PARLIAMENTARY DEBATES HOUSE OF COMMONS OFFICIAL REPORT GENERAL COMMITTEES

Public Bill Committee

FINANCE BILL

(Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, and certain new clauses and new schedules) Eleventh Sitting Tuesday 10 June 2014 (Afternoon)

CONTENTS Programme order amended. CLAUSES 90 to 93 agreed to. SCHEDULE 16 agreed to. CLAUSES 94 and 95 agreed to. SCHEDULE 17 agreed to. CLAUSES 96 to 100 agreed to. SCHEDULE 18 agreed to. CLAUSES 101 to 106 agreed to. SCHEDULE 19 agreed to. CLAUSES 107 and 108 agreed to. SCHEDULE 20 agreed to. CLAUSES 109 and 110 agreed to. SCHEDULE 21 agreed to. CLAUSES 111 and 113 agreed to. SCHEDULE 22 agreed to. CLAUSES 114 to 117 agreed to. Adjourned till Thursday 12 June at Two o’clock. Written evidence reported to the House.

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The Committee consisted of the following Members:

Chairs: MARTIN CATON,†MR GARY STREETER

Burt, Lorely (Solihull) (LD) † Mahmood, Shabana (Birmingham, Ladywood) † Dakin, Nic (Scunthorpe) (Lab) (Lab) † Dinenage, Caroline (Gosport) (Con) † McKenzie, Mr Iain (Inverclyde) (Lab) † Duddridge, James (Rochford and Southend East) † McKinnell, Catherine (Newcastle upon Tyne North) (Con) (Lab) † Elphicke, Charlie (Dover) (Con) † Mearns, Ian (Gateshead) (Lab) † Evans, Chris (Islwyn) (Lab/Co-op) † Menzies, Mark (Fylde) (Con) † Fuller, Richard (Bedford) (Con) † Morgan, Nicky (Financial Secretary to the Treasury) † Garnier, Mark (Wyre Forest) (Con) † Pearce, Teresa (Erith and Thamesmead) (Lab) † Gauke, Mr David (Exchequer Secretary to the † Pincher, Christopher (Tamworth) (Con) (Hastings and Rye) Treasury) † Rudd, Amber (Con) † Rutley, David (Macclesfield) (Con) † Gilmore, Sheila (Edinburgh East) (Lab) Shelbrooke, Alec (Elmet and Rothwell) (Con) † Glindon, Mrs Mary (North Tyneside) (Lab) † Smith, Henry (Crawley) (Con) † Hames, Duncan (Chippenham) (LD) † Swales, Ian (Redcar) (LD) † Heaton-Harris, Chris (Daventry) (Con) Vaz, Valerie (Walsall South) (Lab) † Jamieson, Cathy (Kilmarnock and Loudoun) (Lab/ † Wheeler, Heather (South Derbyshire) (Con) Co-op) † Williamson, Chris (Derby North) (Lab) † Kane, Mike (Wythenshawe and Sale East) (Lab) Wilson, Sammy (East Antrim) (DUP) † Kwarteng, Kwasi (Spelthorne) (Con) † Leadsom, Andrea (Economic Secretary to the Matthew Hamlyn, Kate Emms, Committee Clerks Treasury) † Leslie, Chris (Nottingham East) (Lab/Co-op) † attended the Committee 379 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 380

The Financial Secretary to the Treasury (Nicky Morgan): Public Bill Committee It is a pleasure to serve under your chairmanship, Mr Streeter. We have had an interesting debate on this Tuesday 10 June 2014 grouping, and I thank all hon. Members for their contributions. (Afternoon) Clauses 90 to 93 and schedule 16 make changes to the main rates and carbon price support rates of the climate [MR GARY STREETER in the Chair] change levy. They provide for exemptions from the levy for energy used in metallurgical and mineralogical processes. Finance Bill The climate change levy is designed to encourage the efficient use of energy and to reduce emissions by (Except clauses 1, 5 to 7, 11, 72 to 74 and 112, schedule 1, creating an incentive to use less energy and to source and certain new clauses and new schedules) electricity from renewable sources. Clause 90 increases the main rates of the levy in line with the retail prices 2pm index from 1 April 2015, as has been standard practice Amber Rudd (Hastings and Rye) (Con): I beg to since 2007. The new rates will apply to supplies of move, That the Order of the Committee of 29 April be taxable commodities made to business and the public amended as follows: sector on or after that date. That will ensure that the main rates of levy remain constant in real terms and ‘In paragraph (1) (g), leave out the words “11.30 a.m. and”.’ that the levy maintains its environmental impact by The motion will cancel the Committee’s planned encouraging businesses to reduce their energy use. sitting on the morning of Thursday 12 June, although Consistent with previous increases, the rates are being we will still meet at 2 pm on that day. announced a year before they come into effect to enable Question put and agreed to. business to prepare and to give time for energy suppliers to get their billing systems ready. Clause 90 On clause 91, the carbon price floor that came into effect on 1 April 2013 has two components: the market CLIMATE CHANGE LEVY: MAIN RATES FOR 2015-16 price for carbon under the EU emissions trading system; Question (this day) again proposed, That the clause and a UK-only element, which is the carbon price stand part of the Bill. support rate per tonne of carbon dioxide. Legislation sets out the carbon price support rates for the individual The Chair: I remind the Committee that with this we taxable commodities and, to provide certainty, those are discussing the following: rates are announced two years in advance. Clause 91 stand part. An ambiguity in published data affected the calculation Amendment 25, in clause 92, page 84, line 16, at end of the solid fossil fuel rates included in the Finance Act insert— 2013. The clause corrects the carbon price support rates ‘(3) The section shall not come into force except as specified in of climate change levy for coal and other solid fuels for subsection (2) below. 2014-15 and 2015-16 to ensure that they are consistent (1) The Chancellor of the Exchequer shall bring the section with how the rates for other commodities have been set. into force by order within six months of the passing of this Act. As I go through the clauses, I will try to answer the (2) A statutory instrument containing an order under questions asked by the hon. Member for Newcastle subsection (3) shall be accompanied by a report which details— upon Tyne North. On the error in the calculation, (a) the impact of the provisions in the section on carbon price support rates per taxable commodity are consumers and on fuel poverty; calculated by applying the carbon emission factor for (b) the impact of the provisions in the section on each commodity to the underlying rate per tonne of energy-intensive industries and on employment in carbon. In the case of solid fossil fuels, the carbon price those industries; support rate of the climate change levy is set in pounds (c) the level of carbon leakage in the energy-intensive per gigajoule of energy content. The previous legislated industry as a result of the provisions in this section; rates were calculated using Department of Energy and (d) the effect of the provisions in the section on investment in new renewable power generation and on Climate Change data on the calorific value of coal used investment in new nuclear power generation; in power stations and Department for Environment, (e) any effective subsidy provided to, or additional profits Food and Rural Affairs data on carbon dioxide released accruing to, operators of existing and new nuclear from coal used in electricity generation. power stations as a result of the provisions in the Unfortunately, the ambiguity in the published data section; affected the calculation of the solid fossil fuel rates in (f) what additional package of measures will be enacted to the 2013 Act. The calorific value of coal burned by mitigate the impact of the section on energy-intensive generators was found to reflect the energy content of industries; only UK-produced coal, but imported coal is consumed (g) the impact on business investment of— in UK power stations, and that often has a higher (i) changes to Schedule 6 to the Finance Act 2000 calorific content per tonne than UK coal, and therefore made by Finance Act 2011; a lower carbon emission factor per gigajoule. As a (ii) changes to Schedule 6 to the Finance Act 2000 result, the carbon price support rates for the two years I made by this Act.” mentioned were set too high, resulting in coal-fired Clauses 92 and 93 stand part. power stations being taxed more per tonne of carbon That schedule 16 be the Sixteenth schedule to the emitted than other forms of electricity generation, which Bill. was contrary to the Government’s intention. I stress 381 Public Bill Committee10 JUNE 2014 Finance Bill 382 that the methodology is sound and has not been altered price support rates will reduce electricity bills for all as a result of identifying the ambiguity. The ambiguity businesses. By 2018-19, businesses will have saved around in the published data has now been corrected by officials. £4 billion, and a typical uncompensated energy-intensive The hon. Lady asked about the amendment of the firm will save around £800,000 in 2018-19. In 2018-19, rate. The error was not identified in time to correct the capping the carbon price floor should take £15 off the rate for 2013-14, and the Government do not intend to average household bill, which will be in addition to the amend it retrospectively, because generators sold their £50 on average that the Government have saved for output in 2013-14 at prices reflecting the tax rate that households through the changes they announced at the was then in force, so any rebate would effectively constitute autumn statement. That demonstrates that the Government a straight windfall to the generators. continue to take decisive action to reduce people’s energy bills. That is on top of other measures announced at The Committee will be aware that the Government Budget 2014 to help to reduce businesses’ electricity announced in the Budget their intention to cap the bills, including the introduction of compensation to carbon price support rate per tonne of carbon dioxide electricity-intensive industries for the costs of the renewables at a maximum of £18 from 2016-17 until 2019-20. obligation and feed-in tariffs in 2016-17, and the extension Clause 92 achieves that by setting carbon price support of compensation for the costs of the carbon price floor rates for individual taxable commodities with effect until the end of the decade. That is why the CBI said from 1 April 2016. Effective carbon pricing, including that the Budget through the carbon price floor, remains an important part of the Government’s energy policy. Establishing a “will put wind in the sails of business investment, especially for minimum carbon price sends a credible signal to help to manufacturers.” drive billions of pounds of investment in low-carbon This is all without compromising the Government’s electricity generation. Investment in the energy market commitment to developing renewable energy. The will help to ensure that the UK meets its legally binding established levy control framework arrangements and carbon dioxide emissions reduction targets and to safeguard budget provide the flexibility to achieve the investment the country’s long-term energy security. in growth that is needed to tackle climate change and However, as we heard from my hon. Friend the meet the Government’s renewable energy target. Member for Redcar, ensuring that UK industry remains I can therefore reassure Labour Members that their competitive in the world is a priority, and the Government amendment is not necessary. The Budget’s energy package acknowledge that rising energy costs are a key issue for clearly shows that the Government are taking decisive many businesses. The failure of the EU to agree to action to mitigate the impact of energy policies on substantial reform of the emissions trading system has households and businesses. Furthermore, the Government meant that the European carbon price has remained far keep all tax policy under review, with Her Majesty’s lower than previously expected. Without action on the Revenue and Customs and HM Treasury routinely carbon price floor, the drop in the price of carbon will monitoring the impact of such changes. The review mean that, in a few years, British firms will be at an under the amendment would start six months after the unacceptable competitive disadvantage compared with Bill received Royal Assent, but clause 92 does not come their competitors in the EU. In 2018-19, the Government into effect until 18 months later, so the amendment forecast a European carbon price of around £6 which, would provide a review of something that had not come under the carbon price floor trajectory, would see the into effect. Capping the carbon price support rate at Government setting a UK-only carbon tax of around £18 per tonne of CO2 from 2016-17 to the end of the £30 per tonne of carbon dioxide for that year. The decade will limit any competitive disadvantage that Government are therefore limiting the disparity with British companies face in the global race and save the EU on carbon prices by capping the carbon price billions of pounds for British industry. support rate per tonne of carbon dioxide at £18 from The hon. Member for Newcastle upon Tyne North 2016-17 to the end of the decade. asked about the price of carbon under the EU ETS in 2020. It is not expected to be much higher than at Nic Dakin (Scunthorpe) (Lab): Why not introduce present—about ¤5—but in 2013, the price of carbon the cap a year earlier and therefore bring more timely was predicted to be ¤70, which shows the differential relief to those industries that are challenged? between what was expected to happen and what has actually happened. On the relationship and the discussions that we are having about the ETS scheme, the UK Nicky Morgan: My understanding is that, because supports the cancellation of surplus allowances within the rates are set two years in advance, unfortunately this the EU ETS to raise the ETS price, and our negotiations is not as easy as just changing the rate, as people have in Europe to achieve that are ongoing. started pricing and purchasing energy on the basis of The hon. Member for Scunthorpe asked about the the rate set two years ago. Though such a change might carbon price floor compensation, when it would start seem easy to us as politicians, the process is more and whether it would be backdated. The UK received complicated for those companies in the sector. state aid clearance for the CPF compensation scheme at The £18 cap will be achieved by setting in clause 92 the end of May. We are finalising the administration of the carbon price support rates of climate change levy the scheme and will begin making payments as soon as for gas, solid fuels and liquefied petroleum gas from 1 possible. I am sure that he will chase me if that does not April 2016. happen for the companies in his constituency. The UK The Opposition’s amendment 25 would require the is still considering the feasibility of pursuing backdating Chancellor of the Exchequer, six months after the passing in light of the newly published Commission energy and of the Bill, to publish a report detailing the impact of environment aid guidelines. Compensation is being paid clause 92. I am pleased to say that capping the carbon for the EU ETS as well. 383 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 384

[Nicky Morgan] and schedule to the Committee, and ask the hon. Member for Newcastle upon Tyne North not to press amendment 25 The hon. Member for Newcastle upon Tyne North to a Division. asked about what estimate has been made of the impact Question put and agreed to. of the carbon price floor on fuel poverty. I do not have Clause 90 accordingly ordered to stand part of the Bill. the answers to hand, so I will have to write to her about that, but it was a good question to ask. Clause 91 ordered to stand part of the Bill. Clause 93 introduces schedule 16, which provides for exemptions from the climate change levy for energy Clause 92 used in metallurgical and mineralogical processes. The exemptions came into force on 1 April 2014 under a CLIMATE CHANGE LEVY: CARBON PRICE SUPPORT RATES resolution passed by the House at the end of the Budget FOR 2016-17 debate. To ensure that the benefit of the measure is Amendment proposed: 25, in clause 92, page 84, line 16, at widely felt and to avoid potential state aid problems end insert— that could result from selectivity, energy used by all ‘(3) The section shall not come into force except as specified in mineralogical and metallurgical businesses qualifies for subsection (2) below. the exemptions. (1) The Chancellor of the Exchequer shall bring the section In the 2013 Budget, the Chancellor announced that into force by order within six months of the passing of this Act. the Government would introduce new exemptions for (2) A statutory instrument containing an order under energy used in metallurgical and mineralogical processes. subsection (3) shall be accompanied by a report which details— Exemptions for those purposes are permitted under the (a) the impact of the provisions in the section on energy taxation directive and have long been in place in consumers and on fuel poverty; some other member states giving full relief rather than (b) the impact of the provisions in the section on the partial relief available to those processes under the energy-intensive industries and on employment in climate change agreement scheme. Since that announcement those industries; was made, officials have worked closely with trade (c) the level of carbon leakage in the energy-intensive bodies on the design of the exemptions. As a result of industry as a result of the provisions in this section; that consultation, the Government announced in the (d) the effect of the provisions in the section on investment 2014 Budget that they would allow businesses that in new renewable power generation and on benefit from the exemptions to retain climate change investment in new nuclear power generation; agreements, which will ensure that businesses undertaking (e) any effective subsidy provided to, or additional profits mineralogical and metallurgical processes will be able accruing to, operators of existing and new nuclear to benefit from reduced climate change levy rates on power stations as a result of the provisions in the any energy they use that does not qualify for the new section; exemptions, rather than paying the climate change levy (f) what additional package of measures will be enacted to at the full rates on that energy. In addition, legislation mitigate the impact of the section on energy-intensive has been amended to ensure that businesses that opt to industries; terminate their climate change agreements do not become (g) the impact on business investment of— subject to the carbon reduction commitment energy (i) changes to Schedule 6 to the Finance Act 2000 efficiency scheme. The new exemptions will support made by Finance Act 2011; UK manufacturing by reducing the burden of energy (ii) changes to Schedule 6 to the Finance Act 2000 taxation on some of the most highly energy-intensive made by this Act.”—(Catherine McKinnell.) processes and helping such businesses to remain competitive Question put, That the amendment be made. with their counterparts in the EU and further abroad. The Committee divided: Ayes 12, Noes 17. The hon. Lady asked about other member states’ exemption of energy used in these processes. Member Division No. 8] states such as France and Germany that have a comparable AYES industrial base have similar exemptions in their energy taxation systems. She asked why the Government were Dakin, Nic McKenzie, Mr Iain introducing the exemptions now. When the European Evans, Chris McKinnell, Catherine Commission declined in 2011 to renew the state aid Gilmore, Sheila Mahmood, Shabana approval for full exemption from the climate change Glindon, Mrs Mary Mearns, Ian Jamieson, Cathy Pearce, Teresa levy for energy used in metal recycling processes—the Kane, Mike Williamson, Chris Commission would agree only to a lower rate—the Government decided to review the whole climate change levy treatment in that area. Following representations NOES from other energy-intensive industries, it decided to Dinenage, Caroline Menzies, Mark extend the review beyond metal recycling. Duddridge, James Morgan, rh Nicky Elphicke, Charlie Pincher, Christopher Commercial energy prices have increased markedly Fuller, Richard Rudd, Amber since the climate change levy was introduced, putting Gauke, Mr David greater financial pressure on highly energy-intensive Hames, Duncan Rutley, David sectors. The Government believe that the time has come Heaton-Harris, Chris Smith, Henry to align our treatment of those industries with that of Kwarteng, Kwasi Swales, Ian competitors in other member states. Leadsom, Andrea Wheeler, Heather I hope that I have explained the clauses and addressed the points that have been raised. I commend the clauses Question accordingly negatived. 385 Public Bill Committee10 JUNE 2014 Finance Bill 386

2.15 pm Finally, following industry engagement to address Clauses 92 and 93 ordered to stand part of the Bill. compliance, Budget 2014 announced that the Government would introduce a “loss on ignition” testing regime on Schedule 16 agreed to. fines—the residual waste from waste processing—from waste transfer stations by April 2015. The Budget document Clause 94 announced: “Only fines below a 10 per cent threshold would be considered eligible for the lower rate,” RATES OF LANDFILL TAX and that full proposals would be consulted on later this Question proposed, That the clause stand part of the year. Bill. I would be grateful if the Minister could elaborate on those points. Can he set out even a ballpark figure for Catherine McKinnell (Newcastle upon Tyne North) the landfill tax rates that the Government are considering? (Lab): It is a pleasure to serve under your chairmanship, The Government have already committed to inflationary Mr Streeter. increases in landfill tax rates up to 2019, so are they Clause 94 provides for rates of landfill tax to be considering options over and above those that have uprated in line with inflation. The standard rate of been set out? Are they considering above-inflation increases landfill tax from 1 April 2014 is £80 per tonne, while the in landfill tax rates, for instance, or are they instead lower rate, applying to less-polluting qualifying waste, looking at different rates of tax for different types of is £2.50 per tonne. When the tax was first introduced, waste disposal? These points seem to be unclear at the standard rate was £7 and the lower rate was £2. present and any degree of certainty that the Minister However, following concerns about the limited can provide now would, I am sure, be helpful to the environmental impact that the new tax was having, the industry and the Committee today. standard rate of the tax has been increased consistently since 1999. In 1999, the last Labour Government committed to The Exchequer Secretary to the Treasury (Mr David increasing the rate of the tax by at least £1 per tonne Gauke): It is a great pleasure to serve under your each year. The duty escalator was increased to £3 per chairmanship once again, Mr Streeter, and to respond tonne in 2005 and £8 per tonne in 2007. In the 2009 briefly to our debate on clause 94, which, as we have pre-Budget report, the Government stated that that heard, increases the standard rate of landfill tax from would continue until at least 2013—a policy that the £80 per tonne to £82.60 per tonne, and the lower rate coalition Government have continued to commit to, from £2.50 per tonne to £2.60 per tonne. Both rates take including in this year’s Finance Bill. Indeed, the Budget effect from 1 April 2015. confirmed that landfill tax rates will continue to rise by The landfill tax has been immensely successful in RPI, rounded to the nearest 5p, beyond 2015. reducing the amount of waste sent to landfill. The hon. According to a House of Commons Library note Lady set out the numbers she had from, I think, a 2009 from 2009, the proportion of waste sent to landfill from Library note. I can tell her that since the introduction of the introduction of the tax up to 2009 fell by around a the tax, the amount of waste sent to landfill has more third, and that was accompanied by a similar increase in than halved and recycling rates have increased threefold. recycling. I am interested to hear whether the Minister I am happy to write to her with more detailed numbers could provide the Committee with more recent figures if that would be of assistance, but I hope that those on waste sent to landfill, as well as levels of recycling, to numbers give an indication that the trend that was update those outlined in the Library note from 2009. clearly in place in 2009 has continued. Budget 2014 announced changes to the landfill If waste is not sent to landfill, it goes to alternative, communities fund—the tax credit scheme that enables more sustainable waste management practices, such as operators of landfill sites to contribute money to recycling. As I have said, there have been significant organisations advocating projects that create significant increases in recycling, with a threefold increase. The environmental benefits and jobs and that improve the Government have recognised the importance of providing lives of communities living near landfill sites. The Budget tax certainty, so that industry has the confidence to outlined the changes as follows: invest in alternative waste management processes. The June Budget in 2010 confirmed that the standard rate of “The value of the landfill communities fund for 2014-15 will be reduced to £71 million...This reduction takes account of progress landfill tax would increase by £8 per tonne each year that environmental bodies have made to address the government’s until 2014. The Government also confirmed that the challenge to reduce unspent funds.” rate would not fall below £80 per tonne between 2014 Can the Minister elaborate any further on that reduction? and 2020. I have a personal interest in hearing her views, as I have The pre-announced standard rate increases enjoyed seen first hand the benefit that this fund has had in my the support of business groups, including the CBI and constituency. Last year, for example, I opened a newly the Environmental Services Association, which regarded refurbished tennis facility in Gosforth garden village—a the escalator as providing certainty for long-term investment village that was originally built for railway workers in decisions. The clause provides further certainty for future the 1920s. The new facilities were 90% funded by the standard and lower rates by confirming that they will landfill communities fund and make a tremendous not be eroded by inflation in future years. That means contribution to local sporting facilities. Turning back to that businesses can have the confidence to invest in new the Budget, as a result of the reduction in the fund, the waste treatment facilities, safe in the knowledge that it Chancellor also announced that the saving would be will not suddenly become cheaper in the near future for used to tackle waste crime. waste to be sent to landfill again. The rates will both rise 387 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 388

