Reduction in rate of capital gains tax

Finance Bill – in the House of Commons at 4:15 pm on 28th June 2016.

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Votes in this debate

  • Division number 28
    A majority of MPs voted to reduce the basic rate of capital gains tax by 8%.

Question proposed, That the clause stand part of the Bill.

Photo of George Howarth George Howarth Labour, Knowsley

With this it will be convenient to discuss the following:

That schedules 11 and 12 be the Eleventh and Twelfth schedules to the Bill.

Government amendments 30 to 35.

Clauses 73 to 75 stand part.

Government amendments 36 to 38.

That schedule 13 be the Thirteenth schedule to the Bill.

Clause 76 stand part.

Government amendments 39 to 64.

Amendment 181, in schedule 14, page 432, line 45, at end insert—

“169VS Expiration of Chapter V provisions

(1) The provisions of Chapter V of part 5 of this Act shall remain in force until five years after their commencement and shall then expire, unless continued in force by an order under subsection (2).

(2) The Secretary of State may by order made by statutory instrument provide—

(a) that all or any of those provisions which are in force shall continue in force for a period not exceeding 12 months from the coming into operation of the order; or

(b) that all or any of those provisions which are for the time being in force shall cease to be in force.

(3) No order shall be made under subsection (2) unless—

(a) a draft of the order has been laid before and approved by a resolution of both Houses of Parliament,

(b) the Secretary of State has laid the report of a review of the operation of Investor’s Relief before both Houses of Parliament.”

Government amendments 65 to 68.

That schedule 14 be the Fourteenth schedule to the Bill.

Amendment 182, in clause 77, page 135, line 17, leave out “£100,000” and insert “£50,000”.

Government amendment 184.

Clauses 77 to 81 stand part.

New Clause 2—Review of remuneration of investment fund managers—

“The Chancellor of the Exchequer must commission a review of ways in which the law could be amended to ensure that no element of the remuneration paid to an investment fund manager may be treated as a capital gain, and that such remuneration shall be treated for tax purposes wholly as income, and must publish the report of the review within six months of the passing of this Act.”

New clause 11—Entrepreneur’s relief: value for money—

“The Chancellor of the Exchequer shall, within six months of the passing of this Act, publish a report giving HM Treasury’s assessment of the value for money provided by Entrepreneur’s Relief.”

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

The final session of today’s debate considers a number of changes to capital gains tax, along with Government amendments and one Opposition amendment.

Clause 72 will provide an incentive for people to invest in companies by reducing the main rate of capital gains tax from 18% to 10% and 28% to 20% on most gains made by individuals, trustees and personal representatives. The Government want to ensure that companies can access the capital they need to grow and create jobs, and want the next generation to be backed by a strong investment culture. We believe the best way to encourage this is to let investors keep more of the rewards when their investment is successful. At 28%, our higher rate of capital gains tax is among the highest in the developed world. We do not want high tax rates to deter investment. The lower capital gains tax rates introduced by this clause will make it more attractive for people to invest in companies, helping those companies to access the capital to expand and create jobs. Gains made on residential properties that do not qualify for private residence relief, and those from carried interest, will remain subject to the 18% and 28% rates. Retaining these rates will create an incentive for individuals to invest in companies rather than in property.

Clauses 73 to 75 make changes to ensure that entrepreneurs’ relief on capital gains tax rewards business owners and entrepreneurial investors while safeguarding the effect of measures introduced last year to prevent abuse of the relief. The Government are committed to supporting enterprise and entrepreneurship, but they are equally committed to fairness in the tax system. Entrepreneurs’ relief allows certain capital gains to be taxed at 10%, rather than the normal rates, and plays an important role in supporting the enterprise culture of this country, but, as with all tax reliefs, we need to make sure that it is not being claimed in circumstances where it does not achieve its intended purpose.

These changes will improve the targeting of the anti-abuse rules introduced in 2015. The changes in clause 73 will allow relief for gains on disposal of a private asset used in a business in cases of genuine retirement or where members of the claimant’s family succeed to the claimant’s business. These changes will level the playing field for family-run businesses and allow them to be passed to the next generation without an unfair tax charge.

