficient resources and capacity to deliver its commitments and service levels.”

The combination of the corporation tax increase and the new bank surcharge rate means that banks will have a higher rate of tax under the new regime than currently, she explained.

The Bill was not opposed and passed its second reading. As is conventional it passed through its remaining stages without debate, was read a third time and passed. It now awaits Royal Assent

The transcript is available here.

National Insurance Contributions Bill – Third Reading

Before the Finance Bill debate peers briefly debated the National Insurance Contributions Bill at third reading. With no amendments tabled at this stage this consisted primarily of a brief recap of the main measures in the Bill from government whip Viscount Younger, and thanks from all three frontbenchers to those who had supported them on the Bill.

Both Lord Tunnicliffe, for Labour, and Baroness Kramer, for the Lib Dems, drew attention to the amendments to the Bill passed by the Lords at report stage. Some of these (changes to the use of delegated powers) were made by the Government in response to peers’ concerns, but two were made despite government opposition.

Kramer described these two amendments as “actually rather important. One was on veterans. I hope that it will be well received when it heads back to the Commons. Our amendment, on a public—rather than non-public—register of beneficial ownership of businesses in the free ports, could hardly be more pertinent today, as we look to bring in economic sanctions against henchmen of Putin. Once again, the Prime Minister has talked very publicly about the importance of the public nature of registers, so it would have been sad not to ensure that this register started life in that way. So I hope that that amendment, too, will be very warmly received by the Commons.”

Tunnicliffe also expressed hope that the Government would accept the amendments and, as a consequence, that the Lords ‘see this Bill no more’.

The House of Commons will debate the Lords amendments to the NICs Bill on 1 March.

By Hamant Verma, CIOT Senior External Relations Officer