[Mr David Gauke] any of the new provisions? Conversely, what will the penalty be for those who fail to make a required declaration with RPI in 2015-16, rounded to the nearest 5p. That under the new regulations, in addition to paying any means that the lower rate will be £2.60 and the standard duty due? As the tax information and impact note rate will be £82.60. helpfully explains, schedule 17 amends section 1(4) of The increase in landfill tax will affect businesses and the Customs and Excise Management Act 1979 to local authorities that send waste to landfill. By managing provide that goods for sale to persons carried on a ship waste more sustainably and reducing the amount of or aircraft will be treated as stores if they are to be sold waste they send to landfill, businesses and local authorities by retail in the course of a journey made by the ship or will be able to reduce their landfill tax liability. I know aircraft, but the measure omits a reference to “relevant that some in the industry were looking for the Budget to journey,” as under section 1(4) of CEMA, and instead give similar certainty to that delivered through the provides that eligible journeys will be specified or defined standard rate escalator, but I believe it is crucial to by regulation. Will the Minister clarify how the change establish a level playing field in the industry before any will work in practice? further decisions are taken on rates over the longer term. The success of this tax has offered a small minority Mr Gauke: Clause 95 and schedule 17 will support of unscrupulous individuals an incentive to try to make the growth of the shipping and aircraft industries by a quick buck by avoiding the tax or mis-describing enabling them to simplify procedures and streamline material. The Government will work with the industry operations, thereby reducing burdens. The changes will to address compliance issues. A consultation document provide flexibility to facilitate trade practices and increase will be published later this year. For the reasons I have controls on areas of revenue risk, which will enable outlined, there is nothing more I can say in response to HMRC and Border Force to work with the industry to the hon. Lady’s question on future rates. improve compliance and is in line with our wider On the landfill communities fund, the Government commitment to bring customs and excise law up to date have always been clear that overall progress to meet the to protect customs and excise revenues. challenge will inform the fund’s future value. Although It may be helpful to provide a little background to a large number of environmental bodies have addressed this discrete area of law. In August 2011, HMRC issued the challenge, others have not, with a small number now a consultative document entitled “Modernising Customs holding more unspent funds than at the start of the and Excise Law”, which highlighted a need to bring challenge. The size of the reduction balances the excellent customs and excise law up to date to protect revenues, efforts that many environmental bodies have made to reduce the tax gap and better reflect modern trade address the challenge against the progress of the challenge practices. HMRC announced that it was the intention as a whole. Crucially, the saving is going back to help to reassess the requirements and legislation currently local communities by addressing concerns raised by the used to control ships and aircraft duty-free stores to industry about waste crime. Combating waste crime fits include compliance in this area. with the spirit of the LCF, which is designed to address some of the environmental disadvantages of living in 2.30pm the vicinity of a landfill site. DEFRA advises that 80% of illegal sites in England are within 5 km of a legitimate The measure will provide that goods for sale to landfill site. persons carried on a ship or aircraft will be treated as stores if they are sold by retail in the course of the Clause 94 increases the rate of landfill tax by inflation, journey made by the ship or aircraft. It will clarify that as announced at Budget 2014. As I have set out, the surplus stores can remain on board the ship or aircraft clause not only helps the Government towards their without payment of duty. The journeys on which stores goal of creating a zero-waste economy, but provides can be shipped or carried without payment of duty will certainty so that businesses and local authorities can be specified in regulations, enabling trade and HMRC plan their future waste disposal. I therefore hope that to respond quickly and flexibly to changes in business the clause will stand part of the Bill. requirements. The power to make regulations will come Question put and agreed to. into force on the date that the Finance Bill 2014 receives Clause 94 accordingly ordered to stand part of the Bill. Royal Assent. The changes made are expected to have a negligible Clause 95 impact on most businesses. The cruise ship and airline industry will benefit from the introduction of procedures GOODS CARRIED AS STORES to account for duty retrospectively on stores consumed Question proposed, That the clause stand part of the in port or on an intra-UK flight. Penalties will affect Bill. only individuals and businesses that contravene a provision of the regulations, fail to make a return or do not pay Catherine McKinnell: Clause 95 clarifies the law by the required amount of duty due. All penalties are introducing schedule 17, which makes provisions for the subject to reasonable excuse and mitigation consideration. treatment of goods carried onboard as part of a ship or In the majority of cases, a penalty notice will not be aircraft’s stores. Put simply, the measure addresses legislation issued without the trader first having had a warning and regulations concerning the storage and sale of letter. duty-free goods. New regulations for an authorisation procedure to I have a couple of queries for the Minister. The clause control goods moving from warehouses to be shipped provides for penalties in certain circumstances, but will as stores will impose some new requirements, but this he clarify exactly what those penalties will entail? What, will impact on a small number of specific businesses for example, will the penalty be for those who contravene and, as I said earlier, the introduction of penalties will 389 Public Bill Committee10 JUNE 2014 Finance Bill 390 not affect compliant businesses. “Relevant journey” will The schedule sets the maximum penalty for the be defined in regulations, which will allow the flexibility contravention of a customs provision at either £1,000 or to respond to changing commercial practices to facilitate £2,500. There are no fixed penalties. The minimum trade. We believe that is a pragmatic response. With penalty is £250, which will be the first penalty in all but those remarks and clarifications, I hope that the clause the most serious cases. Penalties for subsequent and schedule will stand part of the Bill. contraventions will be issued in progressively larger Question put and agreed to. amounts until the maximum is reached. The normal Clause 95 accordingly ordered to stand part of the Bill. progression will be £250, £500 and £1,000, with additional steps of £2,000 and £2,500 for the higher maximum. All Schedule 17 agreed to. penalties, including the minimum £250, will be subject to reasonable excuse and mitigation consideration. In Clause 96 the majority of cases a penalty notice will not be issued without the trader first having had a warning letter. PENALTIES UNDER SECTION 26 OF FA 2003: I hope that information on penalties helps the Committee, EXTENSION TO EXCISE DUTY and I hope I have been able to set out how the penalty Question proposed, That the clause stand part of the fits within the wider set of sanctions that are available. I Bill. hope the clause stands part of the Bill. Question put and agreed to. Catherine McKinnell: Clause 96 relates to the applicable penalties in respect of undeclared goods imported in Clause 96 accordingly ordered to stand part of the Bill. excess of the allowance from non-EU countries in specific circumstances. It provides for a customs civil penalty in Clause 97 cases where there is no allegation of dishonest conduct, but where goods are wrongfully imported from a non-EU country. The explanatory notes suggest that the new VAT: SPECIAL SCHEMES civil penalty will be introduced by secondary legislation, Question proposed, That the clause stand part of the although it is worth noting that the current policy states Bill. that the minimum penalty is £250, which is the first penalty in all but the most serious cases. The Chair: With this it will be convenient to consider I have one question for the Minister. Will the same the following: penalty regime be implemented through secondary Clauses 98 to 100 stand part. legislation with respect to imported goods from non-EU countries—the circumstances that this clause will apply That schedule 18 be the Eighteenth schedule to the to? As far as I understand it, neither the tax information Bill. and impact note nor the explanatory note explicitly state what penalty will apply where such behaviour is Shabana Mahmood (Birmingham, Ladywood) (Lab): deliberate. I would be grateful if the Minister could It is a pleasure to serve under your chairmanship, clarify whether the penalty will apply in the way I have Mr Streeter. set out, or whether it will be affected by the secondary Clause 97 will change where VAT is charged as part legislation that the Government propose to introduce to of the final stage of the 2008 European agreement on deal with the new civil penalty for the non-deliberate changes to the VAT place of supply of services rules. I import of non-EU goods. will come to its details shortly, as it is the main event, as it were, among the measures in the group, because Mr Gauke: Clause 96 will provide for the issue of a clauses 98 to 100 are effectively supporting technical customs civil penalty to travellers entering the UK from clauses. outside the EU who fail to declare goods in excess of At the moment, the Value Added Tax Act 1994 treats their allowance when stopped before clearing customs bodies corporate that are not in business as belonging controls. The penalty will be used in cases where no in the country in which they are legally constituted. dishonest conduct is found, as an alternative to existing Clause 98 will change the place of belonging to the penalties, to allow more flexibility in cases of less serious place of establishment, which is usually the principal contraventions. place of business or head office, rather than where the Currently, there is no ability to issue a civil penalty in business is legally constituted. The clause also introduces cases of non-deliberate behaviour, the result of which an explicit reference to “permanent address”. has been inequity of treatment between EU and third- country travellers. There is a criminal penalty for a Clause 99 will allow failure to declare such goods and a customs civil evasions “section 97A of VATA 1994…to be ignored…in relation to penalty for cases where HMRC finds dishonest behaviour. supplies made on or after 1 January 2015”. However, clause 96 will provide a method for penalising In line with clause 97, it makes provision non-compliance where dishonest behaviour is not found “about the place of supply of electronically supplied services, and where criminal prosecution would not be appropriate. telecommunication services and radio and television broadcasting The clause ensures a level playing field for issuing services.” penalties for excise goods wrongly imported from a Clause 100 disapplies the UK’s exemption from non-EU country, as well as those wrongly imported article 28 of the principal VAT directive of 2006 for from an EU country. The proposed penalties will address telecommunication and electronically supplied services. the current risk of reputational damage relating to The exemption currently allows the UK to see supplies having a penalty for only intra-EU travellers. It will also through agents acting in their own name as though they protect revenue and support HMRC’s excise strategies. were made by the agent. 391 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 392

[Shabana Mahmood] on their behalf. The VAT rate used will be that of each member state of consumption at the time the service The background to the clauses is that changes will be was supplied. The HMRC website also helpfully sets made on 1 January 2015 to the European Union VAT out clarification about how individual businesses are to rules on place of supply of services involving business-to- decide where customers are based. consumer supplies of broadcasting, telecommunications and e-services—BTE. Those changes are being introduced 2.45 pm as part of the final stage of the 2008 European agreement Concern has been raised about the proposals, primarily on changes to the VAT place of supply of services rules. by the Institute of Chartered Accountants in England As to what is covered by BTE, broadcasting relates to and Wales, which notes: radio or TV programmes delivered over a TV network “The principle behind the changes is to provide a level playing or the internet. Telecommunications refers to fixed or field for service providers.” mobile telephone services for voice or data, and voice over internet protocol—delivering voice and communications It says that, at the moment, services online. E-services relates to electronic services “it is possible…for a service provider to provide services to that are paid for and delivered over the internet, that are consumers across the EU but be based in an EU country with a low VAT rate that is charged to all consumers, enabling them to essentially automated, and that cannot be provided undercut service providers in the other EU country who must without IT. Such services include downloaded screensavers, charge customers the local higher VAT rate.” films and games, traffic reports, digital newspapers and Although the ICAEW supports the proposals in principle, software upgrades, and website hosting, firewalls and it is concerned that the price of the level playing field online data warehousing. could lead to the creation of At present, BTE supplies are taxed where the supplier “considerably more complexity and administrative burdens that is based. The changes will mean that, from 1 January could discourage intra-EU trade and the efficient operation of 2015, the place of taxation will be where the customer is the single market.” based. That significant change requires suppliers to It would be helpful if the Minister responded to those keep track of additional information about the countries concerns, gave his assessment of the proposals, and told in which VAT will be due. To save suppliers from having us whether he fears that they might have the results that to register for VAT in every single EU member state, a the ICAEW highlights. VAT mini one-stop shop online service has been established, which will allow the EU supplier of e-services to elect to The ICAEW also states: register with the VAT authority of their country of “In addition HMRC has indicated that it intends educational identification and file a single VAT return detailing the services, such as webinars, to be exempt from these regulations as a service of education provided where the service is hosted. supplies made to consumers in other member states, However there remain ongoing discussions at EU level as to and to pay the tax in a single payment to the state of exactly what services would be categorised as e-services, and in identification. the absence of clear agreement at EU level there is a danger that That is an extension of the scheme that was introduced different countries will treat similar transactions differently.” for non-EU businesses in 2003 to file a single VAT It notes that there is return in the member state of identification, and to “a danger that some businesses could find themselves providing submit a single VAT return accounting for all VAT in services that are subject to double or non-taxation.” all member states of consumption. The tax authority Will the Minister comment on whether such uncertainty in the state of identification will be responsible for may lead to double taxation or non-taxation, and give redistributing the VAT to the member state of the us his assessment of those concerns? Is he worried that customer, which should relieve businesses of the burden we do not yet have the result of ongoing EU discussions of filing multiple VAT registrations and making multiple about exactly what services will be classified as e-services? payments. Is there a danger that different countries may end up The system will go live on 1 January 2015, but suppliers treating transactions differently? can register to use it from October 2014. EU businesses Will the Minister outline his plans for publicising can register to use the Union VAT MOSS online service these changes and the launch of the VAT MOSS online in the member state in which the business establishment service to minimise non-compliance and confusion for is based, which is usually the principal place of business businesses? Clearly the change will require fundamental or head office. The VAT MOSS online service is the changes to existing IT systems. Is he confident that the collective name for two schemes. I have mentioned the new systems will all be fully functional by 1 January Union scheme, but there is also a non-Union scheme next year? How are the system upgrades progressing to for suppliers that are not established in the EU. They date? can register in the member state of their choosing to account for the VAT on all their BTE supplies within Mr Gauke: As we heard, clauses 97 to 100 form part the EU on one MOSS VAT return. of a package to amend the UK’s VAT system to provide There is a useful example on the HMRC website that that supplies of broadcasting, telecommunications and shows what happens if someone registers for the VAT electronically supplied services to UK consumers will MOSS online service in the UK. People will be able to be taxed in the UK. They also introduce optional account for the VAT due on all their business-to-consumer accounting schemes, called the mini one-stop shop, that BTE sales in any member state by submitting a single will allow businesses to submit a single return for payment VAT MOSS return and any related payment to HMRC. for their EU digital supplies to consumers in all member HMRC will then send an electronic copy of the appropriate states where they are not established. The final element part of the VAT MOSS return and the related VAT of the package will be a statutory instrument, which has payment to each relevant member state’s tax authority already been exposed to consultation and will be introduced 393 Public Bill Committee10 JUNE 2014 Finance Bill 394 later in the year. Together, the measures will ensure that their customers’ country. There is no reason to believe there is a level playing field for businesses by ensuring that UK suppliers will be at a disadvantage compared that those located in countries with low VAT rates, such with their competitors. as Luxembourg, can no longer undercut UK-based As for whether different countries will treat different businesses. services differently, e-services are clearly defined as services The clauses, along with secondary legislation to which requiring little or no human intervention, so there should I referred, form the final part of a package of VAT not be different treatment by different member states. changes that was agreed across the European Union in However, we will, of course, continue to keep the matter 2008 to align taxation better with the place of consumption. under review. Currently, intra-Community supplies of broadcasting, On the question of what is being done to publicise telecommunications and e-services—known together as the changes, the European Commission has published digital services—to non-business customers are subject interim guidance on its website and is holding road to VAT in the member state where the supplier belongs. shows throughout Europe, one of which has just been From 1 January 2015, that will change to the member held in London. HMRC has published its own guidance state where the customer belongs, which will ensure that and is engaged with stakeholder groups, and with industry UK consumers pay UK VAT no matter where the and its representatives. HMRC will continue to publish supplier of the services belongs. The change could guidance on an ongoing basis, and some information is increase administration costs for suppliers, as they are already on its website. potentially liable to register and account for VAT in I can reassure the Committee that the UK system is each member state where they have customers so, as I on course to be delivered on time. The Commission is mentioned, we are introducing an IT system called the monitoring developments in each member state and a mini one-stop shop that gives suppliers the option to fall-back system will be available if a member state register in just one member state. They may then account cannot deliver its system on time. I am reassured—I for the VAT due on supplies of digital services in respect hope that the Committee will be reassured—that, from of all their EU customers in the other member states on the perspective of the UK, everything appears to be on a single VAT return. course. After strong lobbying from the UK, the EU agreed A sense of fairness is relevant to digital services. A changes to ensure that app stores and other internet number of UK digital businesses have faced difficulty portals will normally be responsible for accounting for over the years due to competition from businesses based the VAT on downloads to consumers, which will simplify outside the UK, not through providing a better service, accounting for many small businesses. We are also but because of their ability to undercut UK businesses changing the place where a non-business legal person due to a lower rate of VAT. A tax at the point of belongs for VAT purposes, which will help to ensure consumption rather than at the point of supply is a that the UK system is consistent with our EU partners sensible approach for digital businesses. It is to be preventing some supplies potentially not to be taxed. welcomed that the Government are able finally to address The changes made by clauses 97 to 100, along with that issue in the Bill, and I hope that the clauses will the secondary legislation, will ensure that digital services stand part of the Bill. are taxed in the place of consumption. The change is Question put and agreed to. expected to result in an additional £300 million of revenue a year. It also removes an incentive for some Clause 97 accordingly ordered to stand part of the Bill. businesses to consider locating elsewhere in the EU. The Clauses 98 to 100 ordered to stand part of the Bill. change will have an impact on large businesses that Schedule 18 agreed to. provide telecommunication and broadcasting services, and suppliers of electronic marketplaces such as electronic bookstores and app stores. It will affect many small Clause 101 providers of electronic services, such as software developers. We estimate that 34,000 businesses will be affected and VAT: REFUNDS TO HEALTH SERVICE BODIES the total additional costs of complying with the change Question proposed, That the clause stand part of the will be £2.2 million a year, taking into account the Bill. benefits of the mini one-stop shop. Let me respond to the questions raised by the hon. Shabana Mahmood: Clause 101 will add Health Member for Birmingham, Ladywood. She asked about Education England and the Health Research Authority an increase in administrative burdens, which I touched to a scheme under the Value Added Tax Act 1994 on in my earlier remarks. It is worth pointing out that through which VAT may be recovered. The scheme in businesses have been invited to contribute to the design the 1994 Act ensured that what would otherwise be and implementation of practicalities arising from the irrecoverable VAT does not dissuade Government legislative change. The IT system has been designed Departments and NHS bodies from contracting out with help from interested parties in the business community. activities if that would otherwise result in efficiencies of Simplifications have been agreed by member states to scale. The bodies that are the subject of clause 101 will make the process easier for businesses to administer. replace two NHS bodies that are already entitled to In terms of whether this measure makes it more recover VAT. The bodies have been established as non- difficult for UK businesses to trade with EU customers departmental public bodies in the Care Act 2014. and the impact on competition among member states, Has the Minister made an assessment of VAT recovery any potential disadvantage caused by member states’ arrangements for Government Departments and the differing VAT rates will be removed, as all suppliers of economies of scale that are achieved? Such arrangements digital services will apply the VAT rate appropriate to enable contracting-out activities. VAT recoverability often 395 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 396