The changes in clause 74 will allow someone selling their business to a limited company to claim relief on the goodwill of that business, providing they have only a small stake in the company. The relief will still be denied where the former proprietor or partner could continue running the business through the company and benefit directly from future profits and business growth. Entrepreneurs’ relief on gains on shares is due only where those shares are in trading companies or the holding companies of trading groups. Clause 75 amends the definition of a trading company to ensure that relief is available for shares in a company that has no trade of its own but which holds shares in a trading joint venture company where the investor effectively holds 5% or more of the joint venture company. The further changes made by these clauses will be backdated to the date on which the 2015 changes came into effect, meaning that no one who has made a genuine disposal for commercial reasons should be disadvantaged by the new rules.

The Government have tabled several minor amendments to the clauses. Amendments 30 to 33 simply move one of the new conditions introduced by clause 73 to a different place in the relevant statute. Amendments 34 and 35 correct two unintended retrospective effects of clause 73. Without the amendments, someone who made a disposal after Budget day 2015 and was eligible for entrepreneurs’ relief could find themselves deprived of that relief by changes announced at Budget 2016. Amendments 36 to 38 clarify the commencement provisions for the new rules introduced by clause 75 and ensure that the new definition of a trading company supersedes the definition used by the Finance Act 2015. These amendments do not reflect any change in policy and will have no impact on the costings of the measures.

Now is an appropriate time to address new clause 11, tabled by Opposition Members, which proposes that my right hon. Friend the Chancellor of the Exchequer should publish within six months of the passing of the Act a report of the Treasury’s assessment of the value for money provided by entrepreneurs’ relief. Opposition Members will be aware that the Government keep all tax policy under review. This includes entrepreneurs’ relief, as demonstrated by recent action taken to ensure that the relief is effective, well targeted and not open to abuse, and we will continue to act where appropriate. I can inform the Committee that officials have for some time been developing a detailed research programme designed to identify taxpayers’ motivations for using entrepreneurs’ relief, and I expect the results to be published at some point in 2017. I do not believe it is necessary to legislate for a review, so I hope that the Opposition will not press the new clause.

Clause 76 and schedule 14 introduce investors’ relief and apply a 10% rate of capital gains tax to gains accruing on the disposal of qualifying shares held by an external investor in an unlimited trading company for at least three years. Many companies struggle to attract the long-term external investment they need to grow and expand, and this can be particularly difficult for unlisted companies, which is why, on top of cutting the capital gains tax rates, the Government are introducing this additional financial incentive to invest in these companies over the longer term. Investors relief has been designed to help unlisted companies attract inward equity investment from external investors. This clause and schedule apply a 10% rate of capital gains tax to gains accruing on the disposal of qualifying shares held by an investor in an unlisted trading company or trading group. The investor must not be an employee or officer of the company at the time of subscription. In addition, the shares must have been newly issued after 17 March 2016 and held for a period of at least three years starting from 6 April 2016. The amount of relief is capped, with individuals subject to a lifetime cap of £10 million on qualifying gains.

We are today making a number of amendments to this clause to ensure that the rules surrounding the relief are fair and clear, and to extend the scope of the relief to prevent market distortions and unlock further sources of capital. Amendments 39 to 41, 43, 44, 50 and 61 will ensure that trustees of a settlement as well individuals who choose jointly to subscribe with other individuals are able to subscribe for investor relief qualifying shares. In the case of trusts, amendment 51 includes rules that prevent individuals from creating multiple trusts, each with a £10 million lifetime limit.

Amendments 45 to 49 clarify how to determine the number of shares that qualify for investors relief when a disposal is made that consists of a mixture of qualifying and non-qualifying shares. Amendments 52 to 60 and amendments 65 to 68 clarify the provisions that deal with share disposals, share exchanges, elections, subscriptions and the distribution of value to existing shareholders.

Finally, some investors may wish to monitor and protect their investment through a seat on a company’s board. Amendments 42 and 62 to 64 allow such an investor to become a director after their investment has been made as long as they are not remunerated in that capacity. They also allow an individual who becomes an employee of the company to access relief in most situations after 180 days of the share issue. Investors’ relief is designed to attract new capital into unlisted companies, enabling them to grow their business. It will help to advance this Government’s aims for a growing economy driven by investment and supporting businesses to grow.