[Shabana Mahmood] Shabana Mahmood: Clause 102 changes an interpretation of EU VAT rules on prompt payment discounts that comes up with regard to other aspects of public sector HMRC and its predecessor have adopted since the work. I have debated VAT recoverability and university inception of those rules. A prompt payment discount is research with the Minister before, and I would be grateful exactly as it sounds: it is a discount given by a supplier for his comments about VAT recoverability and whether for prompt payment, normally within 30 days. HMRC’s it is achieving the economies of scale that we would all current interpretation of the UK legislation allows suppliers like to see. to account for VAT on the discounted price even if prompt payment is not made and no discount is given. Mr Gauke: Clause 101 adds references to Health For example, if a customer buys goods that are priced Education England and the Health Research Authority at £1,000 and is told that if they pay within 30 days they to section 41 of the Value Added Tax Act 1994. The will get a discount of 2.5% and pay £975, the supplier clause provides continuity of VAT funding arrangements can subsequently account for VAT on £975 even if the for those bodies now that the Care Act 2014 has received prompt payment discount was not used and the customer Royal Assent. Section 41(3) of the 1994 Act refunds paid £1,000. VAT to Government Departments and a variety of After the change has been made, HMRC will require NHS bodies named in section 41(7). These bodies include VAT to be accounted for on the amount that was NHS trusts, health authorities, NHS England and clinical actually received, to bring the system into line with EU commissioning groups. The purpose of the provision is legislation. HMRC has suggested that legal developments to ensure that what would otherwise be irrecoverable have forced it to change its view about the requirements VAT does not dissuade Government Departments and of the European legislation. I have not been able to tell NHS bodies from contracting out activities, if that whether the change is motivated by tax losses arising would be more efficient. The clause makes consequential from the current interpretation of the rules. According amendments that are necessary following the passing of to the tax information and impact note, the measure is the Care Act. It will add to section 41(7) the successor not expected to have an Exchequer impact. I would be bodies to two health authorities: Health Education grateful if the Minister could explain the thinking behind England and the Health Research Authority.The successor the change and why it was felt necessary to change the bodies have the same name, but a different legal status. treatment of existing prompt payment discount rules. The authorities are all included in section 41(7) but, as non-departmental public bodies, the successor bodies The Chartered Institute of Taxation has expressed a are not automatically included. Generally speaking, concern that the change is being made in haste. The non-departmental public bodies are not included in institute believes that no change in the treatment of the section 41(7); instead, they are added individually on a rules on prompt payment discounts should be made case-by-case basis. The inclusion of the new Health until the European Court of Justice rules that such Education England and the new Health Research Authority treatment is not in accordance with EU VAT law. I will ensure those bodies can recover the same levels of would be grateful if the Minister would comment on VAT as their predecessors, and it will ensure consistent the concerns raised by the CIOT and other stakeholders. treatment. That point goes back to the thinking behind why the Government chose to make this change now, rather 3pm than wait for case law to that effect. The hon. Lady raised the broader issue of VAT The change being made is significant. The impact recoverability in the public sector. She referred to a note states that up to 250,000 businesses may be affected, previous occasion on which we debated it which, if my that the cost of the change will be about £8 million and memory serves me correctly, was her debut as a shadow that ongoing costs will be about £3.5 million per annum. Treasury Minister. She had previously been a shadow Will the Minister tell us how the change will be publicised Minister for higher education, so she was frighteningly to affected businesses, and will he clarify when the well informed on that occasion, as she has been proposed consultation will be carried out? subsequently. All I can say at this point is that the Government fully support contracting out in the public Mr Gauke: The clause amends VAT legislation relating sector when there is a good case for doing so on the to prompt payment discounts to protect revenue. This grounds of efficiency. The Treasury is reviewing the change removes any ambiguity in UK legislation and provisions and expects to report at the autumn statement, makes clear that VAT is to be accounted for on the full so I do not think that there is much more I can say at consideration actually received by businesses that offer this point. The clause makes one of several consequential prompt payment discounts. For most businesses, the changes to tax legislation that reflect reforms to the change will come into effect from 1 April 2015. However, NHS and provide continuity of VAT treatment to certain to prevent the risk of immediate, significant revenue NHS bodies, and I hope that it will stand part of the loss, the clause provides that suppliers of telecommunication Bill. and broadcasting services, for which there is no requirement Question put and agreed to. to provide a VAT invoice, are subject to the change from Clause 101 accordingly ordered to stand part of the 1 May 2014. Bill. Until now, HMRC has interpreted UK legislation as allowing businesses to account for VAT on the discounted Clause 102 price that they offer to their customers in return for prompt payment even in circumstances where that discount VAT: PROMPT PAYMENT DISCOUNTS is not taken up. Historically, prompt payment discounts Question proposed, That the clause stand part of the have been offered mainly on supplies made between Bill. businesses. Consequently, the recipients of such supplies 397 Public Bill Committee10 JUNE 2014 Finance Bill 398 have generally been able to reclaim any VAT charged to Clause 103 them. However, some large businesses are now seeking to offer prompt payment discounts to final consumers ATED: REDUCTION IN THRESHOLD FROM 1 APRIL 2015 who are not able to recover the VAT charged to them. Under the existing interpretation of UK legislation, Question proposed, That the clause stand part of the that results in a tax loss to the Exchequer because the Bill. supplier can account for VAT on the discounted amount even when the full amount is paid. In particular, HMRC The Chair: With this it will be convenient to discuss has seen examples of prompt payment discounts being clause 104 stand part. offered to consumers in the telecommunication and broadcasting sectors. I turn to the hon. Lady’s question as to why this Shabana Mahmood: With your permission, Mr Streeter, measure is being introduced now. As I set out, HMRC I would like to include clause 105 stand part in this has seen businesses offering prompt payment discounts, group. which leads to under-collection of tax. The introduction of this measure now will protect an estimated £250 The Chair: Proceed. million a year in the telecommunication sector alone, bring UK policy and legislation clearly in line with EU law and prevent potential abuse of VAT prompt payment Shabana Mahmood: Thank you. discount policy where businesses offer terms that few Clauses 103 and 104 extend the annual tax on enveloped consumers can take up, which can result in an unfair dwellings, known as ATED. From 1 April 2015 properties competitive advantage for the supplier. I hope that that held in corporate structures worth more than £1 million helps to explain why we wanted to move now and not and up to £2 million will be subject to a charge of wait any longer. £7,000 per year. From April the following year the tax The clause will ensure that businesses pay less VAT will be extended further and properties worth more only when their customers actually benefit from the than £500,000 and up to £1 million will be subject to a discounts. It will also provide certainty for businesses charge of £3,500 per year. that offer prompt payment discounts and align UK law Clause 105 reduces the threshold at which non-natural clearly with EU law. For the majority of businesses, the persons, usually a company or partnerships with a measure will take effect from 1 April 2015, but for corporate member or an investment scheme, have to suppliers of telecommunication and broadcasting services, start paying 15% stamp duty land tax from £2 million to for which there is no obligation to issue a VAT invoice, £500,000. the change came into effect on 1 May 2014. There is no To provide some background, ATED was introduced obligation to provide a VAT invoice to unregistered in the Finance Act 2013 and came into effect on 1 April people or businesses, so the measure will mainly affect that year. It is paid by companies or partnerships with supplies to final consumers. Should HMRC identify the corporate and collective investment schemes that own risk of significant revenue loss in other sectors, the interests in UK residential property valued at more implementation of the measure may similarly be brought than £2 million. forward by secondary legislation. As the hon. Lady said, about 250,000 businesses offer Most residential properties are owned directly by prompt payment discounts, and this measure will have individuals, but in some cases they may be owned by a an impact only on businesses that account for VAT on company, a partnership with a corporate member or the discounted amount and their customers. HMRC another collective investment vehicle. In those circumstances estimates that if all those businesses have to implement the dwelling is said to be enveloped because the ownership the changes there will be a one-off total cost of £8 million; sits within a corporate wrapper or envelope. ATED is ongoing costs will be £3.5 million per annum. HMRC an annual tax and is charged in respect of chargeable will issue a consultation document on how businesses periods running from 1 April to 31 March. The amount that issue VAT invoices should invoice in circumstances of tax charged is based on the value of the property on where the offer of a prompt payment discount is made. 1 April 2012. The property is revalued on 1 April every The consultation will be published shortly, certainly by five years. the end of this month. The Chancellor announced the reduction in the ATED The hon. Lady asked how the changes would be threshold from £2 million to £500,000, which will be publicised. There was the Budget announcement, and introduced over two years. In future years the charges the consultation will further publicise potential changes. will be indexed in line with the previous September’s HMRC will also monitor compliance and taxpayer consumer prices index. Several reliefs are available that awareness to ensure that the businesses affected are might result in exemption from ATED. An ATED aware of the changes. return has to be sent to HMRC in order to claim the relief. There are several ways in which ATED relief may In conclusion, the clause ensures that businesses that apply to a dwelling, including when it is let to a third offer prompt payment discounts will have to account party on a commercial basis and is not at any time for VAT on the consideration they actually receive, occupied or available for occupation by anyone connected protecting UK revenue. It also ensures there is no to the owner; or when it is open to the public for at least ambiguity in UK prompt payment discount VAT legislation, 28 days per year. If part of a property is occupied as a and that it correctly reflects EU law. dwelling in connection with running the property as Question put and agreed to. a commercial business open to the public, the whole Clause 102 accordingly ordered to stand part of the property is treated as one dwelling and any relief will Bill. therefore apply to the whole property. 399 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 400

[Shabana Mahmood] today’s measures. The measures relate to envelope dwellings, and we have a separate policy on residential property—our The background to clause 105 is that schedule 4A to support for a mansion tax, which we would use to fund the Finance Act 2003 provides for a higher rate SDLT the reintroduction of the 10p rate, which we have discussed charge of 15% for acquisitions of a higher threshold at length previously in Committee. I fear that I would interest by a non-natural person. A higher threshold get into trouble if I went beyond the scope of the interest is an interest in a single dwelling of more than clauses in this group. £2 million or one of a number of interests in a single dwelling acquired in linked transactions where the aggregate Charlie Elphicke: Let us say that a form of tax, such charge exceeds £2 million. as a stamp duty similar to the measure currently under Clause 105 will amend the 2003 Act to reduce the discussion, was introduced for properties worth more threshold to £500,000. There are some exclusions from than £2 million. How many such properties are there in the higher rate, namely acquisitions by trustees for the the UK? purposes of letting, trading or redevelopment; trades involving a dwelling being made available to the public; and providing dwellings for occupation by certain employees Shabana Mahmood: I fear that the hon. Gentleman is or for use as a farmhouse. The measures are expected to trying to draw me into a much wider discussion about raise £365 million over the next five years, and it has property taxation, which takes us beyond envelope dwellings been estimated that approximately 12,000 individuals and properties owned through corporate structures of will be indirectly affected through their interests in the type that we are discussing. I am happy to have a NNPs that purchase UK residential property, such as separate debate with him at another time about residential companies and collective investment schemes. property taxation, but he is asking me to go beyond the subject matter of the clauses. 3.15 pm On the valuation of property, the ICAEW expects more people to be dependent on the pre-return banding The Institute of Chartered Accountants in England check, as the owners of lower-value properties will not and Wales has raised some concerns about the treatment want to pay for a Royal Institution of Chartered Surveyors of NNPs envisaged in the clause. It states that many valuation. It says that that means that HMRC will need more NNPs will now be brought within the scope of to additional resources for those valuations and for ATED, but that many will also qualify for an exemption. compliance. When the Minister responds, will he explain Such companies will have to file a return in order to whether those additional resources are available and claim the relief, which the ICAEW fears will be a how much the cost will be? In addition, the impact note significant compliance burden. It cites the example of states: landlords, who often use a company to own commercially “Processing additional ATED returns will require IT systems let residential property and who will be exempt from the changes and additional staff resource.” charge but will still but will still have to report annually. Will the Minister comment on those concerns and on As earlier, I would like further details about the amount what efforts are being made to ensure that the burden is of additional resources that will be needed for both the minimised and that all NNPs, particularly such landlords, cost of IT systems changes and the additional staff—how will be made aware of how to comply with the new big are staffing resources at the moment, and how much rules? are they expected to increase by? The measures include no graduation in charges, about which the ICAEW is particularly concerned. A property Charlie Elphicke: I wish briefly to make the point that worth £500,000 incurs no charge while a property worth I campaigned for this anti-avoidance measure for a long £500,001 will incur a charge of £3,500. Has the Minister time before it was brought forward. Further, it is really a received any representations about graduating the sums measure for people who are not resident in the UK. that apply to properties of different values? Why did he Enveloped properties are owned in a corporate vehicle decide to go with the current ATED system within that does not pay any capital gains tax on sale, and the HMRC? company will typically be located somewhere such as There are also no transitional provisions to allow a the Channel Islands. company to de-envelope a property without incurring The measures the Government have already introduced excessive tax charges. Many stakeholders are concerned are right, as are these changes. We have to stop the sort about the lack of transitional provisions, and it would of systematic abuse of our tax system that we saw for be helpful to learn whether the Minister considered too many years. In fact, I would go further: we should such provisions and why he decided not to go ahead look at catching capital gains on UK land more closely with them. and look further at that kind of avoidance. The avoidance of stamp tax and the issue of companies being sold overseas so that no receipt is made are wholly wrong, so Charlie Elphicke (Dover) (Con): Does the hon. Lady these measures are absolutely right. accept that this anti-avoidance measure is the right thing to do? Does the Labour party accept the measure’s We need to be clear about the scale of the measures, principle and that this manner of organising matters is however. It would not be right to think that they are an right? easy hit and will raise a lot of revenue. This is an anti-avoidance measure to deal with an abuse, not a measure that will raise vast quantities of revenue for the Shabana Mahmood: The hon. Gentleman will be UK. I therefore say gently to the Opposition that when aware that we supported the ATED changes that were they talk about whether the measures should be extended introduced in the previous Finance Act and will support to all properties with a value of over £2 million, they 401 Public Bill Committee10 JUNE 2014 Finance Bill 402 should bear in mind that only 55,000 residential properties Clause 103 reduces the existing £2 million valuation in this country are worth over £2 million. The Opposition’s threshold for ATED to £1 million. From 1 April 2015, policy to raise £2 billion from the owners of those there will be an additional band for enveloped properties properties is ill thought out, and would mean an annual worth more than £1 million and up to £2 million, with tax on such properties of £36,000. It is the tax policy an annual charge of £7,000. ATED is a self-assessed and economics of the madhouse. It is undeliverable, ill annual tax, and returns and payments are usually due thought out and absurd, and shows that the Labour by 30 April each year. The clause includes a transitional party has learned nothing and forgotten nothing from rule, so that those caught by the new £1 million to its time in office. £2 million band will be required to file returns by 1 October 2015 and to make a payment by 31 October 2015, instead of the normal deadline of 30 April 2015. Mr Gauke: Tempting though it is to renew our discussions The extra time will help to smooth the administration on the Labour party’s proposals for a mansion tax, of the tax following the extension, particularly in view Mr Streeter, shall I turn to clauses 103, 104 and 105? of potential further changes to the administration of the regime as a result of the consultation over the summer. The Chair: Why not? Clause 104 introduces a further reduction in the valuation threshold to £500,000. From 1 April 2016, Mr Gauke: Clauses 103 and 104 extend the annual there will be an additional band for properties worth tax on enveloped dwellings, or ATED, a charge paid by more than £500,000 and up to £1 million, with an a company, a partnership with a corporate member or a annual charge of £3,500. HMRC estimates that a further collective investment scheme—for brevity, I will refer to 21,000 properties will be brought within the scope of those three entities as companies—that owns UK residential the regime as a consequence of the extensions. Of those property valued at more than £2 million. Purchases of 21,000, HMRC estimates that 9,000 properties will meet such property by those entities are subject to a higher-rate the conditions to qualify for a relief from the tax. The stamp duty land tax charge of 15%. Clause 105 reduces additional ATED revenue is estimated to be £5 million the starting threshold for the 15% charge from £2 million in 2014-15, rising to £25 million in 2015-16 and £50 million to £500,000. in 2016-17. Before I set out the detail of the clauses let me remind Clause 105 reduces the threshold above which SDLT hon. Members why we introduced the annual tax on may be charged at the 15% rate from £2 million to enveloped dwellings and the SDLT higher-rate charge £500,000. The 15% charge replaces the normal SDLT in the first place. Some individuals choose to put the charge, which would otherwise apply at 4%, 5% or 7%, ownership of their homes within the wrapper of a depending on the amount paid for property. The new company that they control, a practice often referred to £500,000 threshold applies where the effective date of as enveloping. Once the property is enveloped, it can the purchase—usually the date of completion—is on or effectively be sold by transferring the shares of that after 20 March 2014. Transitional provisions will, in the company. That transaction will not be subject to the majority of cases, preserve the existing £2 million threshold normal rate of stamp duty land tax and is therefore a where contracts were entered into before 20 March tax avoidance device. 2014, but are completed on or after that date. Other aspects of the 15% charge—including the exclusions The Government have made our position clear: this that apply where the purchase is undertaken for form of tax avoidance is not acceptable. We therefore genuine commercial purposes, such as property letting, introduced a package of measures to tackle this form of redevelopment or trading—are unchanged. We estimate avoidance, to ensure that owners of enveloped residential that as a result of the change the number of transactions properties pay their fair share of tax. The annual tax on that attract the 15% SDLT charge will rise from about enveloped dwellings was part of that package of measures. 80 to about 350 per year, and SDLT revenue will increase The other measures were the 15% rate of stamp duty by £30 million in 2014-15, with that figure rising to land tax charged on enveloping a property and the £35 million in 2018-19. extension of the capital gains tax regime charged on the disposal of the enveloped property. The annual tax on enveloped dwellings includes a number of reliefs aimed 3.30 pm at legitimate commercial businesses—for example, property Let me turn to some of the questions raised in the developers and traders, and property rental businesses— debate. First, there is the issue whether the extension of which can reduce the tax liability to zero. Similarly, ATED increases the compliance burden—particularly acquisitions of residential property for legitimate business on genuine businesses—and whether that will result in purposes are excluded from the SDLT higher-rate charge. any difficulty complying with the regime. We recognise Clauses 103, 104 and 105 extend the scope of ATED the potential for the structure of ATED to create and the SDLT higher-rate charge further to discourage administrative burdens for genuine property rental, trading people from using such avoidance devices. Furthermore, and development companies. The Government have the extensions will discourage the use of corporate therefore committed to consult over the summer on envelopes to invest in UK housing that is then left possible simplifications to the regime to reduce compliance empty or underused. The Government recognise that burdens for bona fide businesses. In fact, informal the structure of ATED can create administrative burdens discussions have already taken place in advance of the for some legitimate businesses—for example, property formal consultation. developers and traders—so we will consult on On the question whether HMRC’s IT system will be simplifications to the administration of the regime to able to cope with the additional returns expected once reduce the compliance burdens for that group. the thresholds have been reduced, and on the issue of 403 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 404 resource for valuations, HMRC is exploring the possibility judgment have claimed the overpayment of stamp duty of securing a more robust online solution for ATED. It land tax, the value of those claims and whether he is offers pre-return banding checks for ATED for valuation confident that there has been no exploitation of the purposes, and those will be offered to new taxpayers relief available for the avoidance of SDLT? who fall within 10% of each band. On transitional measures, a chargeable period runs Mr Gauke: Clause 106 and schedule 19 make it clear from 1 April to 31 March, and the normal date for filing that partial relief from stamp duty land tax is available an ATED return and making payment is 30 April in the where a charity purchases property jointly, as tenants in chargeable period. Extra time has been given in the first common, with a non-charity purchaser. The change is year to help to smooth the administration of the tax being made in response to a Court of Appeal judgment, following these changes, bearing in mind the potential as the hon. Lady rightly pointed out. The Court ruled for further changes as a result of the consultations that that where a charity purchases property jointly with a will take place over the summer. non-charity purchaser, the charity could claim relief on All I will say on SDLT threshold rates is that the its share of the property. Without the change, it would Government do not normally pre-announce them, for not have been clear from the legislation that partial the very good reason that that would increase the risk of relief is available. The legislation will provide certainty forestalling. There is nothing further I want to say for taxpayers about the availability of relief and the about that. amount of relief that the charity can claim. The change Let me conclude by saying that the extension will will also ensure that the availability of partial relief further counter schemes that use corporate structures cannot be exploited for avoidance purposes. to avoid tax, and it will ensure that those who own UK The change made by clause 106 and schedule 19 will residential property in this way pay their fair share of make it clear on the face of the legislation that partial tax. I hope that the clauses can stand part of the Bill. relief is available. The relief will apply where a charity Question put and agreed to. purchases UK land or property jointly, as tenants in common, with the non-charity purchaser. The amount Clause 103 accordingly ordered to stand part of the of relief that the charity can claim will be based on the Bill. percentage that share the charity holds in the property Clauses 104 and 105 ordered to stand part of the Bill. or the percentage of the purchase price paid by the charity for its share in the property, whichever is lower. Clause 106 We estimate that as a result of the change, fewer than 100 charities a year will be able to claim partial relief SDLT: CHARITIES RELIEF from SDLT where relief would not have been available previously. The change is expected to have a negligible Question proposed, That the clause stand part of the Exchequer impact. Bill. On the question of how many have claimed the value, given the context I have just set out, it is not likely to be The Chair: With this it will be convenient to discuss a significant number, but I am happy to write to the schedule 19. hon. Lady with an answer to her questions on that issue. As for whether there has been exploitation before now, Shabana Mahmood: Clause 106 is being introduced we are not aware of any exploitation of the relief as a as a result of a Court of Appeal judgment handed result of the judgment, but obviously we would want to down on 26 June 2013 in the case of the Pollen Estate address the potential for that at the earliest opportunity. Trustee Company Ltd and King’s college London v. To conclude, this measure provides certainty for taxpayers HMRC. The substance of that judgment was that when on the availability of partial relief and the amount of a charity purchases property jointly with a non-charity relief that can be claimed. I therefore commend the purchaser, relief from SDLT under paragraph 1 of clause and schedule to the Committee. schedule 8 to the Finance Act 2003 is available on the charity’s share of the property. Relief is subject to a test, Question put and agreed to. based on the extent to which the charity’s share is used Clause 106 accordingly ordered to stand part of the for charitable purposes. Bill. In the light of that judgment, HMRC has invited Schedule 19 agreed to. claims for any overpaid SDLT from charities that purchased property jointly with a non-charity purchaser and that satisfied the relevant conditions, but did not claim the Clause 107 relief. Relief is limited to circumstances where the charity used the greater part of its share of the property for a ABOLITION OF SDRT ON CERTAIN DEALINGS IN charitable purpose. Where HMRC has opened an inquiry COLLECTIVE INVESTMENT SCHEMES into the relevant land transaction return, it has been in touch with the charities concerned. Cathy Jamieson (Kilmarnock and Loudoun) (Lab/Co- We are told that the measure is expected to have a op): I beg to move amendment 26, in clause 107, page 90, negligible impact on the Exchequer, and the impact line 33, at end insert— note estimates that fewer than 100 charities a year will ‘(5A) The Chancellor of the Exchequer shall, within six be affected by the change and that the compliance costs months of this Act receiving Royal Assent, publish and lay to the charities are expected to be minimal. I would be before the House of Commons a report setting out the impact of grateful if the Minister could confirm that. Also, can he changes made to Schedule 19 of the Finance Act 1999 by this tell us how many charities since the Court of Appeal section. 405 Public Bill Committee10 JUNE 2014 Finance Bill 406

(5B) The report referred to in subsection (5A) must in Cathy Jamieson: I am trying to get to the Government’s particular consider— thinking, and hopefully the Minister will be able to (a) the impact on tax revenues; address some of my points. We opposed the change (b) the expected beneficiaries; and when it was announced in Budget 2013. The Government’s (c) a distributional analysis of the beneficiaries.” tax information and impact note shows the cost to the Exchequer and states: The Chair: With this it will be convenient to discuss “The measure is likely to have a positive effect on investments clause stand part. and employment.” The note does not seem to provide supporting estimates Cathy Jamieson: It is a pleasure to be here, Mr Streeter. to back up those claims, so I would be interested to hear We are making good progress, and I am sure that we whether the Minister has any further information. The will continue to do so. However, this is an important note goes on to acknowledge that the change directly amendment to an important clause, so I want to make a affects only a relatively small number of individuals and few points, as well as posing some questions to the bodies: 100 fund managers and 2,500 funds. Again, we Minister. assume the people affected to be wealthy because we The clause removes part 2 of schedule 19 to the have no information to the contrary. Other than possible Finance Act 1999, abolishing the stamp duty reserve benefits to pension investments, I am trying to understand tax currently payable by fund managers when investors how the measure will affect individuals and households. surrender units in unit trusts or shares in open-ended The note states that the change is only “likely” to create investment companies. Our amendment essentially asks additional employment. the Treasury to publish the costs to the Exchequer in I have some questions for the Minister. People are order to ensure that a list of beneficiaries and a distributional struggling with the cost of living and problems associated analysis for the abolition of stamp duty reserve tax is with their day-to-day experiences. People have household put into the public domain. In a sense, the amendment costs, and they are trying to get into employment. They is not dissimilar to some of our previous amendments are trying to ensure that they have a basic standard of that asked for further information and a report within living. Those on the lowest and middle incomes have six months of Royal Assent, but it specifically focuses been hit by consecutive years of wage stagnation, cuts on the key points that I have raised. The clause removes to tax credits, VAT rises and the bedroom tax, and so the stamp duty reserve tax charge for which fund managers on. It is difficult for people to understand why the are liable when investors sell or surrender their units in Government essentially seem to be giving a hefty tax UK unit trust schemes or shares in UK open-ended break to the wealthiest people. investment companies. Those changes were first announced by the Chancellor in the 2013 Budget. The Government say that their intention is to boost Mr Iain McKenzie (Inverclyde) (Lab): My hon. Friend investment in the UK asset management industry by makes a strong point. On the whole, this looks like the abolishing part II of schedule 19 to the Finance Act Government giving away a tax cut to their friends in the 1999, which has been cited by some in the industry as an City, while they turn their back and refuse to accept that obstacle to establishing funds in the UK. The schedule there is a cost of living crisis up and down the country. applies a special stamp duty reserve tax to collective investment schemes, such as unit trusts or open-ended 3.45 pm investment companies, when investors sell their units and those units are reissued to new investors within a Cathy Jamieson: My hon. Friend makes an interesting two-week period. The change will not affect investors point and I know, because his constituency is not all directly, but fund managers will no longer have to that far from mine in the west of Scotland, the impact account for, and pay, the special stamp duty reserve tax there of many of the Government’s policies. He asks charge that is currently levied at a rate of 0.5%. exactly the kind of question that his own constituents We have concerns about what the explanatory note will ask him, and he always makes a very powerful point says about how the cost will ultimately be borne, because on their behalf. the proposal is that the reduced transaction costs of The Minister would, of course, be welcome within surrendering UK collective investments should make the confines of what we are discussing to make any them more attractive to investors. Of course, the move comment he liked on how he will try to assist our has largely been welcomed by industry bodies; indeed, a constituents to deal with the cost of living crisis, although number of them have been campaigning for the measure I suspect, Mr Streeter, that you might want to put some for some time. The legislation makes other amendments, boundaries around that, so I will not stray too far. The too. Our concern, however, is that this could become a Investment Management Association, whose members tax cut for those who are already wealthy. The purpose manage a total of £4.5 trillion in assets in the UK, of our amendment is partly to try to ensure that we get stated: information about exactly who will benefit from the “UK assets under management and funds under management measure, which is why we have asked for specific information are at record levels, and the UK retains its position as the second about tax revenues, the beneficiaries and the distributional largest asset management centre in the world after the US.” impact of the clause. Of course, we recognise the value to the economy of that particular industry, and we want to see people James Duddridge (Rochford and Southend East) (Con): continuing to be based in the UK. However, I think that Is the hon. Lady arguing that there should be a differential prompts the question of why the Government are intent in the tax treatment of closed-ended unit trusts and on giving that industry such a big tax break when, by open-ended unit trusts? If so, why? I fail to see the the industry’s own assessment, it seems to be doing argument for a differential. very well. 407 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 408

[Cathy Jamieson] Chris Williamson: Government Members can disabuse me, but we still do not know who the huge beneficiaries Will the Minister give us any further information on were—it is a secret. The public have a right to know the whole question of how this will have a positive who will benefit from the latest mates rates proposition impact on the UK jobs market in particular and the in this clause. UK economy more widely? Last year, the then Financial Secretary to the Treasury stated: Sheila Gilmore (Edinburgh East) (Lab): I wonder “What are the advantages of having funds domiciled in the whether my hon. Friend thinks, like me, that the comments UK? First, there are advantages in terms of jobs, particularly in from a sedentary position, such as “back to the 1970s”, the regional economy. While fund managers can operate from are particularly revealing. Actually, inequality was lower anywhere, most jobs in fund management come from ancillary in the 1970s than in the whole of the post-war period. services and the professional services associated with them. These Clearly, Government Members do not like that period. are high-value jobs in IT, legal services and accountancy support, and they are typically in the jurisdictions in which the funds are domiciled.”—[Official Report, 2 July 2013; Vol. 565, c. 871.] Chris Williamson: My hon. Friend is absolutely right. On the basis of that information, will the Minister In the 1970s, earned income as a proportion of the provide us with a concrete number or an estimate of the national cake was significantly greater than it is today. jobs he expects to be created as a result of this particular Ever since the dreadful day in 1979 when Margaret move? Will he be more specific about the regional Thatcher came to power and heralded the neo-liberal benefits that were previously referenced? agenda, workers’ earnings as a proportion of national income have diminished, while unearned income has Given the amount that the tax information and impact risen exponentially. note talks of in relation to the changes, their impact on the Exchequer is not inconsiderable. That is why it is important to understand the impact and the potential The Chair: Order. Before we continue with the history benefits, and to try somehow to marry those up to see if lesson, can we look at amendment 26, which does not there is indeed a benefit. According to the Government’s refer to the 1970s? It is important that this good-natured figures, HMRC potentially loses out on an estimated debate continues strictly within the confines of the rules £160 million a year over the next three years, £165 million of the House. We are considering clause 107 and in 2017-18 and £170 million in 2018-19. That is not an amendment 26. inconsiderable sum of money and I wonder if the Minister feels able to justify the loss of that revenue to Chris Williamson: I am grateful for that guidance, the Exchequer. If he gives us the figures for the jobs and Mr Streeter. for the wider economy, we will of course listen to that. It does, however, seem a significant loss to the Exchequer Sheila Gilmore: I hope that, like me, my hon. Friend over the next five years, and he would surely agree that does not find it remotely funny to be talking about a this money would perhaps be better spent elsewhere, period when for 10 years out of 16 more than 3 million such as on creating jobs for young people, and on people were unemployed. improving support for those people on the lowest and the middle incomes that my hon. Friend the Member Chris Williamson: My hon. Friend is absolutely right. for Inverclyde and other Opposition Members are I would sooner take us back to the 1970s than the 1870s, particularly concerned about. I will be interested to which is the direction of travel in which the Government hear the Minister’s response. want us to go with the workhouse mentality they are We will press our amendment, unless the Minister trying to inflict on the nation—[Interruption.] makes revelations that I have not anticipated, because it is important that we get those figures into the public The Chair: Order. I want to hear whether the hon. domain. The Minister has on many occasions gently Gentleman is in order. and politely knocked back my efforts to get such reports on other issues. Perhaps on this occasion he will make Chris Williamson: I can tell that Government Members my day and accept our amendment—[Interruption.] I really cannot care less about the cost of living crisis that doubt it, going by the look on his face. is affecting millions of people in our country; they are more interested in looking after their friends in the City. Chris Williamson (Derby North) (Lab): It is a pleasure It is clear from Government Members’ guffaws and to serve under your chairmanship this afternoon, Mr laughter that they have taken great pleasure in inflicting Streeter. I rise to speak in support of the shadow austerity on our country over the past four and a bit Minister, my hon. Friend the Member for Kilmarnock years. We have seen the impact of their decimation of and Loudoun. This is an eminently sensible amendment, our public services, from reduced social care to longer and the general public are entitled to see it passed this waiting lists. Yet with this proposition the Government afternoon. are seeking to give a tax cut to an industry that is not People are pretty cynical about the coalition Government. struggling but doing incredibly well. According to the We have already seen examples of their looking after latest figures that I have seen, the industry is responsible their mates in the City, such as the mates rates when the for some £5.4 trillion-worth of funds, so it is hardly in Royal Mail was flogged off— need of any assistance. I am sure that Government Members would say that they want to make the UK more attractive to investment funds, but this is yet Charlie Elphicke: Back to the 1970s. another example of a race to the bottom. Frankly, I do not think that we want to be in competition with the The Chair: Order. likes of Luxembourg and Ireland on tax rates. 409 Public Bill Committee10 JUNE 2014 Finance Bill 410

It is important to bear this in mind: who is benefiting? constructed, Labour authorities are building far more We often hear Government Members say, “We’ve turned than Conservative authorities. I welcome new houses the corner. The economy is recovering. We have economic wherever they are, whether they are built by Conservative- growth.” But who is benefiting from that? By and large controlled South Derbyshire district council or Labour- the top 1% are benefiting, but the bottom 90% have controlled Derby city council. The fact is we need a lot seen a diminution of their income, after tax is taken into more than the ones being built in Derby and South account. Derbyshire at the moment. We need hundreds of thousands of new homes. Mr McKenzie: That may be why the Government are In conclusion— so reluctant to put this report in front of the House. They know that the numbers who benefit from this will be very limited indeed. Ian Swales (Redcar) (LD): The hon. Gentleman is making an interesting speech. He seems to be assuming Chris Williamson: Absolutely right. It may also be that the entire amount of money involved will end up in revealing to note that many of the people who will the hands of the managers of the various investment benefit are benefactors of and donors to the Conservative companies and unit trusts. As the background note party. We can only speculate about that, of course, makes absolutely clear, the money will end up in the because it is a secret. However, it is important that we companies and in the trusts ultimately to the benefit of have this matter on the record and that the general investors, which can include some of the workers he is public know who will benefit from the measure. talking about. The cost to the taxpayer of the clause over the next five years—my hon. Friend the Member for Kilmarnock Chris Williamson: With the greatest respect to the and Loudoun made the point—is going to be the best hon. Gentleman, that is a fairly naive intervention. We part of £1 billion, with some £800 million of tax revenue have seen huge bonuses being paid out to our friends in lost to the Exchequer, at a time when 27 million workers the City, totally irrespective of the state of the economy in our country have seen their incomes after tax diminishing, and the fact that people are really struggling outside the even though we are in a state of economic growth at the City and living through a cost of living crisis. If the moment. Would it not be better to use that money to hon. Gentleman thinks that the money will not filter generate jobs and support our public services? Looking through to the fund managers, he is sorely mistaken. at the figures, what could this money be used for? It is In conclusion, unless Government Members agree about choices, is it not? We know about the choices that the amendment tabled by my hon. Friend the Member Conservative and Liberal Democrat Members want to for Kilmarnock and Loudoun, it will be yet another make; they want to look after the wealthiest and most indication that the Government are entirely out of powerful people in our country—their mates in the touch, completely out of date, and, in 330 days from City, as I have already said. today, they will be out of office. Let us make some comparisons. I was doing a quick calculation as my hon. Friend was speaking, about where that money, which is going to be lost to the Mr Gauke: Let me turn to the clause, at least to begin Exchequer, could be used to much better effect. It with. The Government announced in Budget 2013 that would fund some 7,000 additional nurses, on the starting they would abolish the schedule 19 charge as part of salary, bearing in mind that waiting lists are growing in their investment management strategy to improve the our NHS at the moment; some 7,000 teachers could be UK’s competitiveness as a domicile for collective investment appointed on the starting salary, if this tax cut did not schemes. HMRC published draft legislation in December go ahead; and around 8,000 social workers could be 2013 for consultation, which ended on 4 February 2014. employed. That would be possible in each of the five As a result, a minor change was made to the final clause years that we will be losing this money, and into the included in the Bill. future. Schedule 19 is a special stamp duty reserve tax charge Perhaps we could use the money for capital investment. levied on UK collective investment schemes, or “funds”. For example, it would fund some 10,500 council houses. A charge arises when investors surrender back to the We have a massive housing crisis in our country, but we fund manager either their units in UK unit trust schemes are still building fewer houses than we have ever built or shares in UK open-ended investment companies. It is since the 1920s. Would it not be better to use this money paid by fund managers, but the cost is ultimately borne to build houses and generate jobs, rather than giving tax by the investors in the schemes—a point made by my cuts to already wealthy and powerful people in the City hon. Friend the Member for Redcar. The investors are of London? largely pension schemes, life companies and individual savers. It is worth stressing that the charge is only Heather Wheeler (South Derbyshire) (Con): In the payable by UK schemes. An identical scheme established hon. Gentleman’s peroration about building council outside the UK would not be subject to the charge, homes, will he congratulate the Conservative-run South placing the UK at a competitive disadvantage as a Derbyshire district council, which is building council domicile for collective investment schemes. Investors houses, even though it has had to cope with the who do not wish to pay schedule 19 charges already reconfiguration of finance from this Government? have the option of investing in funds domiciled offshore. The schedule 19 regime is regarded as complex and 4pm burdensome, requiring frequent tax calculations and Chris Williamson: I am delighted that South Derbyshire returns to be sent to HMRC. Additionally, because of is building council houses. Indeed, if we look around the way in which the tax operates, its headline rate the country at the number of council houses being implies a much greater tax burden than the annual cost 411 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 412

[Mr Gauke] schedule 19 is not a tax cut for hedge fund managers or hedge funds, which have in fact never paid tax under the actually suffered. This is difficult to explain to investors schedule 19 charge. and gives rise to presentational complications when I make reference to hedge funds not because the hon. trying to market UK funds, especially overseas. It is for Member for Kilmarnock and Loudoun referred to those reasons that schedule 19 was identified as a major them—in fact, it was noticeable that neither she nor the deterrent to domiciling funds in the UK, with a particularly hon. Member for Derby North, who usually likes to damaging effect on the ability of UK funds to attract bring them into most subjects, mentioned hedge funds non-UK investors. in their remarks—but because fairly consistently and The clause repeals part 2 of schedule 19 to the until recently, the Opposition characterised the measure Finance Act 1999, thereby abolishing the schedule 19 as a tax cut for hedge funds. The Leader of the Opposition, charge. This levels the playing field between the UK and in Prime Minister’s Question Time no less, accused us other countries as domiciles for collective investment of introducing a tax cut for hedge funds. The shadow schemes. The abolition has effect from 30 March 2014. Chief Secretary has certainly referred to it as a tax cut The clause makes various consequential amendments for hedge funds on many occasions. I take it from the and, in a minor change from the draft provisions published remarks of the hon. Member for Kilmarnock and Loudoun in December, it also makes a small change to how the that that is no longer the Opposition’s position, and I main or principal stamp duty reserve tax charge applies am glad. They have finally understood what schedule 19 to certain rare transactions. is and they no longer make accusations that the measure The transactions concerned are where investors surrender is a tax cut for hedge funds. I will give the hon. Lady an their units in a fund for assets of the fund, rather than opportunity to withdraw formally that accusation, which for cash, which is known as an in specie redemption. her party has made repeatedly. The securities transferred to the investor are usually in proportion to the assets held in the fund. Where that is Cathy Jamieson: I am not going to withdraw anything the case, there is no SDRT charge. If the securities that has been said previously, which will not surprise transferred are not in proportion to the assets held in the Minister. I wonder whether he can explain why the the fund, that is known as a non-pro rata in specie impact note specifically states: redemption and would previously have been taxable “This measure directly affects managers of collective investment under the schedule 19 regime. The abolition of schedule schemes.” 19 means that these types of transactions would have It goes on to say: become free from tax. The principal charge is therefore “This measure removes a charge” being amended to apply to these rare transactions instead of the schedule 19 charge. and Amendment 26, which Opposition Members tabled, “Schemes that are affected will pay less tax”— asks the Government to lay a report before Parliament that seems fairly straightforward to members of the within six months of the Bill’s receiving Royal Assent public. It also states that the measure “could” improve that sets out the clause’s impact on tax revenues and returns on investments, and I am not sure where he who benefits from it. The Government are not minded found the 22-year old that he was talking about in his to accept the amendment. While the Government rightly example. keep all tax policy under review, there would be little merit in producing a report in the way suggested by the Mr Gauke: The 22-year old was found by the amendment. We have already had the impact of the Government Actuary’s Department, rather than by me. measure independently assessed by the Government There is an important point to make—it would be Actuary’s Department. It calculated that a typical 22-year- helpful to the Opposition if they grasped it—about tax old, currently earning average weekly earnings and investing incidence and the distinction between who writes the the equivalent of 10% of gross income each year over a cheque and who bears the tax. It may well be the case 45-year period, would see a fund value that was £11,200 that the funds write the cheque—the funds pay the greater at retirement as a result of these changes. That is money over—but the tax is borne by the investors. approximately equivalent to a 1.3% uplift in their total Those are principally pension funds, and underlying fund at retirement. In current money terms, that is that are the policyholders in a pension fund. That point equivalent to an additional £4,600. Further detail on should not be missed. the distributional impact of the measure was included Another point, which we fully acknowledge, is that if in a tax information and impact note for the measure in we want to help our investment management industry, December, alongside the draft legislation. an uncompetitive charge that puts UK-domiciled funds On the benefits seen due to the improved competitiveness at a disadvantage to funds domiciled elsewhere is clearly of the UK as a fund domicile location, the time taken to damaging to the investment management industry. The authorise and launch new funds means that any positive industry is important to the UK economy. A strong effects of the change would not have been established investment management industry is good for the UK as by the time of such a report, which would be premature. a whole and all its citizens due to the jobs and taxes it I want to stress again, because this point has been generates. This is a critical time for the industry and it is consistently missed by Opposition Members, that the important to make these changes now. schedule 19 charge is borne by investors, not by fund In July 2013, the alternative investment fund managers managers. Data from the Investment Management directive—the AIFMD—came into force. That may Association suggest that around 85% of the charge is lead to an estimated ¤250 billion moving onshore in borne by pension and insurance companies together Europe and it gives the UK an opportunity to attract with retail and public sector investors. Abolishing significant new funds. In addition, the industry is currently 413 Public Bill Committee10 JUNE 2014 Finance Bill 414 experiencing significant growth. Emerging economies Charlie Elphicke: Never mind the amendment; I want are becoming increasingly wealthy and are able to save to pick up on the Opposition’s tone. If we are to and invest significant amounts. EU funds are, in many support hard-working people and their families, we ways, a natural home for those investments and the UK need to ensure that there are jobs. This measure is about must lay the right foundations now before that new creating jobs. We have heard from the same old Labour market is lost to our competitors. I could even go as far party, which is obsessed with the rich and the poor, as saying that ensuring that we have a strong investment rather than with just creating jobs and prosperity for management industry is part of a long-term economic the country, so that people can get on, work hard and plan. The provisions ensure that we have in place the do well. long-term conditions for a thriving industry, which benefits not only London and the south-east, but employs Mr Gauke: I entirely agree. There are moments during 1,400 people in the west midlands, 3,600 people in our debates when the mask slips from some Opposition Scotland—some hon. Members who spoke in this debate Back Benchers, at least. might be interested in that—and 1,000 people in the north-west. Chris Williamson: Will the Minister give way?