Let me turn to the Opposition amendment that was tabled by Seema Malhotra, but is now being taken up by her successor—and may I congratulate Rebecca Long Bailey on her promotion? Amendment 181 seeks to end the relief after a period of five years, with the option of an additional 12-month extension if agreed by both Houses, subject to the Chancellor laying a review of the operation of the relief before both Houses. The amendment is unnecessary when the Government rightly keep all tax policy under review in line with normal tax policy-making practice. There would be limited merit in conducting the review within five years; the first data on the uptake of the relief in its first year of operation would not be available to HMRC until 2020-21. The Government believe that legislating for a review within five years is unnecessary and inappropriate. I therefore hope that amendment 181 will be withdrawn.

Clause 77 relates to shares given to employees who accept employee shareholder status. It places a lifetime limit of £100,000 on the capital gains tax exempt gains that a person can make on disposal of those shares. The limit will apply to shares received under arrangements entered into after 16 March 2016. The change will enable employee shareholders to realise the significant growth in the value of their shares without paying any capital gains tax, while helping to ensure that the status is not misused. The clause provides for fair and consistent treatment of transfers of shares to a spouse or partner. The change will benefit the Exchequer by £10 million in 2019-20 and £35 million in 2020-21.

It is also an appropriate point to address amendment 182, which was tabled by Opposition Members. It proposes that the lifetime limit be £50,000 rather than Government’s proposed £100,000. This is not a change that the Government would welcome. The introduction of a cap of £100,000 where there was none before is, we believe, a significant change. The level of the cap is a matter of weighing up two policy objectives—ensuring that employee shareholder status is not misused, and encouraging and rewarding entrepreneurship. The Government believe that setting the cap at £100,000 strikes the right balance. It encourages entrepreneurship by allowing an exemption from capital gains tax which is still generous while reducing the likelihood of abuse by ensuring that the benefits for individuals are proportionate and fair. I therefore invite hon. Members to reject amendment 182.

On Government amendment 29, the normal CGT rule is that when a share is involved in certain paper-for-paper transactions, such as a bonus issue or a share-for-share takeover, a tax charge is prevented from arising at that time because the shareholder receives no cash from which to pay that tax. The new lifetime cap in clause 77 means we need a rule to ensure fair and consistent treatment when an exempt employee shareholder share is involved in these types of transactions. This amendment ensures that an employee shareholder will not have to pay CGT at the time of those transactions. Without the amendment, an employee shareholder who has used the whole of his or her lifetime limit may suffer a tax charge owing to events beyond their control although they receive no cash from which to pay that tax. That would plainly be unfair and inconsistent with the treatment of other shareholders in similar circumstances.

Clause 78 introduces a further limit to the relief from CGT on the disposal of employee shareholder shares. The clause is designed to ensure that investment fund managers cannot take advantage of the employee shareholder rules to avoid tax on the rewards they receive for managing funds. Clause 78 is part of the legislation introduced by this Bill to ensure fund managers are eligible to pay CGT on their performance-linked rewards or carried interest only when the underlying fund they manage holds investments for the long term. To continue the Government’s work ensuring that fund managers pay the right amount of tax, this clause is designed to ensure that any planning that seeks to exploit the employee shareholder rules will not work. The changes made by clause 78 are narrow in scope. They amend the rules governing the relief afforded to employee shareholders to make it clear that the relief from CGT does not apply to the management fees and carried interest paid to fund managers. Those funds were never intended to benefit from this relief and should always be charged to tax at the appropriate rate.

Turning to new clause 2, the SNP proposes a review within six months of Royal Assent of the tax treatment of investment fund managers’ remuneration. Legislating for a review in six months is unnecessary. The Government have already undertaken extensive work on this area over the last year, launching a consultation after last year’s summer Budget on the remuneration of investment fund managers and publishing draft legislation at autumn statement. Indeed following this work the Government have included provision in this Bill to ensure that investment managers’ rewards will be charged to income tax whenever the underlying fund is not investing for the long term. By contrast, treating carried interest that arises to fund managers from long-term investment strategies as essentially a capital gain, rather than an income issue, is the right approach, and one that keeps the UK in step with other countries. It is also the approach consistently adopted by previous Governments in this country over a long period. Of course if any part of a manager’s reward payments are properly regarded as income rather than capital they should be charged to income tax and the clauses included by the Government in this Bill will ensure fund managers do not access CGT treatment except where they are long-term investors.

I welcome this debate. The Government have already looked closely at income and capital for fund managers’ remuneration and have introduced clauses in this Bill to ensure that the line is drawn in the right place. Again I hope hon. Members opposite will not press new clause 2.

Clauses 79, 80 and 81 make minor changes to ensure the CGT system for non-residents operates effectively. Since April 2015 non-residents disposing of UK residential property have been subject to CGT. This has addressed a significant unfairness in the tax regime and ensures that non-residents investing in the UK property pay their fair share of tax. While the regime is working well overall, the Government have identified a small number of technical issues that need addressing. The changes made in clause 79 will ensure that there is neither double counting nor under-counting in the determination of how much capital gains tax is due when a non-resident disposes of UK residential property. The changes made in clause 80 will provide for two circumstances in which a capital gains tax return by a non-resident is not required when no tax is due, and gives the Treasury secondary legislative power to add, amend or remove circumstances. That will minimise the administrative burden on taxpayers.

Clause 81 adds capital gains tax to the provisions in the Provisional Collection of Taxes Act 1968, which allows tax to be collected on a provisional basis between Budget and Royal Assent. Before capital gains tax for non-residents was introduced, it was normally payable at the end of the tax year, so there was no need to collect tax on a provisional basis. However, non-residents are required to notify and pay any capital gains tax that is due within 30 days. From April 2019, UK residents disposing of residential property will also notify and pay capital gains tax within that period. It is therefore now necessary for any rate cut or rise to apply properly to UK residents and non-residents disposing of residential property before a Finance Bill receives Royal Assent.

A wide range of measures is before us, and I have already spoken for long enough—for too long, some might argue. Taken together, those measures do much to support entrepreneurship, investment and economic growth. The introduction of investors relief and the reduction in the main rates of capital gains tax for non-property investments in particular are big, ambitious steps. Meanwhile, we are also being vigilant in tightening areas of capital gains tax and associated reliefs that have the potential to be exploited, and addressing any instances in which restrictions unfairly exclude justified users. I encourage Members on both sides of the Committee to support our proposals.

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee 4:45 pm, 28th June 2016

I thank the Minister for his earlier kind words, and commend him for his sterling effort over the last two days. He has fought his way through the Finance Bill with a bad back, and we wish him a speedy recovery. There will be a place in heaven for him, I am sure of that.

I want to speak about clauses 72 to 81, schedules 11 to 14, Government amendments 30 to 68, new clause 2, and the amendments that stand in my name and those of my hon. Friends. Clause 72 and schedules 11 and 12 cut the basic rate of capital gains tax from 18% to 10%, and the 28% rate to 20% on most gains made by individuals, trustees and personal representatives. Gains accruing on the disposal of interest in residential properties that do not qualify for private residence relief, and gains arising in respect of carried interest, remain subject to the 18% and 28% rates.

The Government have said that the retention of the higher rates for residential property is intended to provide an incentive for investment in business over property. Entrepreneurs’ relief will remain at 10 %, and will be extended to investors. I shall return to those reliefs, about which the Opposition have some concerns, later in my speech. The changes will take effect on 6 April 2016.

As the Committee will know, Labour Members have a serious problem with this policy decision, which they opposed during the Budget debate and on Second Reading. It constitutes a major tax giveaway to the tune of £2.7 billion over the next five years for the wealthiest in our society, at a time when the poorest communities are crying out for help and investment. The Chancellor had a choice to make in his Budget. He had to decide whether to use any spare cash, of which he keeps saying there is none, to help the most vulnerable, who have suffered six years of the Government’s austerity programme, or to give a tax break to those who need it the least. He chose the latter, and, in the Opposition’s view, that says it all about the Government’s priorities.

The explanatory notes state that

“the Government wants to ensure that companies have the opportunity to access the capital they need to grow and create jobs, and wants the next generation to be backed by a strong investment culture.”