David Rutley (Macclesfield) (Con): My hon. Friend Mr Gauke: I am delighted to provide a further makes a very important point about the significance of opportunity for the mask to be cast off altogether. investment management and financial services in the UK. The industry does indeed make a difference to the long-term economic plan, but would it not also Chris Williamson: We just heard an intervention arguing help the UK economy in the global race? that the provision is about job creation. I gave a list of the jobs that could be created if the money were directed in a different way. How many jobs will be created, and Mr Gauke: My hon. Friend beats me in getting in yet in what sectors, as a result of the measure that the another important phrase. He is absolutely right; this is Minister is putting forward? the right change to ensure that the UK is an attractive place for funds to be domiciled. It is good for that industry, and it is good for the people who invest in a Mr Gauke: The sectors are likely to be the investment pension. I do not know whether that is the category of management sector. What do we mean by that? It is not person whom the Opposition consider to be wealthy only those who are directly employed; this also relates and therefore not worthy of any support, but a lot of to operations and administration, IT, compliance, and people—increasingly, indeed, as a consequence of auto- legal and audit services. All those will benefit. It seems enrolment—will be investing in pension schemes, and to me that the hon. Gentleman’s only answer on job we should do everything we can to encourage and creation is more public sector employment. That is what support that. he proposed and that is his position—one that I think he is consistent about. However, we must recognise that The Opposition’s approach to the measure appears to putting in place the conditions for private sector job be hostile. That will do nothing for the pension schemes creation matters. or the investment management industry, and some of the rhetoric we have heard about a return to the 1970s does absolutely nothing for economic confidence in this Chris Williamson: It is not working. country, should there be any prospect of the Labour party returning to office. Mr Gauke: The hon. Gentleman says it is not working, but there are more people in work today than ever 4.15 pm before. The biggest risk to that is the anti-business policies of the Labour party. Chris Williamson: In view of what the Minister says, what is his objection to the Labour amendment? All we seek is publication of who the beneficiaries are. Surely Cathy Jamieson: I shall not detain hon. Members too that is not unreasonable. Do the British people not have long before we vote; I intend to press the amendment. If a right to know? What is there to fear? it is not carried—and no doubt it will not be, given the Minister’s comments—I want to vote against the clause. We have not heard a response from the Minister to the Mr Gauke: I addressed that point earlier. We have set issues that we wanted to draw out: the number of jobs, out, in the tax information and impact note, the impacts the expected beneficiaries and the distributional analysis of the abolition of schedule 19. There is no reason for a that the amendment calls for. more detailed analysis for that measure. It would be I am glad that we livened up the debate, because these disproportionate, and it is difficult to see what such are important matters. My hon. Friends are speaking analysis would achieve, particularly given that it would out on behalf of their constituents when they express take longer than six months for evidence to become concern about the impact of Government policies, and available of how the benefits of the change were accruing about the jobs question. Unfortunately, it is sometimes to investors. too easy for those on the Government side to resort to I will not accept the amendment and I urge the hon. saying that there are more people in employment than Member for Kilmarnock and Loudoun to withdraw it. ever before, when we know that the reality for many of I want to highlight the fact that the clause will help the our constituents is that they are working in jobs in many, not just the few, and will strengthen an industry which they are not able to gain full-time hours. In many that is important to us. instances, they are working in jobs that ultimately are 415 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 416

[Cathy Jamieson] Division No. 10] AYES not the jobs for which they have been trained. They are perhaps taking those jobs rather than having no job Duddridge, James Leadsom, Andrea at all. There are a number of young people in particular— Elphicke, Charlie Menzies, Mark Fuller, Richard Pincher, Christopher Garnier, Mark Rudd, Amber Ian Mearns (Gateshead) (Lab): Will my hon. Friend Gauke, Mr David Rutley, David give way? Hames, Duncan Smith, Henry Heaton-Harris, Chris Swales, Ian Cathy Jamieson: I will in a moment. I was interested Kwarteng, Kwasi Wheeler, Heather in the notion of the 22-year-old, because the majority of 22-year-olds who have come to me are desperate to NOES get a job, either because they have finished an apprenticeship Dakin, Nic McKenzie, Mr Iain and are not being kept on, because companies cannot Evans, Chris McKinnell, Catherine keep them on, or because they have recently graduated Gilmore, Sheila Mahmood, Shabana and are determined—desperate—to get their foot on Glindon, Mrs Mary Mearns, Ian the employment ladder. Unfortunately, the notion that Jamieson, Cathy Pearce, Teresa their first decision would be about where to put that Kane, Mike Williamson, Chris investment for the long term does not apply to the majority of the 22-year-olds in my constituency. I am Question accordingly agreed to. sure that it is little comfort to my hon. Friend the Clause 107 ordered to stand part of the Bill. Member for Derby North either that most of the jobs will be created in the investment management sector, Clause 108 rather than in the manufacturing sector and the other areas on which many of our communities depend. ABOLITION OF STAMP DUTY AND SDRT: SECURITIES ON RECOGNISED GROWTH MARKETS Question proposed, That the clause stand part of the Ian Mearns: My hon. Friend has almost pre-empted Bill. my question. I was just wondering whether she would speculate on how soon we can expect to see advertisements, and how many there will be, for investment management The Chair: With this it will be convenient to discuss job opportunities at the jobcentre in Gateshead. schedule 20.

Cathy Jamieson: I am sure my hon. Friend will tell me Cathy Jamieson: I hope that we will be fairly brief on when the adverts do appear, because I cannot speculate this clause, which introduces schedule 20. It will relieve on when that will happen. from stamp duty and stamp duty reserve tax—collectively, I have said that I intend to press the amendment to a stamp tax on shares—trades made on recognised growth vote. I suspect that nothing that I say at this point will markets such as the alternative investment market and change the Minister’s mind. Therefore, I will leave it at the ICAP securities and derivatives exchange. The that in order that we can make further progress. Government’s stated intention is to boost investor participation in equity growth markets and improve Question put, That the amendment be made. conditions for growing companies raising equity financing. The Committee divided: Ayes 12, Noes 16. At present, transfers of shares and securities of Division No. 9] UK-registered companies generally attract stamp duty charges at the rate of 0.5%. Stamp duty is charged if the AYES transfer is enacted by execution of a written statement, Dakin, Nic McKenzie, Mr Iain and SDRT applies to transfers when no written instrument Evans, Chris McKinnell, Catherine has been executed. The clause means that, as of April Gilmore, Sheila Mahmood, Shabana this year, buyers of shares traded on recognised growth Glindon, Mrs Mary Mearns, Ian markets such as AIM and ISDX will no longer have to Jamieson, Cathy Pearce, Teresa pay the 0.5% tax. Kane, Mike Williamson, Chris When the Chancellor announced the measure in the 2013 Budget, he said it was designed to ease access to NOES funding for small and medium-sized businesses to help Duddridge, James Leadsom, Andrea to reinvigorate the growth of SMEs and, therefore, the Elphicke, Charlie Menzies, Mark wider economy. According to schedule 20, markets will Fuller, Richard Pincher, Christopher be regarded as recognised growth markets if the majority Garnier, Mark Rudd, Amber of the companies on the market have market capitalisations Gauke, Mr David Rutley, David of less than £170 million or if the market’s rules of Hames, Duncan Smith, Henry admission require companies to demonstrate at least Heaton-Harris, Chris Swales, Ian 20% compounded annual growth in revenue or employment Kwarteng, Kwasi Wheeler, Heather over the three financial years preceding admission. The new provisions ensure that transfers of shares and Question accordingly negatived. securities admitted to trading on markets specifically Question put, That the clause stand part of the Bill. designed for smaller companies, or for companies that can demonstrate a sustained record of growth, will no The Committee divided: Ayes 16, Noes 12. longer attract the stamp duty tax charges. 417 Public Bill Committee10 JUNE 2014 Finance Bill 418

The tax information and impact note estimates this measure will succeed when other schemes have not the cost that will accrue to the Exchequer as a result of created the number of jobs or growth equitably across the measure. The Government’s argument is that this is the UK? yet another measure to stimulate lending and ensure that money comes into SMEs. Let us hope that it does The Economic Secretary to the Treasury (Andrea what it says on the tin, because some of the other Leadsom): Clause 108 makes changes to relief from measures that the Government have introduced—including stamp duty and stamp duty reserve tax on purchases of the flagship so-called funding for lending scheme—have shares in UK companies quoted on recognised growth not been as successful as the Government suggested markets. The measure is designed to boost investor they would be. The latest figures from the Bank of participation in equity growth markets and improve the England show that lending to SMEs declined by financing conditions for smaller and growing UK £700 million in the three months to April. companies. The Chancellor argues that clause 108 will incentivise Transaction taxes are widely considered to be a drag investment that will benefit small businesses, but it is by on economic growth. In particular, they increase firms’ no means guaranteed that small UK businesses will cost of capital by depressing their share prices. At a benefit. I hope that the Minister will respond to that time when financing for small and growing business is point. I understand that an employee of the Wealth hard to come by, the Government want to help to ease Management Group has raised concerns about the fact the burden. That is why we are abolishing this tax for that shares quoted on recognised growth markets. With this “not all of the benefit would flow to UK smaller companies measure, we are improving the long-term financing starved of financing, which is part of the Government’s conditions for the smaller and growing British businesses rationale…There are some larger businesses listed on exchanges that use AIM, the ISDX growth market and other such as AIM and around 40 per cent of AIM companies— representing half of its market cap—are either incorporated equity growth markets to raise the funds they need to overseas or operate outside the UK.” help them to grow and create jobs. The value of the UK companies on AIM and the Ian Mearns: My hon. Friend’s point about small and ISDX growth market alone is almost £40 billion. Companies medium-sized enterprises needs to be emphasised. I will feel the benefits of this measure via their share have said in the Committee before—but it needs to be prices and every time they conduct equity fundraising. restated—that if we are going to get the economy in the In combination with the Government’s move in August north-east of England to grow and create jobs in the last year to allow AIM shares to be held in ISAs, this region, we must stimulate small and medium-sized measure will attract more investors to equity growth enterprises. Of 136,000 companies registered in the markets, improving liquidity in those markets and the north-east of England only 1,000 have more than funding environment for more than 800 UK companies. 50 employees. We need to help SMEs. The clause establishes a recognition process under which stock exchanges meeting certain criteria related 4.30 pm to the size or growth rates of companies on those markets may apply to be recognised growth markets. Cathy Jamieson: My hon. Friend again makes an Purchasers of shares in companies quoted on one of important point about the number of jobs. Perhaps the those recognised growth markets no longer have to pay Minister will be able to inform us about that. As far as I stamp duty or SDRT on those purchases, as long as can see, once again the tax information and impact note those shares are not also listed on a main market. The contains no information about the number of jobs the relief came into effect on 28 April. Government expect to be created by the changes. That To conclude, long-term economic success depends on seems to suggest that the tax cut in this context will have today’s small and high-growth companies being able to no impact on ordinary individuals and families. It would access affordable long-term financing to grow into the be helpful if the Minister picked up that point. large businesses of tomorrow. With this measure, the To return to the point I was making about AIM Government are showing that they fully support them. companies, when the change was first announced in Question put and agreed to. Budget 2013, the top five companies listed in AIM included two oil exploratory companies focused on Clause 108 accordingly ordered to stand part of the Africa, a low-cost African airline and a middle eastern Bill. oil exploratory company. Two of them had capitalisations Schedule 20 agreed to. well over the £170 million threshold and one had a capitalisation of £1.6 billion. We want to ensure that support is available for SMEs, particularly where jobs Clause 109 can be created in the short term and in areas where people are most squeezed by the cost of living crisis. It TEMPORARY STATUTORY EFFECT OF HOUSE OF is important that whatever measures are put in place COMMONS RESOLUTION impact on those areas and those people. Question proposed, That the clause stand part of the Will the Minister comment on the points I have Bill. made? Can she also tell us what percentage of the companies listed on registered growth markets that will Cathy Jamieson: The clause is a purely procedural benefit from the change are incorporated and operated one, which addresses the parliamentary machinery for in the UK? Will she give us an estimate of the number introducing legislation and amends provisions relating of SMEs that she expects to benefit from this change? to the House of Commons resolutions for stamp duty On the subject of jobs, what evidence does she have that contained in the Finance Act 1973. Those resolutions, 419 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 420

[Cathy Jamieson] HMRC has always taken the view that income retained for too long should not receive that special treatment, which can be used to vary or abolish stamp duty, have but it has been difficult to determine a legal basis for temporary statutory effect until replaced by an Act of how long is too long. The clause attempts to do that by Parliament. The clause ensures that, following the change introducing a deemed rule: retained income will be to spring-to-spring Sessions, any resolutions for stamp deemed to be capital if it has been held for more than duty will retain their practical effect and allow sufficient five years. It is important to note a number of things. time for parliamentary scrutiny. First, time before 6 April 2014 will be counted, so The change to spring-to-spring Sessions means that any income already held could be subject to charge Parliament may be prorogued each year between the immediately—for example, if there were a 10-year Budget, when a resolution might be passed, and the anniversary on 7 April 2014. Secondly, the deeming rule enactment of the Finance Bill. Section 50 of the Finance will apply only for inheritance tax purposes; the income Act 1973, which contains the provisions relating to will still be income for all other tax purposes, in particular resolutions for stamp duty, will now be amended to income tax. Thirdly, deeming rules will apply only for ensure that such a resolution remains effective until it is the purposes of 10-yearly charges and not exit charges, replaced by an equivalent provision in the Finance Act. meaning that trustees distributing the income will need Similar issues in relation to resolutions for other taxes to consider only the income tax issue, and not potential and duties covered by the Provisional Collection of inheritance tax issues at the same time. Fourthly, when a Taxes Act 1968 were resolved by legislation introduced rule applies at a 10-yearly anniversary, the income will by the Finance Act 2011. We have no objection to the be deemed to have been capped for the whole of the measure standing part of the Bill. previous 10 years. As I said, both the Chartered Institute of Taxation Mr Gauke: I thank the hon. Lady for her comments. and the Institute of Chartered Accountants in England She has explained the clause and its contents. and Wales have concerns about that aspect of the Question put and agreed to. measures introduced by the clause. Both organisations Clause 109 accordingly ordered to stand part of the agree that from their perspective, it seems to be change Bill. for the sake of change. Indeed, the CIOT goes further, saying that it feels that it has much more to do with raising revenue than with tax simplification, although I Clause 110 note that the tax information impact note states that the measure is expected to have negligible impact on the INHERITANCE TAX Exchequer. Question proposed, That the clause stand part of the Given those concerns about the changes to the 10-year Bill. anniversary charge, it would be helpful if the Minister, in his comments on the clause, could outline in detail The Chair: With this it will be convenient to discuss what problem he is trying to solve. What did he have in schedule 21. mind when the clause was introduced? That might allay the concerns of the CIOT and the ICAEW. It would Shabana Mahmood: The clause does four things. First, also be helpful if he could explain to the Committee the threshold for a zero rate of inheritance tax, which is whether he shares the ICAEW’s concerns that trustees frozen at £325,000, is extended until 2017-18. Secondly, might now be forced to decide about distributing trust it enables borrowed funds in a foreign currency bank income on the basis of an impending tax charge rather account to be treated in a similar way to how excluded than the needs of the beneficiaries. properties—property overseas where the person beneficially entitled to that property is non-UK domiciled—is treated. A little more broadly, there are also concerns that the Filing and payments dates for inheritance tax trust measure is creating a further mismatch between trust charges will be aligned; as a result of the clause, trustees law and tax law. It would be helpful to have the Minister’s of property settlements must now file and pay the tax comments on the present slight differences in treatment due six months after the end of the month when the between trust law and tax law measures, and whether he chargeable event happened. The measure also introduces has any intention of making those more uniform. a new provision to treat income arising in relevant property trusts that remain undistributed for more than five years as part of the trust capital when calculating Mr Gauke: Clause 110 and schedule 21 make reforms the 10-year anniversary charges. That aspect of the to inheritance tax. First, the clause freezes the inheritance measure has raised the most comment, in particular tax threshold until 2017-18 to help pay for the capping from taxation specialists. of social care costs. Secondly, the clause aligns the filing Changes made to the treatment of trusts in Finance dates for reporting the tax liability and payment dates Act 2006 brought in a new relevant property regime. for charges on relevant property trusts and clarifies how Apart from a few exceptions, all settled property, including income arising in such trusts is treated for inheritance assets such as money, shares, houses or land, in most tax purposes if it is undistributed for more than five kinds of trusts will be relevant property. In addition to years. Finally, the clause prevents people from avoiding the inheritance tax payable when assets are transferred inheritance tax through the use of foreign currency UK into them, trusts containing relevant property pay bank accounts. inheritance tax when assets are transferred out of Clause 110 and schedule 21 help fund social care the trust, which is the exit charge; the trust reaches a reforms. In February 2013, the Government announced 10-year anniversary of when it was set up, which is the a package of reforms to the funding of social care, periodic charge; and the trust comes to an end. providing financial support for 100,000 more people a 421 Public Bill Committee10 JUNE 2014 Finance Bill 422 year. To help fund the changes, the Government announced I was asked whether the measure will cause trustees at Budget 2013 that the inheritance tax threshold will be to distribute income so as to minimise tax rather than frozen until 2017-18. meet the needs of beneficiaries. The purpose of the Clause 110 and schedule 21 make changes to the measure is to provide certainty and clarity for trustees. inheritance provisions to give effect to the freeze, meaning It remains for the trustee to make commercial decisions that the threshold will remain at £325,000 for individuals about what is best for the beneficiaries. On whether the and up to £650,000 for surviving spouses and civil measure will cause a further mismatch between tax law partners. Freezing the inheritance tax threshold provides and trust law, it is worth pointing out that the measure a simple and fair way to ensure that those with the applies only to IHT charges. It stops any avoidance of largest estates, who are most likely to benefit from the the 10-year charge. That is its purpose. reforms, help fund them. I turn now to the final aspect of the clause and Clause 110 and schedule 21 also introduce changes schedule, which is the change to the way certain foreign that will help to simplify how trusts calculate and pay currency accounts are treated for inheritance tax. New tax. Inheritance tax payment and filing dates can appear rules introduced in the Finance Act 2013 disallow a confusing and inconsistent. The time limits for paying deduction for a liability for the value of an estate if it inheritance tax charges can range from six months after has been used to acquire or maintain excluded property, the month in which the transfer or anniversary occurred which is not chargeable to inheritance tax. The rules to almost a year after the chargeable event. Furthermore, prevent a double deduction and stop avoidance schemes in many trusts, the trustees have the power to accumulate that exploited that tax advantage. HMRC became aware or add undistributed income that arises in the trusts to of a loophole that allowed non-residents and non-domiciled the capital of the trust. In those circumstances, there is individuals to get round the new rules by using a bank little doubt about the correct treatment for the calculation account denominated in a foreign currency. Deposits in of inheritance tax charges, but it can be different where such accounts are disregarded for inheritance tax purposes, income remains undistributed for long periods and the yet are not excluded property. They would therefore not trustees have not made any formal accumulation, or be caught by the new rules and so could be used to gain where the trust deeds do not stipulate when an accumulation the same tax advantage that the rules in the 2013 Act must take place. In such cases, there can be uncertainty were designed to remove. about how the calculation should be undertaken, resulting The changes made by the clause will treat funds in in questions to or correspondence with HMRC to establish disregarded foreign currency UK bank accounts in a acceptable treatment. similar way to excluded property, meaning that a deduction for any liability will be disallowed where borrowed funds have been deposited in such accounts so that they 4.45 pm are not chargeable to inheritance tax on death. The changes will affect only those individuals who are non- The changes made by clause 110 and schedule 21 domiciled and non-resident when they die and who align the filing and payment dates for inheritance tax have deposited borrowed sums in UK bank accounts charges and make the inheritance tax treatment of denominated in a foreign currency. The changes are retained trust income clearer for trustees and practitioners. expected to affect only about 75 estates a year, but will From 6 April this year, the date by which trustees of protect revenue by ensuring that the anti-avoidance relevant property trusts must deliver an inheritance tax rules introduced in the 2013 Act continue to apply. account and pay any tax due will be six months after a chargeable event such as a transfer out of the trust or The freeze in the inheritance tax threshold will help the trust’s 10-year anniversary. The changes will also to fund important reforms, which will limit social care mean that any income arising in relevant property trusts costs and benefit many older people. The clause also that has remained undistributed for more than five simplifies the payment and filing rules for relevant years at the date of the trust’s 10-year anniversary will property trusts and will ensure that the anti-avoidance be treated as part of the trust’s capital for the purposes rules relating to the treatment of liabilities cannot be of the 10-year anniversary charge. sidestepped. I hope that the clause and schedule will stand part of the Bill. I will respond to questions from the hon. Member for Birmingham, Ladywood and set out in a little more Question put and agreed to. detail what the measure is intended to do. As matters Clause 110 accordingly ordered to stand part of the stand, it is advantageous for trustees to retain undistributed Bill. income in the income account for long periods rather Schedule 21 agreed to. than formally accumulate it as capital, because it will escape IHT on a 10-year anniversary and will also have Clause 111 the benefit of the tax credit for income tax purposes if distributed. Where income has been retained for many GIFTS TO THE NATION: ESTATE DUTY years and trustees maintain that they have not yet Question proposed, That the clause stand part of the decided whether to accumulate or distribute income, Bill. HMRC challenges the analysis, but without recourse to litigation it is not clear what the true legal position is. The Chair: The debate on clause 111 will be led by the The new legislation does not affect the trustees’ powers one and only Catherine McKinnell. to accumulate or distribute income but is simply a deeming rule for IHT purposes. The deeming rule provides Catherine McKinnell: Thank you, Mr Streeter. The certainty about the IHT treatment of retained income clause provides for technical changes to the cultural and avoids long-running disputes between the taxpayer gifts scheme. It corrects a technical flaw in the legislation and HMRC. and will ensure that the cultural gifts scheme works in 423 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 424