Opposition Members want capital investment in our economy. Indeed, we champion it and we have been saying so for more than nine months. However, we question whether cutting the headline rate of capital gains tax will indeed trigger large-scale investment. We believe that it could simply line the pockets of some of the wealthiest.

The Chartered Institute of Taxation echoes those concerns, stating that

“the intention of the reduction is stated as being to drive productivity growth across the UK, but we question whether a simple reduction in rates will stimulate growth”.

The Office for Budget Responsibility’s economic and fiscal outlook document suggests that such a cut is unlikely to put rocket boosters under business investment, having not predicted massive increases over the next five years. What is more, business itself has not been calling for this measure, which was totally unexpected. The top priority for business is investment in skills and infrastructure, not cuts in the top-line rate of taxation—especially when the headline rates are frequently chopped and changed by the Chancellor in what Paul Johnson, the director of the Institute for Fiscal Studies, describes as an

“up and down rollercoaster ride”.

He also stated that

“we need a serious plan and strategy here. This is not the way to make good tax policy”.

In the current economic climate, given the result last Thursday, it is even more vital to provide as much certainty as possible to business on the rates of tax that they will pay. Given the serious risk of recession in the latter end of this year, I again make the point that £2.7 billion is a lot of money that could be put to better use. The Opposition will not support such an unfair measure, and we will oppose this clause standing part of the Bill.

Clauses 73 to 75 relate to entrepreneurs’ relief, which provides a rate of capital gains tax of 10% on any gains accrued when directors who own 5% or more of a company sell shares in the companies they own, up to a lifetime limit of £10 million. The clauses address some issues with the legislation that was introduced in the Finance Act 2015. According to the Government’s explanatory notes to the Bill, changes in that Act

“prevented certain abuses involving ER, but they also limited the availability of relief on some transactions where there was no abuse. The effect of the changes made by this clause are backdated to the introduction of FA 2015 in order to mitigate the disadvantage suffered by some as a result of earlier changes.”

Opposition Members have no issue with the content of the clauses, and we are pleased that the Government have tabled amendments to correct the poor drafting of the original ones. The Chartered Institute of Taxation had raised some concerns about that, so we are pleased that the Government have clarified the legislation.

However, the Opposition are concerned about entrepreneurs’ relief as a whole and we have therefore proposed, in new clause 11, that the Government produce a report within six months of the passing of this Bill giving the Treasury’s assessment of the value for money provided by entrepreneurs’ relief. The relief was estimated to cost £2 billion in 2012-13, rising to £3 billion in 2015-16. That represents a vast amount of Government revenue that is being forgone, and there appears to be no assessment of the relief’s efficacy in encouraging entrepreneurialism. We understand the rationale behind it, but as with all tax reliefs, the Government must ask themselves whether it provides value for money and whether it works in practice.

Tax Research UK’s analysis of the relief suggests that in the 2013-14 financial year, 3,000 people received tax relief to the tune of £600,000 each, at a total cost to the Treasury of £1.8 billion. Will the Minister confirm whether that is the case and tell us whether the Treasury has the relevant figures for 2014-15? That analysis also highlighted a couple of issues with the logic behind the relief itself, arguing that it is given at a time when people cease to be entrepreneurs by selling out of their businesses, and that it therefore does not encourage entrepreneurialism. It also argues that the relief has unfortunate behavioural consequences because by increasing the reward from sale it encourages sale far too early. The Opposition therefore feel that an assessment of the relief is in order given the vast amount of forgone Government revenue, which appears to be concentrated in the hands of a small number of individuals. I noted the Minister’s earlier comments and look forward to the results of the Government’s research, due to be published in 2017.

That leads me nicely on to clause 76, Government amendments 44 to 68 and Opposition amendment 181 relating to investors’ relief. Clause 76 extends entrepreneurs’ relief to external investors in unlisted companies, applying a 10% rate of capital gains tax to gains accruing on the disposal of shares in an unlisted trading company. Shares must be held by individuals, be newly issued on or after 17 March 2016 and have been held by the investor for at least three years, starting from 6 April 2016. A person’s qualifying gains are subject to a lifetime cap of £10 million. The theory behind the relief was that it would encourage investment in small businesses that need capital to expand and create jobs, and it is expected to cost £120 million over the next five years.