[Catherine McKinnell] duty attached to the exempt object is more than the rate of inheritance tax—it can be as high as 80%—the line with the publicly stated policy. To understand the policy intention was that the excess amount should policy intention of the cultural gifts scheme with regard become chargeable. However, a technical flaw in the to estate duty, it is worth revisiting the legislation as it Finance Act 2012 meant that in some cases, on which I stands. The cultural gifts scheme was introduced by hope the Minister will be able to provide more information, schedule 14 to the Finance Act 2012. the latent estate duty has not come into charge on a gift as it should have done at any rate above 40%, therefore James Duddridge: I hesitate to interrupt the hon. remaining deferred. It means that donors of objects on Lady’s flow. I would like to claim that was meant to be which there is a deferred estate duty liability are better funny but I in fact just stumbled on my words. I would off donating it under the cultural gifts scheme, avoiding be interested as to why she is speaking to the clause at any deferred liability, rather than selling it on the open this stage and whether she has any preliminary views on market. That was apparently not the intention of the why it might be flawed or whether this is more an policy. introductory message about the Labour party’s overall The proposed new paragraph 32A ensures that the position. I hope I will not have to intervene again and intended amount of estate duty comes in to charge by that she will be comprehensive in her remarks, but I specifying that, for the purposes of estate duty, any stand ready to probe her in detail and I am sure she will qualifying gift to the nation under the cultural gifts be gracious in giving way. scheme will be deemed as if it were for sale at market value and thus allow the intended amount of estate Catherine McKinnell: I thank the hon. Gentleman for duty to be charged. The scheme has been in effect for his intervention, which very much hit the nail on the more than a year, so will the Minister inform the head. At this stage, we need to reflect on the previous Committee of progress so far? How many donors have Finance Act when this policy was initially enacted. We donated pre-eminent objects as a result of the estate had a robust debate at the time, and he is right to query duty exemption? Opening the cultural gifts scheme to whether we will simply revisit those arguments or whether include those liable for estate duty was intended to there is a new proposition we need to look at. It was provide a greater pool of eligible objects. As I mentioned, introduced at the time to encourage lifetime giving of the explanatory notes and the tax information impact culturally significant objects to the nation in exchange note suggest that donors may have benefited financially for a reduction in the donor’s income tax and capital from the technical flaw by donating through the scheme gains liability—a policy objective which the Opposition as opposed to selling on the open market. Is the Minister very much supported. able to give an idea of in how many cases this may have happened or how many donors the Government think At that time, I did raise concerns about one particular may not have had to pay that estate duty and may have aspect of that legislation, paragraph 33 of schedule 14, benefited from this technical flaw? Are there any estimates which appears to be the subject of the changes of the Exchequer revenue losses as a result of the provided for in the clause now before us. On behalf technical flaw? Considering that estate duty can be of the Opposition, I outlined the concerns that the anything up to 80%, the Exchequer could potentially provisions contained in paragraph 33, announced following have lost significant amounts of estate duty, up to the consultation, were considered to be significantly different rate of 40% on any relevant object—that would be in from those originally announced and proposed, something the worst case. It would be useful if the Committee that the ICAEW in particular thought was wrong in could hear an indication of the level of potential Exchequer principle. Perhaps the fact that the Government are losses. now going to revisit the provisions in the light of “technical flaws” shows that the ICAEW and the Opposition were right to have those concerns. Paragraph Mr Gauke: It is a pleasure to respond to the hon. 33 of schedule 14 provides a partial exemption from Lady in respect of clause 111 which amends the estate estate duty on exempt objects that would otherwise duty provisions of the cultural gifts scheme to ensure have become chargeable under schedule 5 to the Inheritance the scheme works as originally intended. The excitement Tax Act 1984 on a gift of property under the scheme. of discussing the clause could make anyone breathless, It is worth noting that estate duty has not existed for but I will do my best. The measure means that a gift of a many years, having been replaced by capital transfer tax pre-eminent object carrying a latent estate duty liability, and then inheritance tax. However, under the estate known as a conditionally exempt object, is deemed to duty legislation, there were rules similar to those contained be a sale for the purposes of the scheme. This means in the cultural gifts scheme which meant that an estate that donors of such objects cannot receive more of a duty liability could be deferred. In other words, where financial benefit from their donation than if they had an asset was of historical or scientific interest, estate sold the object on the open market. duty liability could be deferred and would crystallise on The cultural gifts scheme was announced at Budget the subsequent disposal of the asset on the open market. 2011 and introduced in 2013. Its purpose was to encourage While that regime no longer exists, a deferred estate people to donate pre-eminent works of art and historical liability would still be a charge to estate duty, as opposed objects to the nation. In return, donors receive a reduction to any other form of inheritance tax. in their UK liability, based on a percentage of the value The partial exemption for estate duty provided in of the object they donate. Individual donors are entitled schedule 14(33) to the Finance Act 2012 was intended to a reduction in their income tax or capital gains tax to be limited to the amount that would be chargeable if liabilities of 30% of the value of the object. Companies the rate of tax was the same as the rate of inheritance are entitled to a reduction in corporation tax of 20% of tax, which is currently 40%. Where the rate of estate the value of the object. The amount of the tax reduction 425 Public Bill Committee10 JUNE 2014 Finance Bill 426 ensures that there is always an element of philanthropy Clause 113 in the gifts: donors will be less well off than if they had kept their objects or sold them on the open market. BANK LEVY: MISCELLANEOUS CHANGES Even though it is still new, the scheme has been a great success. People are already enjoying gifts made Cathy Jamieson: I beg to move amendment 27, in under the scheme, such as the Lennon and McCartney clause 113, page 94, line 2, at end insert— lyrics now on show at the British Library. We announced ‘(1) Before bringing forward any further changes to the bank at the Budget that an extra £10 million a year in funding levy rates system the Chancellor shall lay before Parliament a is being made available for the scheme, to allow even report setting out the impact of all tax changes applying to banks more objects to be donated under it. since 2010 on— (a) UK banking groups; 5pm (b) building society groups; However, there is a technical flaw in the legislation, (c) foreign banking groups; and relating to condition-exempt objects carrying a latent (d) relevant non-banking groups. state duty liability. Unfortunately, a consequential (2) The report will pay particular attention to receipts from— amendment was overlooked when the original legislation (a) corporation tax; was drafted. The consequence of that flaw is that estate (b) the bank levy, and duty above the inheritance tax threshold of 40% is not (c) bank payroll tax.” always brought into charge on the gift of a condition-exempt object under the scheme, because in most cases the underlying estate duty rules bring the duty into charge The Chair: With this it will be convenient to discuss only on the sale of an object. the following: Without the amendments introduced by the clause, a Clause stand part. donor could be better off donating an object under the That schedule 22 be the Twenty-second schedule to scheme than if they sold it on the open market. For the Bill. example, an individual could benefit from a waiver of estate duty of up to 80% of the value of the gift, plus a Cathy Jamieson: It is a pleasure to speak on this 30% tax reduction. That would clearly undermine the section, and to follow my hon. Friend the Member for philanthropic purpose of the scheme. Newcastle upon Tyne North, who did such a remarkable The clause amends the estate duty provisions of the job on the previous clause. Indeed, I should also mention cultural gift scheme and ensures that it will work as the gallant intervention from the hon. Member for intended. For the purposes of the estate duty, any gift of Rochford and Southend East. That might be last time a pre-eminent object to the nation under the cultural that I say anything complimentary about an Opposition gift scheme would be deemed to be in sale at market Member, either this afternoon or later. value. That will allow the latent estate duty above the The clause contains several largely technical changes inheritance tax threshold of 40% to come into charge, to the bank levy that arose from a review of its operational ensuring that the scheme works in line with the original, efficiency. Those changes were subject to consultation publicly stated policy. The changes will affect only a and the measures that were announced were relatively handful of donors, who may have a pre-eminent object uncontroversial in technical terms. Indeed, when there that became condition-exempt before 1965 and that were problems, some measures were updated to take they wish to give away under the cultural gift scheme. suggestions into account. However, it is important that We expect the impact to be minimal. the Chancellor, prior to bringing forward any further On the questions raised by the hon. Member for reforms of the bank levy system, should lay before Newcastle upon Tyne North about the scale of use of Parliament a report considering total tax receipts paid the scheme, eight applications have been made, three to the Exchequer since 2010 by UK banks, building offers have been refused under the scheme: one was not societies, foreign banks and relevant non-banking groups. owned by the applicant, one was not pre-eminent and We want particular attention to be paid to receipts the other had the estate duty attached to it and the generated from corporation tax, the bank levy and the donor did not want to wait for estate duty provisions to bank payroll tax. All those things are encapsulated in be changed in line with the stated policy. How many amendment 27. offers have been refused because of this issue? One. The The Government’s proposed changes aim to improve donor was asked if they would like to make their offer the operational efficiency of the bank levy. We do not once the law had been corrected, but they did not want have a problem with that in principle. Indeed, since the to. How many people have taken advantage of the levy’s introduction in 2011, we have consistently highlighted technical flaw, by giving more than intended? None. that the Chancellor’s annual revenue targets for it have The Department for Culture, Media and Sport and not been reached. The Red Book says that the changes Arts Council England, who administer the scheme for will DCMS, agreed that they would not register any applications “limit the protected deposit exclusion to amounts insured under a that may have a estate duty on them until the provisions deposit protection scheme…treat all derivative contracts as short were corrected. term…restrict relief for a bank’s High Quality Liquid Assets to I hope that those points help the Committee and that the rate applicable to long-term liabilities…align the bank levy the clause stands part of the Bill. definition of Tier One capital with the new Capital Requirements Directive from January 2014…exclude liabilities in respect of Question put and agreed to. collateral that has been passed on to a central counterparty from Clause 111 accordingly ordered to stand part of the January 2014” Bill. and 427 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 428

[Cathy Jamieson] has resulted in it being changed no fewer than seven times. That does not seem to fit with the idea of promoting “widen legislation-making powers within the bank levy from certainty and stability in the industry. January 2014 to ensure it can be kept in line with regulation”. Consultation is now taking place on wholesale changes The tax information and impact note states that the to the levy that would lead to the introduction of a changes will generate additional revenues to the Exchequer band-based system in which the tax of an individual of £35 million in 2014-15, £260 million in 2015-16 and bank is capped at an upper limit of £375 million. £275 million in each of the three subsequent years. Although the Government say that that will be cost-neutral, We have been clear all along that the bank levy is not there is speculation that it could lead to a tax cut for the a bad idea in itself, but the Government have been banks that are currently paying the largest share of the unambitious for it and the measure has been poorly levy. The Opposition have raised that matter before. implemented. Once again, the Government are bringing We call on the Government to support our amendment forward additional changes, which is more evidence of to provide for a full and comprehensive review of all poor implementation and the fact that the Government’s taxes levied on the banking sector. I do not hold out inability to apply the levy correctly has led to the much hope that the Government will suddenly change Exchequer losing revenue. It is on record that the Opposition course and accept the amendment—they have resisted have argued that the initial levy was set at a relatively such measures in the past—but, as I said earlier, I am an low rate, both by international standards and when eternal optimist, and when new Ministers take up their measured against the scale of taxpayer subsidies received post— by the sector during the financial crisis and after. When the Chancellor announced the introduction of Nic Dakin: New brooms. the levy in June 2010, he confidently asserted that it Cathy Jamieson: Indeed, when there are new brooms, would we have an opportunity to look at things again. We are “generate over £2 billion of annual revenues”—[Official Report, pressing our case today because we want the bank levy 22 June 2010; Vol. 512, c. 176.] to bring in the revenue that was expected, and that it He has reiterated that assertion on several occasions was claimed it would bring in for the Treasury. This is and has been enthusiastically backed by the Prime not a matter for debate on the present clause, but it is Minister. In his Budget evidence to the Treasury Committee important to recognise that the Opposition would increase in 2010, the Chancellor said: the bank levy to raise an additional £800 million a year “When it is fully operational the bank levy is going to raise to fund an expansion of free child care places for £2.5 billion and we made it clear that we are targeting a revenue working parents of three and four-year-olds to 25 hours sum rather than a particular rate because we think that this is an a week. That would be of great significance and a great appropriate contribution that balances fairness with the help to many people. competitiveness of the UK banking sector.” Will the Minister give us an update on the projected At Prime Minister’s Question Time on 12 January 2011, increase in Exchequer revenues arising from the clause? the Prime Minister said: How can we be sure that that projection is accurate, “The bank levy will raise £2.5 billion each year once it is fully given that the initial predictions do not seem to have up and running…we will raise £9 billion compared with his £2.3 been accurate? Even at this late stage, will she take billion.”—[Official Report, 12 January 2011; Vol. 521, c. 280.] account of our call for a full and comprehensive review I think the “his”was a reference to the shadow Chancellor. of all the taxes levied on the banking sector, and accept However, in its first two years, the levy generated just that that is justified? Will she guarantee that the proposed £1.6 billion per year, which was well below the target changes to the levy and the introduction of the band-based that the Government had set themselves. system will not lead to the big banks paying less? If it Another problem that has emerged is that the dual turns out that the proposed changes are a tax cut for the objectives seem to be in conflict. By setting the levy as a big banks, why should that be a priority at a time when tax on bank liabilities in excess of £20 billion, and working people are worse off, but the banks can still charging a lower rate for more secure long-term liabilities, afford to pay bigger bonuses, which the general public the Chancellor seemed actively to be encouraging banks find it difficult to understand? to reduce their exposure by moving towards more stable forms of funding. At the same time, however, he wanted Andrea Leadsom: First, I thank the hon. Lady for to generate “over £2 billion” of annual revenue. Of saying that the bank levy is not a bad idea. course, questions have arisen about how the banks Clause 113 and schedule 22 make several changes to would or would not change their behaviour, and how the bank levy’s detailed design in response to an operational the more they remodelled their balance sheets, the less review in 2013. The changes are designed to strengthen money the levy would generate. Following one of the the bank levy’s behavioural incentives while making the Chancellor’s latest projections for the bank levy, a tax base simpler and fairer and, importantly, more contributor to the Tax Journal said that the continued aligned with recent regulatory developments. Alongside difficulty in raising the expected yield the increase in the bank levy rate made by clause 112, the measures will help to ensure that future years’ “should become a lesson in the problems of saddling a new tax aimed at managing behaviour with a fixed revenue target”. receipts meet Government targets. There is still tension in that system. 5.15 pm The Chancellor has also cut corporation tax annually, The bank levy, which is a permanent tax on banks’ thereby handing the banks a tax break. To ensure that balance sheets, equity and liabilities, was introduced by the banks do not benefit from that, every time he has the Government from 1 January 2011. It had two core cut corporation tax, he has had to raise the levy, which policy objectives: first, to ensure the sector makes a fair 429 Public Bill Committee10 JUNE 2014 Finance Bill 430 contribution that is reflective of its risks to the UK showed that 2012-13 receipts remain below the peak economy and the wider financial system; and, secondly, reached in 2010-11. However, the 2010-11 figure was to provide incentives for banks to move towards more inflated by receipts from the bank payroll tax, a one-off stable funding profiles, thus reducing the likelihood of measure implemented on the day of the announcement liquidity shocks. that the previous Chancellor had said could not be As part of their approach to improving the tax policy introduced permanently. I quote the right hon. Member making process, the Government announced that they for Edinburgh South West (Mr Darling) in the Financial would review the bank levy’s design in 2013 to ensure Times on 1 September 2010: that it was operating effectively. In line with that “It will be a one-off thing because, frankly, the very people you announcement, a formal consultation was published in are after here are very good at getting out of these things July 2013 that considered whether changes could be and…will find all sorts of imaginative ways of avoiding it in the future.” made to simplify the bank levy, apply it more fairly across the population, align it better with the regulatory Bonuses in the banking sector have fallen markedly regime and reduce its compliance costs for businesses since the bank payroll tax applied, with the yield from a and HMRC. The Government believe that the underlying repeat tax likely to be much lower. The Government policy objectives for the bank levy remain appropriate, have also taken wider action since 2010-11 to tackle so they did not include them within the scope of the unacceptable remuneration and ensure that pay does 2013 review. In particular, they were clear that there are not incentivise excessive risk taking. no plans to revisit the fixed target for bank levy receipts, Hon. Members will know that under the Prudential which is currently set at £2.9 billion a year for 2015-16, Regulation Authority’s remuneration code, large parts with the bank levy forecast to levy approximately £20 billion of bonuses must now be deferred and paid in shares. in total by 2018-19. Also, firms are now required to have in place clawback The 2013 review consultation ran for 12 weeks, and policies to reduce or revoke pay altogether when subsequent the Government actively sought engagement with a information on poor performance comes to light. That broad range of stakeholders. The representations made was why the Government chose instead to introduce a as part of that process were used to inform a number of permanent tax on banks’ balance sheets, which helps to changes to the bank levy’s detailed design. The changes ensure that there is a fair contribution from the banking that the Government announced in the 2013 autumn sector while supporting the regulatory regime by statement were, first, that the exclusion of protected encouraging banks to move towards safer funding profiles. deposits from the bank levy charge will be limited to The hon. Lady asked whether the changes to the amounts insured under a deposit protection scheme bank levy will result in lower revenues. The changes from January 2015. Secondly, all derivative contracts being considered as part of the consultation are intended will be treated as having a short-term maturity from to be revenue-neutral and will not impact on the target January 2015. Thirdly, relief that banks receive for their yield from the levy. The independent Office for Budget high-quality liquid assets will be restricted to the rate Responsibility forecasts that the levy will raise £2.9 billion applicable to long-term liabilities from January 2015. a year from 2015-16. That is seen as a fair contribution Fourthly, the bank levy definition of tier 1 capital will that reflects the risks of the sector to the UK financial be aligned with the new capital requirements regulations system and the wider economy. The particular impact from January 2014. Finally, specific liabilities arising on individual banks is not yet clear and will, of course, from the central clearing of derivatives will be excluded depend on the detailed design of the banding model, from the bank levy charge from January 2014. which is itself the subject of consultation. The changes will simplify the bank levy and help to The hon. Lady asked about the Exchequer impact of ensure that it applies consistently across banks of different the changes. The changes made by the clause will widen sizes, activities and domiciles. They will also help to the tax base, increasing the bank levy yield by around ensure that the behavioural incentives for banks to £270 million a year in the steady state. Alongside an move towards more stable funding profiles are effective increase in the bank levy rate from 0.14% to 0.156%, and appropriately targeted. Finally, they will help to that base broadening helps to offset a downward revision ensure that the bank levy is aligned with recent in the bank levy forecast and ensures that future years’ developments in the regulatory regime, including the receipts meet Government targets. new European markets infrastructure regulation, which The changes made by clause 113 and schedule 22 are aims to increase transparency in the derivatives market. designed to strengthen the bank levy’s behavioural incentives I turn to amendment 27. The Opposition are asking and make the tax base simpler, fairer and more aligned the Government to lay before Parliament a report that with recent regulatory developments. I therefore hope considers overall tax receipts from UK banks, foreign that they will be agreed to without the amendment banks, building societies and relevant non-banking groups proposed by the Opposition. since 2010. The Government are not minded to accept the amendment. HMRC already publishes statistics on Cathy Jamieson: I listened carefully to the Minister. I PAYE, the bank levy, corporation tax and bank payroll am struck by the important point that a consultation is tax receipts from the banking sector each year, albeit still going on in relation to the banding and how that not broken down by different groups of banks. The would impact on individual banks. That was partly why most recent publication from August 2013 showed that we tabled the amendment, because we wanted proper the relevant tax receipts from the banking sector were information on the exact impact on a range of areas. On £21.7 billion in 2012-13, which represented an increase that basis, I shall press the amendment to a Division. of 6%, or £1.2 billion, on the previous year, despite Question put, That the amendment be made. corporation tax receipts continuing to be depressed by losses incurred during the financial crisis. The publication The Committee divided: Ayes 12, Noes 15. 431 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 432

Division No. 11] hope that that explanation provides some clarity to the hon. Member for Newcastle upon Tyne North and that AYES the clause will stand part of the Bill. Dakin, Nic McKenzie, Mr Iain Question put and agreed to. Evans, Chris McKinnell, Catherine Clause 114 accordingly ordered to stand part of the Gilmore, Sheila Mahmood, Shabana Bill. Glindon, Mrs Mary Mearns, Ian Jamieson, Cathy Pearce, Teresa Kane, Mike Williamson, Chris Clause 115 NOES RATE OF BINGO DUTY Dinenage, Caroline Kwarteng, Kwasi Duddridge, James Question proposed, That the clause stand part of the Leadsom, Andrea Bill. Elphicke, Charlie Menzies, Mark Fuller, Richard Pincher, Christopher Garnier, Mark Rudd, Amber The Chair: With this it will be convenient to consider Gauke, Mr David clause 116 stand part. Hames, Duncan Swales, Ian Heaton-Harris, Chris Wheeler, Heather Catherine McKinnell: I shall deal first with clause 115 Question accordingly negatived. and the reduction in bingo duty from 20% to 10%. As Committee members will be aware, bingo duty, similarly Clause 113 ordered to stand part of the Bill. to gaming duty, which we have just discussed, is a gross Schedule 22 agreed to. profits tax. In other words, the amount of bingo receipts minus the amount of bingo winnings equates to the Clause 114 HMRC-termed bingo promotion profits. It is those profits that are liable to bingo duty, which is currently at a rate of 20%. RATES OF GAMING DUTY Question proposed, That the clause stand part of the 5.30 pm Bill. The position differs from that under the previous taxation regime. Until 2009, there was a gross profits Catherine McKinnell: I do not want to dwell on this tax at a rate of 15% plus VAT. In 2009, that was short and fairly technical clause for too long, especially replaced by a 22% gross profits tax, with bingo clubs as I am sure that Committee members are eager to becoming partially exempt for VAT reclaim purposes. move on to bingo duty, which is the subject of the next Gross profits tax was then reduced to 20% in 2010. clause. As hon. Members will be aware, gaming duty is However, the industry remained concerned about its charged on any premises in the UK where dutiable inability to reclaim all its VAT, which caused investment gaming takes place, which includes the playing of casino and refurbishment costs to remain high. I raised that games such as roulette, baccarat and blackjack. The concern on behalf of the Opposition in last year’s amount of duty is calculated based on gross gaming Finance Bill Committee. I also pointed out concerns yield—in effect, the money gambled minus the winnings raised by the bingo industry, notably by the Bingo paid. It is banded on a single sliding scale from 15% to Association, about the impact of the current rate of 50% of gross gaming yield. As in previous Finance bingo duty on the industry, the wider economy, and Bills, this measure increases the bands for gross gaming jobs and growth. The Opposition have raised such yield in line with inflation. The explanatory notes state concerns on numerous occasions. that the basis of revalorisation is the retail prices index for the year ended 31 December 2013. The figure was calculated at 2.64%, compared with 3.1% the previous Duncan Hames (Chippenham) (LD): The hon. Lady year. As in last year’s Finance Bill Committee, I have has clearly done a lot of work on this subject. That just one question for the Minister: will he clarify for being the case, was she at all surprised that many of her Committee members what additional revenue the Exchequer colleagues criticised the Government for acting on the will receive as a result of the rise? measure in the last Budget?

Mr Gauke: It is a pleasure to speak to clause 114, Catherine McKinnell: It is interesting that the hon. which increases the thresholds for the gross gaming Gentleman raises that issue. I will go on to address yield bands for gaming duty in line with inflation. The some of the concerns raised about how the policy was change will take effect for accounting periods starting announced; it also relates to members of his party. on or after 1 April 2014. The gaming duty rates remain Obviously, we welcome that change. We had called for unchanged. Gaming duty is a banded tax, with marginal the Government to consider it on numerous occasions rates varying between 15% and 50%. Revalorising the during debate on previous Finance Bills. However, we duty bandings will prevent fiscal drag and works in the also need to address the wider issues in this debate. This industry’s favour. Without it, some casinos would pay a is not only about the impact of bingo duty; it is also higher marginal rate of tax on some of their gross about the introduction of the machine games duty in gaming yield. Increasing the bands in line with inflation February 2013, which according to industry figures will is already assumed in the public finances, so there is no hit bingo clubs with an additional £9.25 million in tax scorecard impact as a consequence of the changes. I each year. The industry believes that that, combined 433 Public Bill Committee10 JUNE 2014 Finance Bill 434 with a high rate of bingo duty, has left it facing one of reduced and therefore whether a Labour Government the highest starting rates of tax of all gaming activity in would have turned round and said to them, “No, we’re Britain. not going to support the bingo clubs; we’re going to For that reason, we tabled an amendment to last keep the bingo duty high.” year’s Finance Bill calling on the Government to explore what consideration they had given to the impact of the Catherine McKinnell: The hon. Gentleman is clearly rate of bingo duty on the bingo industry, which, as we being ridiculous and not listening to the important have discussed in previous Finance Bill Committees, points I have made. I have said clearly that we have plays an important role in communities up and down called on this and numerous other Finance Bill Committees the country, but whose bingo clubs are closing at a rate to look at the duty. We welcomed the change, but not of one a month. As we had sought clarification on why the Government’s inability in this Budget to recognise bingo is being taxed at a higher rate than other kinds of the cost of living crisis that people are facing up and gaming, our amendment highlighted the fact that Ministers down the country. It was incredibly patronising to suggest had apparently taken no account of the impact of to members of the public that 1p off a pint of beer and bingo duty on the industry, jobs and growth. In fact, a tax cut for the bingo industry would somehow solve when the then Economic Secretary to the Treasury, the everybody’s problems. right hon. Member for Bromsgrove (Sajid Javid), responded, he discussed only the impact of a bingo duty cut on the Treasury, not the impact on the industry, while Charlie Elphicke: The cost of living crisis—by which simultaneously dismissing any notion that the coalition’s the hon. Lady means that wages have not kept pace machine games duty might inadvertently have affected with inflation—is something that happens after every the bingo industry. recession, as she knows. It is particularly deep on this However, it appears that Ministers had a rethink on occasion because the recession and the stunning, galactic the issue in the intervening period. The Chancellor economic mismanagement that we saw previously brought announced at this year’s Budget that he would go this country so low for so long that this Government further than the industry’s calls to cut bingo duty to have been turning things around. Very soon, she may 15% and instead cut it to 10%. Clause 115 enacts that regret banging on about the cost of living crisis, as we provision and is welcome. We called on the Government head to the election with rising wages. for many years to explore such a measure, and we are pleased that our calls have been heeded. Indeed, it The Chair: Order. I feel obliged to intervene at this seemed that the cut in bingo duty, perhaps along with point. We are discussing the rate of bingo duty and the cut in beer and other alcoholic duties, was possibly clauses 115 and 116, and I do not particularly want to one of the most popular announcements in the Chancellor’s go into too much detail about adverts relating to them. Budget, at least until the evening tweet-fest began and Let us continue our important mission on clauses 115 that poster surfaced on social media, doing the rounds and 116. in the press the following morning after the Conservative party chairman’s tweet that said: Catherine McKinnell: Thank you, Mr Streeter, for “#budget2014 cuts bingo & beer tax helping hardworking people do more of the things they enjoy.” calling us back to order. I appreciate the point the hon. I confess that I thought it was a spoof at first, as I Member for Dover is making, but it totally ignores the believe did the Chief Secretary to the Treasury. He went fact that many of the choices and decisions made by on to say on national television: this Government—the VAT increase is just one example— have made it a lot worse for ordinary households up “It may be our Budget, but it’s their words”. and down the country. It is interesting to explore whether Ministers really thought they could just fob off working people, patronising Let me turn to clause 116 and the small-scale exemption them with cuts in bingo and alcohol duties to brush for adult gaming centres. I would like some clarity from over the cost of living crisis, which the Government the Minister. Clause 116 relates to an exemption to have completely failed to deal with. I have some questions, bingo duty—specifically, the exemption provisions for and although I regret that the Chancellor is not here to adult gaming centres—that is available to small-scale answer, I would be grateful if the Exchequer Secretary amusements provided commercially, which are arcades would answer them in his absence. It has been difficult for adults providing gaming machines with higher payouts to ascertain exactly what went on with that advert. Did than family entertainment centres. The legislation provides the Chancellor sign it off? Did he or any other Ministers for certain types of bingo operation—from domestic have any part to play in its design or its signing off? The and small-scale bingo, to not-for-profit bingo and, of idea that taking 1p off a pint of beer—we have already course, small-scale amusements provided commercially—to discussed that people would have drink 100 pints of be exempt from bingo duty. Paragraph 5 of schedule 3 beer to save £1—or cutting bingo duty and then saying, to the Betting and Gaming Duties Act 1981 describes a “Don’t worry, people out there; we’ve solved the cost of number of conditions that need to be met for small-scale living crisis faced by millions of hard-working people amusements provided commercially to be exempt from up and down this country, and we know what you enjoy bingo duty, including the maximum levels of stakes and doing in your spare time,” just shows how out of touch winnings. the Government are. It very much rang that way with One further condition in the case of adult gaming members of the public. centres, is that such premises should have an amusement machines licence in force. However, as I am sure Committee Mark Garnier (Wyre Forest) (Con): I am curious to members know, amusement machine licence duty was know whether the hon. Lady is saying that she would repealed in the Finance Act 2012 and replaced with have ignored the calls by bingo clubs for the duty to be machine games duty. At that point, the reference to 435 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 436

[Catherine McKinnell] Ian Mearns: The fact that the online petition reached 300,000 signatures is of great interest. I was invited to amusement machine licensing in the conditions listed in my own local bingo club, the Mecca bingo club in paragraph 5(1)(b) of schedule 3 to the 1981 Act became Gateshead. I have to say that I had not set foot in it redundant. Clause 116 seeks to correct that by replacing before and I was stunned by the vastness of the place—it the reference in paragraph 5 with an equivalent reference is a really large establishment. However, I still do not to machine games duty in order for adult gaming centres really understand why the Minister and his team decided to remain exempt from bingo duty. to cut the percentage rate of duty from 2-0, blind 20, to I have one question for the Minister. Neither the Downing street, No. 10. explanatory notes nor the tax information and impact note on the measure explain what the impact of the 5.45 pm technical flaw has been so far. Machine games duty was introduced on 1 February 2013, so presumably from Mr Gauke: We believe that it was the right thing to do that date until the change in the clause comes into force to support the bingo industry. I would describe No. 10 following the Bill gaining Royal Assent, any bingo in as Dave’s den—put it this way, I do not think it is going adult gaming centres will not have been exempt from to be Ed’s den. It was right to provide support to the bingo duty as it should have been. Can he tell the sector. As an industry, it was facing a significant and Committee what impact this technical flaw has had on difficult tax regime—one that we inherited, it has to be adult gaming centres? Has it led to them inadvertently said. paying more duty than they would have, had the irregularity The hon. Member for Newcastle upon Tyne North not been missed? Has the flaw resulted in any notable tried to convey the impression that she had long been impact on the Exchequer? campaigning for this cut in bingo duty, but that is not I would be grateful if the Minister would address the impression I got from previous Finance Bill debates. those points, as well as the important issue relating to There was a vigorous campaign, and I can think of one the bingogate advert that I put to him earlier. or two of my parliamentary colleagues in particular who were prominent in that campaign, not least my Mr Gauke: Clauses 115 and 116 make changes to the hon. Friends the Members for Wyre Forest, for Hastings taxation of bingo. The bingo industry plays an important and Rye, for Gosport, for Spelthorne, for Dover, for role in bringing local communities together, supporting Fylde, for Tamworth, for Crawley, for South Derbyshire employment and contributing to British culture. and for Harlow (Robert Halfon). Before I set out the detail of the clauses, I will give Before I start giving too much credit to various hon. some background. According to the Bingo Association, Friends for their contribution, let me say that we believe in the mid-1970s there were around 1,700 bingo clubs in the Budget announcement will allow many bingo clubs Great Britain. However, as hon. Members will be aware, to expand. Since the Budget, both major operators and the bingo industry is in long-term decline and club many independent operators have come forward with numbers have fallen drastically. The Bingo Association investment plans as a result of the duty reduction. The estimates that there are now only 400 bingo clubs Rank Group, which operates Mecca bingo, has committed operating in Great Britain. There are many reasons to develop three new bingo clubs and restart its touted for the decline, including changing consumer modernisation programme. Those changes will involve tastes and the smoking ban. In recent years the tax at least £6 million in capital investment over the next treatment of bingo has also changed. In 2009, bingo three years and are expected to create more than 200 participation fees were made VAT exempt, but the rate jobs, as well as safeguarding many existing ones. of bingo duty was increased to 22%, before being reduced to 20% in 2010. Gala Bingo no longer plans to close nine of its clubs, According to industry figures, there were 43 million protecting almost 200 jobs, and will invest £40 million visits to bingo clubs in 2012 and 6 million people are in stepping up its refurbishment programme. In addition, retail members of the Bingo Association. Earlier this Gala has announced that it will open a new club in year, more than 300,000 bingo players signed a petition Southampton, investing £5 million and creating 50 new that was delivered to 11 Downing street asking the jobs. Castle Leisure is an independent operator that Chancellor to cut bingo duty. Their slogan was “Boost runs 11 bingo clubs. Shortly after the Budget, the Chancellor bingo”, because they wanted bingo duty to be cut to visited Castle bingo in Cardiff. In the next three years, 15% to boost the industry. I am happy to say that the Castle will create 100 jobs by substantially increasing its Government have been able to go further: clause 115 capital investment. Castle will invest £5.5 million in halves the duty to 10%. refurbishing its existing clubs and a further £7.5 million in developing a new bingo club. Non-traditional bingo Ian Swales: May I pass on to the Minister the thanks clubs are also investing in bingo. Rileys Sports Bars also of the Beacon bingo club in Redcar? Its members took intends to recommence its roll-out of bingo, creating an active part in the campaign he mentioned and were 60 new jobs. quite pleasantly surprised to see that it was doubly I hope that provides a bit of an answer to the hon. successful. Should things not work out for me next Member for Gateshead on the benefits of the reduction— May, I have been offered alternative employment as a and who knows, it might even bring new jobs to his bingo caller. constituency. The reduction will certainly support bingo players living in Gateshead and elsewhere. The changes Mr Gauke: I am grateful to learn from my hon. in clause 115 will enable the industry to grow and secure Friend of the support from his own bingo club. Although its future as a safe social activity at the heart of local clearly it must be pleasing to him to have the offer he communities. Miles Baron, chief executive of the Bingo mentioned, I am sure it will not be needed. Association, has said: 437 Public Bill Committee10 JUNE 2014 Finance Bill 438

“We are already seeing evidence that the duty reduction on (c) the usage of category B2 games compared with other bingo will be transformational for operators and customers.” category games; Clause 116 addresses a related issue: bingo provided (d) the number and prevalence of betting shops on high commercially, on a small scale, in adult gaming centres. streets; and Such premises were exempted from bingo duty on the (e) problem gambling as a result of category B2 games. condition that they met certain qualifying criteria, one (9) The Chancellor of the Exchequer must publish the report of which was that they also provided gaming machines of the review and lay the report before the House.” and paid amusement machine licence duty. When machine games duty was introduced in 2013 to replace AMLD, The Chair: With this it will be convenient to discuss the relief was unintentionally overlooked. Clause 116 clause stand part. corrects that by substituting the requirement for an amusement machine licence with a requirement that a Catherine McKinnell: The clause relates to machine machine subject to machine games duty is also provided games duty, the tax charge on dutiable machine games, for play on the premises. Businesses that were covered where customers pay to play in the hope that they will by the exemption when AMLD was in force will generally win a cash prize. The clause provides for measures that be covered after this update. The Government’s intention introduce a new higher rate of machine games duty, is clear: such businesses are exempt from bingo duty. chargeable on any gaming machines where the charge HMRC will not be pursuing any bingo duty in respect payable for playing exceeds £5. The higher rate of of such clubs, so there will be no effect on them. MGD is aimed specifically at a certain category of I am delighted that we can pass legislation this afternoon gaming machine, known as B2 machines, where players to reduce the bingo duty rate and to reinstate an exemption can stake up to £100 a play. By contrast, most other that was inadvertently lost. It still seems to me that the category machine games are limited to £2 stakes or less. Opposition are somewhat grudging about the changes There has been much controversy around these machines, we have introduced. They are not so much interested in which are known as fixed odds betting terminals. I will the substance, but in extraneous matters. The truth is discuss these later, but there is no doubt that they are that this Government are delivering a substantial cut increasingly prevalent and frequently used on the high that will benefit millions of people and I am delighted street and in betting shops in particular. to be able to put it in place. Mike Kane (Wythenshawe and Sale East) (Lab): I do Catherine McKinnell: The Minister talked about not think my hon. Friend explained the full facts. It “extraneous matters”, which drew my attention to the might be £100 a play, but a play can take place every fact that he has not responded to my question. Did 20 seconds. Ministers have a role to play in reviewing and signing off the advert that went out on the bingo and beer duty Catherine McKinnell: I thank my hon. Friend for his cut, which was clearly insulting to the majority of the intervention. I will go on to explain the full facts—don’t population? you worry, Mr Streeter. It is the Government’s view that B2 machines in particular, with their higher stake limits, Mr Gauke: Not for the first time this week, the are extremely profitable in comparison with other, lower- Opposition are more interested in process than substance. stakes machines. The Chancellor therefore announced All I would say is that if the hon. Lady wishes to in the Budget that a new, higher rate of MGD was continue this discussion and draw further attention to a necessary to increase the fairness of the tax system by reduction in bingo duty that will benefit bingo clubs up making the more profitable high street gaming machines and down the country and those who play bingo, she is pay a higher rate of duty.The Budget document elaborated more than welcome to do so. I, for one, am proud that further by stating that this new higher rate on the the Government have taken action to cut bingo duty. high-stake B2 machines would Question put and agreed to. “bring their profitability more into line with other gaming machines Clause 115 accordingly ordered to stand part of the on the high street.” Bill. The measure follows the Government’s announcement Clause 116 ordered to stand part of the Bill. on wider measures to “protect players further”—as the Under-Secretary of State for Culture, Media and Sport, the hon. Member for Maidstone and The Weald Clause 117 (Mrs Grant) recently stated—when using high-stakes gaming machines on the high street. I will come to those measures in more detail shortly, but the Opposition RATES OF MACHINE GAMES DUTY believe that, together with the higher rate of machine games duty provided for in the clause, they do not go Catherine McKinnell: I beg to move amendment 52, far enough in addressing the concerns of local people in clause 117, page 96, line 7, at end insert— and local authorities about protecting at-risk gamblers ‘(7) The Chancellor of the Exchequer shall, within three and high streets. The Opposition have therefore tabled months of Royal Assent, undertake a review of the impact of the amendment 52, which calls for the Government to higher rate of machine games duty introduced under this section. conduct a thorough review of the impact of the changes (8) The report referred to in subsection (1) above must in on a number of areas. These include the profitability of particular examine the impact of the higher rate on— B2 machines, as per the Government’s stated aim, the (a) the net profitability of category B2 gaming machines number of betting shops on the high street, which was a compared with other categories; concern expressed by local authorities, and the prevalence (b) the prevalence of category B2 machines; of problem gambling. 439 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 440

[Catherine McKinnell] be applicable to all games on a machine, regardless of their individual maximum stakes, if a type 3 game is Before I turn to the amendment, however, I want to being played on it. put some of the measures into context. Machine games Will the Minister confirm whether that is indeed the duty was introduced by the coalition Government on Government’s stated policy intention? If so, will he set 1 February 2013, replacing the duty regime on gaming out the reasoning behind it? I am interested to hear machines known as amusement machine licence duty, a from him whether the impact of the policy—taxing band of licence duty that gaming machines were liable some type 2 games, as well as type 3 games—was for in addition to VAT. The duty was banded according factored into the Treasury’s policy costings. The Budget to the different seven categories of machine, which are policy costings document states that the Government categorised according to the amount required to play expect the measure to raise £95 million a year for the the game, the stake and the maximum prize available—the four financial years following its introduction next March. winnings. The B2 category was created under this regime Have those policy costings taken account of the fact to account for high-stake gaming machines where the that they will also impact on the profitability of lower-stakes maximum stake is £100 and the maximum win is £500. games and may therefore affect their prevalence? In that The coalition Government replaced that regime with case, might the Treasury have overestimated the revenue machine games duty in the Finance Act 2012, which that the 25% rate of machine games duty will raise? also exempted gaming machines from VAT. The Government said it was necessary to put the tax on 6pm gaming machines on a more sustainable footing to That leads to a wider point that I would be grateful if protect tax revenues and to ensure that the operators of the Minister addressed. If the higher rate of tax will gaming machines continued to make a fair contribution impact on lower-stake games, does it not risk their to tax receipts. Machine games duty is charged on the viability and thus their availability? If it risks undermining net takings—stakes less prizes—from the playing of those games where the stakes are a fraction of the dutiable machine games. £100 per spin games that are strongly linked to problem The expanded structure is significantly simplified gambling, it might have the perverse effect of creating a compared with the former regime. There are now only proliferation of type 3 games and reducing the availability two rates of machine games duty: a reduced rate of 5%, of lower-stake games. The tax is at the same level which applies to machines with a maximum charge regardless of the size of the stake being played. The payable for playing of 20p and a maximum cash prize of Government’s stated aim is to bring the profitability of not more than £10, which is known as a type 2 machine; higher-stake games more into line with lower-stake and a standard rate of 20%, which applies to any other games, but concerns have been expressed that, with machine with a charge payable of more than 20p and a these measures, they risk throwing out the baby with the cash prize of higher than £10, which is known as a type bathwater. I would be grateful if the Minister addressed 1 machine. some of those concerns in his response. The clause replaces paragraph 5 of schedule 24 to the Amendment 52 calls on the Government to review Finance Act 2012 with a proposed new paragraph 5, the impact of the measures on several of the biggest which instead makes provision for three types of machine, concerns surrounding fixed-odds betting terminals. Central again defined by reference to the highest charge payable to the debate about FOBTs and the higher-stake gaming for playing a game and the highest cash prize that can machines are questions about their impact on local be won from the game. The lower rate is applicable to areas and the extent to which they fuel problem gambling. type 1 machines, with a maximum stake of 20p and maximum winnings of £10, the standard rate applies to type 2 machines, with a maximum stake of £5—although Ian Swales: I am conscious that neither the hon. Lady there is no reference to maximum winnings—and the nor I were in the previous Parliament, but has she higher rate applies to type 3 machines, which the legislation looked at the impact assessment carried out by the describes as “any other machine”. In addition, the previous Government when they introduced such terminals clause provides that the specified values that define the to the high street? Does she agree that many of the machine types may be increased by secondary legislation. problems that we now see were entirely predictable? I The measures will have effect on or after 21 March am curious to know whether they were predicted at the 2015. time. Before I turn to the Opposition amendment, I want to seek clarification on the operation of the higher rate Catherine McKinnell: My concern is that we seem to of tax. The Government’s stated intention for the new, lack the data to assess the situation. We are legislating higher rate of tax on high-stakes gaming machines is to for a change in the tax regime, and other activity is bring their profitability more into line with other gaming going on elsewhere to deal with other concerns associated machines, yet there are concerns that the tax may apply with FOBTs. It has been accepted—I will go on to more broadly than to just high-stakes games. The clause explain where—that there is a lack of evidence and data implies that the higher rate of machine games duty will that would enable us truly to understand the impact of apply to the machine—whether a type 1, 2 or 3 machine—as those games. We know that there has been a significant opposed to the games being played on them. As the proliferation in recent years, so I do not think that it Minister knows, more than one type of game is playable would particularly help the discussion if we were to on a number of machines, so some machines will have reflect back on whichever year the hon. Member for both type 2 and type 3 games installed on them. My Redcar is referring to. understanding is that the rate of duty applicable to the The two key concerns that I mentioned are the impact machine will be based on the highest-stake game on on local areas and the impact on problem gambling. the machine. In other words, the higher rate of duty will The first relates to concerns about the prevalence of 441 Public Bill Committee10 JUNE 2014 Finance Bill 442 betting shops on high streets. There are concerns about makes changes to which the Opposition committed last betting shops clustering on high streets as a result of the autumn. Betting shops will be put in a smaller planning cap of four FOBTs per shop and the relatively lax use class, so that when a bank, building society or estate planning laws on the matter. In February, the Local agent is proposed to be converted, a planning application Government Association highlighted research from Deloitte is now—and should be—required to convert it. that found that 52% of respondents wanted to see fewer On the regulation of FOBTs, however, the Minister betting shops on their high street. It has since launched announced that the Government will enforce supervised a betting commission that works with the industry to cash staking above £50. In other words, players will address clustering and gaming machine concerns. The have to interact with a member of staff before they LGA, along with numerous councils, including Newham, stake anything over £50. The Minister’s written statement has called for greater planning licensing powers to deal conceded that the Government are taking a precautionary with problems associated with betting shop clustering. I approach. Presumably, that means the Government are refer to Newham because numerous reports, including still not fully aware of the facts or the evidence to make one last year by the BBC, have highlighted the staggeringly an informed decision on regulating FOBTs, so I would high number of betting shops in the area, including a be interested to hear this Minister set out the evidence single street that contains 18. According to the BBC, base behind the Government’s decision to introduce that is more than in any other part of the country. supervised cash staking on stakes over £50. Why did the The Opposition share those concerns, although we Government settle on £50? What evidence is there to appreciate that not all areas are similarly affected. That support that figure? The Gambling Commission recently is why we believe that local authorities showed be found that an extremely small proportion of stakes on empowered to take action in response to local concerns FOBTs—7% of them—are above £50, so what impact about betting shops and the proliferation of FOBTs. do the Government believe the measure will have? We believe that betting shops should be put into a The recent Government announcement has shown separate use class so that councils can use their planning that the debate still fails to be informed by comprehensive, powers to control the number of betting shops that independent data, so the Government are just taking open in their area, and indeed that local authorities precautionary steps when a well informed approach could be granted the power to restrict the number of would have much longer-term value. That is why we FOBTs that are allowed per betting shop from the have said we will require operators to provide data in a current maximum of four. Of course, several concerns consistent, standardised format and procedure, so that have also been raised about the link between FOBTs, or researchers can fully analyse the impact of those machines high-stake gaming machines, and problem gambling. on players. That is the best way to ensure that we have B2 machines—type 3 machines, as they will now be informed decision making on a hugely important and known—are high-speed games with only 20 seconds deeply concerning issue in the future. between games, as my hon. Friend the Member for The Government still need to answer a number of Wythenshawe and Sale East rightly pointed out at the questions about their approach to betting shops on the beginning of my comments. There are 20 seconds between high street and on the regulation of FOBTs. They are games, with no required break in play. Critics have increasing the duty on such machines to 25%, for the argued that that is what makes those machines addictive, stated purpose of levelling the tax playing field, but it leading to concerns that the immersive nature of those remains unclear whether that measure is, in fact, part of games lulls people into spending more than they might the Government’s approach to addressing those issues, have intended. or is just a revenue raiser. Perhaps the Minister could The Opposition recognise that features of such games clarify that point. can be immersive and pull some players into “the zone”, as researchers have termed it, where they may spend Amendment 52 would hold the Government to account much more than they intended to. That is why we on their approach to those issues, asking them to set out believe action should be taken to minimise potential exactly the impact of the measures contained in the harm from FOBTs through, for example: increasing the clause. We believe that we need more harm-minimisation time between play; introducing warning pop-ups on the measures for high-stake machines, as well as enabling machines; and requiring more breaks in between plays local people to have a greater say over new betting that allow players to pause and take stock. shops opening up. Above all, we need an informed debate on the subject—the necessary information just is However, we also acknowledge that we are still not there at present. The amendment would help inform missing—in response to the hon. Member for Redcar—the the debate, and it would help the Government to understand necessary information, data and evidence to inform the better the impact of their precautionary approach to debate and to understand properly the links between FOBTs. That is why I urge all members of the Committee FOBTs and problem gambling. In addition to the increase to support our amendment. in machine games duty, the Minister responsible for sport, tourism and equalities, the Under-Secretary of State for Culture, Media and Sport, the hon. Member Ian Swales: I wish to make some brief remarks, partly for Maidstone and The Weald (Mrs Grant), recently in support of the hon. Lady in regard to the technology informed the House that the Government would involved in these machines. I believe the intention behind “adopt a precautionary approach and take targeted and proportionate the Bill is to place a higher tax rate on B2 games, the action to protect players further when using high-stake gaming high-stakes games. As she rightly pointed out, the terminals machines on the high street.”—[Official Report, 30 April 2014; typically have other games, particularly B3 games, with Vol. 579, c. 54WS.] a maximum stake of £2 on the same machine. The As a consequence, the Minister announced that the industry is understandably concerned at these lower-stakes Government would make two regulatory changes. The games being potentially taken into the same tax net. first relates to betting shops on the high street and They themselves, and I have met the Association of 443 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 444