We are happy to support the initial implementation as an experimental relief, but as with entrepreneurs’ relief we believe that the Government should periodically assess its efficacy. Amendment 181 would introduce a sunset clause whereby the relief will expire in five years’ time. To extend it, the Chancellor would have to enact secondary legislation, but before such an order could be made he must review matters and lay a report of the investors’ relief before Parliament. That would be a sensible approach to ensure that the relief is doing in practice what the Government intend it to do in theory. I hope that the Government can see the merits of that approach and accept our amendment, but I will not seek to divide the House on it today.

Clauses 77 and 78 relate to employee shareholder schemes, as does Opposition amendment 182. Employee shareholder schemes allow employees to become a shareholder in the company by which they are employed by giving up some statutory employment rights in exchange for free shares issued by the employer. As the Chancellor helpfully explained in 2012:

“You the company: give your employees shares in the business. You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership. And what will the government do? We’ll charge no capital gains tax at all on the profit you make on your shares. Zero percent capital gains tax for these new employee-owners. Get shares and become owners of the company you work for.”

Under the current law, the tax treatment is that the first £2,000 of free shares received by the employee shareholder are free of income tax and national insurance. Gains on the first £50,000 of shares received are free of capital gains tax when sold. Clause 77 places a lifetime limit of £100,000 on the capital gains tax exempt gains that a person can make on the disposal of shares acquired under employee shareholder agreements entered into after 16 March 2016.

Now, I must be clear that the Opposition do not like employee shareholder schemes one bit. Giving up one’s statutory employment rights is certainly a red line for me and the Opposition. However, we welcome this specific clause and the imposition of a lifetime limit. Frankly, we are amazed that it has taken so long seeing as how the scheme has been labelled

“the best tax wheeze in town”.

Given the mounting evidence to suggest that the scheme is being misused for tax avoidance purposes, we question whether a £100,000 limit is too high. Amendment 182 proposes reducing it to £50,000. I hope the Minister will heed my concerns about the schemes, and I look forward to his response. Again, I do not want to divide the House on this matter tonight, but I hope that the Government will address my points.

Clause 78 is an anti-avoidance measure designed to prevent investment managers from converting their management fees and carried interest into an exempt gain for capital gains tax purposes. The clause prevents the employee shareholder scheme capital gains tax exemption from applying if the relevant disposal is not compliant with a new test introduced in clauses 36 and 37. We support this measure.

Clauses 79 to 81 make some minor changes to the capital gains tax regime for non-residents disposing of UK residential property. The first corrects a technical error, removing a potential double charge, and the second provides two circumstances when a non-resident’s capital gains tax return is not required. The last simply amends the Provisional Collection of Taxes Act 1968 to include capital gains tax. I have no issues with those clauses, and we will support them.

New clause 2, tabled by the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin would specifically require the Chancellor to conduct a review of the ways in which the law could be amended to ensure that no element of the remuneration paid to an investment fund manager may be treated as a capital gain, and that such remuneration shall be treated, for tax purposes, wholly as income. We welcome that suggestion and we will support it if Scottish National party Members push it to a vote.

We are supportive of most of the measures up for discussion in this group of clauses, but I hope that the Minister will take account of the Opposition’s concerns that I have outlined about the entrepreneurs’ relief, investor relief and employee shareholder schemes. However, what we cannot support is such a huge, huge tax giveaway for the wealthiest in society with this cut to capital gains tax while our communities are completely starved of investment. We will therefore oppose clause 72.

Photo of Roger Mullin Roger Mullin Shadow SNP Spokesperson (Treasury) 5:00 pm, 28th June 2016

I welcome Rebecca Long Bailey to her new post. If I recall correctly, one of the first debates that we took part in together was about that very important topic of whisky. It is appropriate that I mention that given the Minister’s condition.

Photo of Rob Marris Rob Marris Shadow Minister (Treasury)

It was not from drinking whisky.

Photo of Roger Mullin Roger Mullin Shadow SNP Spokesperson (Treasury)

No, I know, but perhaps the Minister could take a few drams to relieve the pain. I certainly think that he deserves it given what he has put himself through over the past couple of days.