[Ian Swales] 6.15 pm Mrs Mary Glindon (North Tyneside) (Lab): My hon. British Bookmakers, know that there is no political Friend may recall my example—one of my constituents mileage in challenging the higher rate on B2 machines; was self-excluded but he went into a betting shop and they accept that will happen. However, they—I think presented his partner’s credit card to use, no questions we can understand why—do not think it is appropriate asked. Does my hon. Friend agree that that shows the to have the higher rate on the B3 part of the games. If importance of his point? we are talking about problem gambling, they also point out that having lower tax rates on lower-stakes games is Ian Mearns: It is all too clear. Being an MP and being obviously part of the incentive process to make people interested in the activities of all my constituents, I have trade down. visited betting shops in conjunction with the industry. In fact, an important part of Ladbrokes’s national I am not a cipher for the Association of British operation—its national audit centre—is in my constituency. Bookmakers, but it is important to ensure that these Every Ladbrokes betting shop is audited and overseen points are made. It has proposed changing only one from an operation in Gateshead town centre; it is an word in the Bill—“machines” to “games”. It understands important employer in my constituency. The industry the higher rate for stakes of over £5, but not for lower now accepts that it needs to do more to save people stakes. Even on the B2 machines, it suggests that if from gambling addiction. someone plays a B2 machine for only £1 or £2, it could be argued that that should not be subject to the higher Despite the plethora of betting shops on our high taxes—again, partly as an incentive to use lower stakes. streets, there are probably fewer than there were 30 The feedback it has had so far, I think from HMRC, is years ago, but they were much better distributed back that this is all too difficult and that it can tax only by then—there were more on estates, next to large pubs machine. Now that the bingo tax has changed, the and social clubs. Now, they are concentrated in high electronic bingo terminals that I am familiar with also streets and there seem to be more. have B3 games on them. HMRC has already agreed that We need to ensure that, as part of the Bill, we do not it could tax the bingo games at 10% and the B3 slot create unintended consequences. We do not want to machine-style games at 20% on the same hand-held drive people away from low-stakes games of £2 towards terminal. £5 minimum bets on high-stakes games. It would be totally inappropriate for us to pass legislation of that There is no real technological argument against splitting nature. Although I do not think that Government Members the games. I do not know whether it is just a drafting will accept our amendment, they need to think about point or a genuine attempt to tax the whole machine at and try to safeguard against that during the Bill’s passage. 25%, but I would appreciate the Minister’s clarification. We do not want to drive low-stakes punters into higher- stakes betting and gambling games. That would be a Ian Mearns: I echo the sentiments of my hon. Friend major mistake. the Member for Newcastle upon Tyne North and the From the perspective of the betting shop industry, hon. Member for Redcar. There is clearly a worrying there is a danger of taxing gaming machines in one set anomaly here. This all needs to be set in a context in of establishments at a different rate from those in other which we all, without exception, promote responsible establishments, for example, in bingo halls. Let us have gambling and eradicate the dangers of people falling some fairness across the different elements of the industry foul of a gambling addiction. For those who suffer from and try to work together in a much more rounded way a gambling addiction, it can be a life-ruining experience to attempt to alleviate those worrying situations. not just for the individual but for their family. We are Mike Kane: It is a pleasure to serve under your living in a very changed world. People can use their chairmanship, Mr Streeter. I agree with my hon. Friends money as they see fit in betting shops on our high the Members for Gateshead and for Newcastle upon streets, but there is also a whole range of online gaming Tyne North that we need an informed debate on the and gambling opportunities in competition with those issue, regardless of who is going to be governing the betting shops, which can quite easily siphon money out country next year. The regulatory and taxation environment of people’s bank accounts. governing the industry will have to change over the next I occasionally use a betting shop, but not very often. few years. On the Opposition side, the relaxation of In fact, the last time was for a free bet given to me by some of the legislation in 2007-08 was not good. We Ladbrokes and I will declare an interest. I bet on were promised a super-casino in Manchester, which was Gateshead to beat Cambridge United and Gateshead undermined, and we were promised regional casinos. In came up trumps and beat them. The mayor of Gateshead’s many senses, a lot of us wanted casinos because they charity benefited by £112.50, so it was a worthwhile are well-regulated environments with high standards of exercise. The industry, however, could do much more to management. We have been left with high streets cluttered alleviate the problem of gambling addiction. I spoke to with gaming shops, where there is very little regulation the Association of British Bookmakers about the different as it is. organisations in the industry sharing information in a Landman Economics found that FOBTs are massively particular locality. If an individual goes into a betting labour unintensive and, for every £1 billion spent on shop to self-exclude because they have a problem, they them, it believes that 22,000 jobs are lost to the wider self-exclude from that individual shop under the umbrella economy. My hon. Friend the Member for Gateshead of that company, but they can walk into a betting shop said that the industry could do more to help problem 30 yards away and carry on with their addiction. We gamblers and those with gambling addiction. At the need to do much more to share that information across moment, only 0.1% of the industry’s £5 billion profit the industry so that self-exclusion can be a remedy. goes towards treating people with gambling problems. 445 Public Bill Committee10 JUNE 2014 Finance Bill 446

The Campaign for Fairer Gambling commissioned £500 per spin. Gambling Commission data suggest that Geofutures, which found that £13 billion was being there are now some 33,000 such machines in Great sucked out of the 55 most deprived boroughs of England. Britain, with the majority located in high street betting When a proliferation of payday loan lenders’ shops in shops. our poorest boroughs is layered on top of that, it can be Since the introduction in 2007 of the Gambling Act seen that those industries are targeting some of the 2005, betting shops have been permitted to have up to most vulnerable in our society. I go back to the point I four B2 machines, with the majority taking up their full made at the beginning: no matter who is in government allocation. Such machines are highly profitable; on over the next 12 months or the next four or five years, average, each machine makes a weekly gross profit of we will have to begin to tackle this industry and this almost £900, which is just over £46,000 a year. Collectively, problem. the machines make annual gross profits of nearly £1.6 billion. Mr McKenzie: It is a pleasure to serve under your The changes made by clause 117 will ensure that chairmanship, Mr Streeter. Naturally, I support our these extremely profitable machines continue to make a amendment. It is sensible that we start measuring, to fair contribution to UK tax revenues. The rate of machine get a handle somehow on the extent of the problem games duty on the machines’ gross profits will increase with the machines in our communities and high streets. from 20% to 25% from March next year, which is We have asked for five points to be reviewed, but I shall expected to generate initial Exchequer revenues of concentrate on just two. First, on the number and £335 million in total over the scorecard period. This prevalence of these betting machines on our high streets, increase in the rate of duty reflects the profitability of in my high street I am seeing ever more shops springing B2 machines and the progressivity of the machine games up with those machines and they are moving out of the duty regime. Most machines are subject to the standard high street into the communities that can least afford 20% rate of machine games duty. However, machine them. games duty already reflects different levels of machine profitability. There is a lower rate of 5% for machines People in those communities are being encouraged to with low stake and prize levels, which tend to generate spend continuously on those machines, as we heard. low profits. The introduction of the new higher rate will The speed at which money can be put into the machines ensure that the machine games duty regime extends that is quite frightening. There has been an increase in the progressive approach to the high end as well as the low number of loans from sources that we would not like end. Hon. Members will be aware that the Government people to look for loans from: such loans enable people have also taken regulatory action on category B2 gaming to play the machines. machines for consumer protection reasons. The tax change is focused on profit. Ian Mearns: I neglected to say earlier that I have heard senior managers from the industry say among Sheila Gilmore (Edinburgh East) (Lab): Will the Minister themselves that it was worth their while opening an explain whether he thinks the change will have a behavioural additional shop on a high street to get four fixed odds change impact, or is it simply seen as a revenue-raising betting terminals in that location and receive the proceeds measure? If it is a revenue-raising measure, will that from those machines. That is how important they are to make it less likely that the Government will regulate and the industry. reduce the prevalence of these machines?

Mr Gauke: As I said, the tax change is focused on Mr McKenzie: I thank my hon. Friend for his profit. Regulation is the responsibility of the Department intervention. for Culture, Media and Sport. We believe that the Secondly, the machines are having a big impact on changes will improve the fairness of the tax system, and credit unions in the communities. Some credit unions DCMS will reach its own conclusions about consumer are now having to say no to people, because they know protection as part of this process. exactly where they are going with the money that they are getting from the credit unions. Catherine McKinnell: It is strange that the Minister is Moving on, across the border, let us consider giving saying that Treasury policy bears no resemblance to local government the power to say no to such outlets what the Department for Culture, Media and Sport setting up on the high street and so on. I am particularly thinks needs to be done to deal with the social issues. Is glad that my Labour-led council has now refused to the Minister saying that the Treasury is looking at this rent shops to these gambling outlets. However, needless issue purely from a tax perspective and that it does not to say they still cannot stop them getting on to the high liaise with the Department for Culture, Media and street and into the suburbs and communities. Sport on its efforts to deal with issues relating to local Will the Minister accept this amendment, although planning, local communities and health? he has said no to previous amendments? We have had the beer and the bingo and we do not need the bandits. Mr Gauke: There are a number of aspects of Government policy in respect of B2 machines. Of course, DCMS, the Treasury and other parts of Government Mr Gauke: The clause makes changes to ensure that will liaise and co-ordinate to determine Government one of the most profitable forms of high street gambling— policy as a whole on this matter. The hon. Lady asked gambling on B2 gaming machines—continues to contribute what the focus of the measure is. It is to ensure that the a fair share of tax revenues. Category B2 machines, or tax system is fair and that it contains a degree of fixed odds betting terminals—FOBTs, as they are also progressivity. At the moment we distinguish low-profit known—allow people to stake up to £100 and win up to machines, which have smaller stakes and prizes, but we 447 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 448

[Mr Gauke] hope I can reassure him that there are separate regimes and they are charged differently, so his concern will wish to bring in a distinction between the machines that not apply. include B3s, but no higher, and those that include B2s. That is the purpose of the policy. Ian Mearns: The Minister is arguing against himself. Ian Swales: The Minister might have just answered He says that a single machine that has high-odds games my question, but can I clarify that his intention is to tax and low-stake games mixed will all be taxed at the B3 games machines that also have B2 games at the higher rate, and the answer is to get rid of the machine higher rate of 25%? Was that his intention in drafting and put in a low stake machine. From a revenue perspective, the legislation? that will automatically massively reduce the revenue that it is said that the system will generate, not only 6.30 pm because the low-stakes games will still be taxed at 20%, Mr Gauke: I was going to come to that point in a but because the turnover on low-stakes games means moment. Let me be clear about it. It is well understood that the £900 profit a week that was mentioned in the that gaming machines can have a dual content. The earlier part of his speech will not be achieved. The current structure on machine games duty recognises Minister is arguing against himself. The technology that, provided there is mixed content, the higher of the exists within the machines, through the betting companies’ rates will apply to the machine in question. This is the accounting systems, to distinguish between the different same approach that is used already for machines that amounts. have content that straddles the boundary for the lower rate and the standard rate. It is also worth pointing out that the new 25% rate of MGD will apply only to The Chair: Order. That was a very long intervention. machines that offer the high-stake games with stakes over £5. It is possible for a bookmaker, if they choose, Mr Gauke: I do not agree with the hon. Gentleman. to remove their existing B2 machines from their properties The point is that if a bookmaker wants to offer a and replace them with lower-stake machines such as B3 machine that provides B3 games only, it will be taxed as machines, which will continue to be subject to the 20% a B3 machine at 20%, which is the current practice. If rate. So it is not an anomaly; it is consistent with our the machine also offers B2 games, it will be taxed at the machine game duty that currently exists. higher rate. That is already in place with the MGD. Ian Swales: I thank the Minister for that clarification. Where a machine has dual content, it straddles two Will he confirm to the bingo industry that he is not different types of game. It is therefore consistent with opening up a new anomaly, so that, if bingo is played how the system works currently. If the hon. Gentleman’s on an electronic terminal that also allows B3 games to concern is that bookmakers will be discouraged from be played, he will not be taxing bingo at 20% should it providing B2 machines, fair enough, but one got the be played on such a terminal? impression from his remarks and those of his colleagues that they would welcome that. The important point, Mr Gauke: Let me come back to my hon. Friend however, is that the proposal is based on machines and about bingo and deal first with the other questions it is applied consistently within the MGD. raised in the debate. As I have said, this tax change is focused on profit. Obviously, the change will affect the industry. It has lobbied hard on this matter, but the Catherine McKinnell: My hon. Friend the Member decision was not taken lightly. We have had to balance for Gateshead raised an important point. The Minister’s carefully any potential impact on the industry against reply indicates that the Government do not actually the fairness and progressivity of the tax system as a know what the impact of the change in tax rates will be. whole. It could be that more B3 games are offered or it may be Amendment 52 would compel the Government to that machines are changed to offer lower-stakes games publish a review on the impact of the new higher rate of only in order to ensure that they are not taxed at the machine games duty on the profitability, prevalence, higher rate unnecessarily. The difficulty that I and other usage and association with problem gambling on these hon. Members have is that the Government do not seem machines in addition to the number and prevalence of to know what the impact of the changes will be, both on betting shops on the high street. The Government carefully Treasury projections and social factors. consider gambling tax rates and the potential impact on affected industries each year in the Budget, and will Mr Gauke: As with all tax measures, certain assumptions continue to do so to ensure that gambling businesses are made about the revenue that will be raised as a continue to make a fair contribution to the public consequence and that should come as no particular finances. To that extent, the provision is unnecessary as surprise. In response to the point from the hon. Member the Treasury keeps taxes under review at all times. for Gateshead that I was trying to address, the way that Furthermore, I would like to remind the Committee the MGD currently works is consistent and the proposal that the new higher rate of machine games duty introduced does not change the way that that system works. The under this clause does not come into effect until 1 March evidence from bookmakers suggests that they will probably 2015. Consequently, a measure asking for us to respond not change their machines, which will continue to be at an earlier date would not be based on the experience dual content, but we will see. The scoring and the of this measure coming into effect. assessment that was made here, as with all measures, Returning to the question asked by my hon. Friend was signed off by the Office for Budget Responsibility the Member for Redcar, bingo is charged with bingo and was made on the best evidence that we have about duty and games content is charged with MGD, so I the behavioural impact. The change is the right one to 449 Public Bill Committee10 JUNE 2014 Finance Bill 450 ensure a fair approach and that our tax system has Catherine McKinnell: I thank the Minister for his progressivity. The more profitable machines should pay thorough response to the questions raised and for taking a higher rate of tax. so many interventions. Opposition Members still believe that there needs to be a more informed basis for these Catherine McKinnell: The Minister said that assumptions decisions and that that data need to be available in the are made and that projections are based on those public sphere. We will press our amendment to a vote. assumptions. It might be helpful to the Committee, as I Question put, That the amendment be made. appreciate that he may not have the information to The Committee divided: Ayes 10, Noes 13. hand, for him to write to the Committee to confirm what assumptions have been made in relation to today’s Division No. 12] questions about the Treasury’s projections. Alternatively, the Government could support our amendment, which AYES seeks to examine exactly such issues and to document Dakin, Nic McKenzie, Mr Iain the process properly so that we can learn lessons for the Gilmore, Sheila McKinnell, Catherine future. Glindon, Mrs Mary Mahmood, Shabana Jamieson, Cathy Mearns, Ian Kane, Mike Williamson, Chris Mr Gauke: Even if we accepted amendment 52, it would not give us the answer that the hon. Lady is seeking to find. The change in tax will occur after a NOES report is supposed to have been provided to the Committee, Dinenage, Caroline Leadsom, Andrea so I cannot see how amendment 52 helps us here. I am Duddridge, James Menzies, Mark happy to provide more information and I will write to Elphicke, Charlie Pincher, Christopher her about the assumptions used. However, I would Garnier, Mark Gauke, Mr David Rudd, Amber make the point that in any change to the tax system Smith, Henry where there is an assessment for additional revenue, Heaton-Harris, Chris Kwarteng, Kwasi Swales, Ian assumptions have to be made in good faith on the basis of the evidence. The assumptions are verified and scrutinised by the Office for Budget Responsibility and this case is Question accordingly negatived. no exception. Clause 117 ordered to stand part of the Bill. I believe that the clause will ensure that there is a fair Ordered, That further consideration be now adjourned. and progressive tax system and a report in these —(Amber Rudd.) circumstances would add nothing to our knowledge. I ask the hon. Member for Newcastle upon Tyne North 6.44 pm to withdraw the amendment and I hope that the clause Adjourned till Thursday 12 June at Two o’clock. can stand part of the Bill. 451 Public Bill CommitteeHOUSE OF COMMONS Finance Bill 452

Written evidence reported to the House FB 02 Mr Raoul Strachan FB 01 Gibraltar Betting and Gaming Association