May I also say to the hon. Lady that we on the SNP Benches agree with everything that she has argued? I am delighted to say that we will be supporting her opposition to clause 72.

Photo of Roger Mullin Roger Mullin Shadow SNP Spokesperson (Treasury)

It is not quite as short as that.

I want to speak to new clause 2, which is in my name, and I will begin with a quote that I have used before in this House:

“I was shocked to see that some of the very wealthiest people in the country have organised their tax affairs, and to be fair it’s within the tax laws, so that they were regularly paying virtually no income tax. And I don’t think that’s right.”

I entirely agreed with the Chancellor of the Exchequer when he said that in April 2012. That is precisely why we are bringing this new clause to the Floor of the House today. Many people in remunerated employment, working hard every day of the week, will be surprised to learn that the managing director of an average European firm can expect to receive around £8 million in remuneration. Private equity fund managers are able to shrink their bills by paying, as we have heard, only 28% in capital gains, rather than 45% in income tax simply because it is classified as carried interest. In effect, they are getting a remuneration for managing other people’s money, and therefore they should be taxed in the same way that other people are taxed—through income tax.

A fund manager’s ability to pay capital gains instead of income tax allows them to avoid paying national insurance on part of their income. I am well aware of the Minister’s technical explanations about why we are dealing with a different form of gain. However, that does not wash with people in society who are undertaking their work in most other occupations in life. The Government yesterday indicated that they were content to squeeze yet more money out of the contractor sector, affecting teachers, nurses, people in rural communities and the like. These are not the people who are aggressively avoiding tax. The people who are aggressively avoiding tax are people working in the City of London. They are avoiding paying the income tax that the rest of the people in society are quite happy to comply with.

The loopholes that continue are simply an example of the over-complication of our tax system, a matter that has been referred to by hon. Members on both sides of the House. As we look at the thousands upon thousands of pieces of paper in the tax code, it is clear that the bigger we make it the more we create the possibility of loopholes. Surely the time has come for a more fundamental review of all forms of business taxation, a matter that I know Sammy Wilson has raised in the past.

Indeed, some of the people gaining considerable sums of money have great sympathy with this. I would like to quote not some of the campaigners but one of the highest-paid people in the country, the head of the private equity firm Cerberus, Stephen Feinberg. He said in 2011, tellingly:

“In general, I think that all of us are way overpaid in this business. It is almost embarrassing.”

I do not think that we should allow this gentleman, the head of an investment fund, and others to be embarrassed any more. I think we should end their embarrassment by making sure that in the future they pay appropriate levels of income tax.

We also find ourselves in agreement with the OECD, which in May 2014 recommended in its position on tax

“taxing as ordinary income all remuneration, including fringe benefits, carried interest arrangements, and stock options”,

and that this should be paid as income tax.

We have evidence not just from campaigners but from people in the City who admit that this is an anomaly that needs closing, so I ask the Minister to give further consideration to this important move. I would also say in general that we welcome quite a lot of the technical changes that have been made on investment, entrepreneurs’ relief and the like. We want to encourage an entrepreneurial economy, but not at the cost of heightening income inequality and of further division in society.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

I shall be relatively brief in responding to the debate. I addressed one of the issues that we have debated in my fairly lengthy remarks earlier and there is also a certain sense that these are issues we have debated in the past. I certainly remember debating the issue of carried interest with Roger Mullin in last year’s Finance Bill. He made very similar points and I am inclined to make very similar points in response, so I will not necessarily run through all that once again. I remind the hon. Gentleman that where we are talking about remuneration that is income, we are determined to ensure that it is taxed as income. As a Government we have shown a willingness to make changes in this area.

Let me turn to the wider issues of capital gains tax and yet again welcome Rebecca Long Bailey to her position. I wish her a long and distinguished period as shadow Chief Secretary, given that I understand that there might be uncertainty more generally on the Labour Front Bench. It is extremely important that our tax system is competitive and encourages investment, which will drive our economy forward in the future. A number of external bodies have welcomed the steps that we have taken in reducing CGT rates. The CBI and the Institute of Economic Affairs have welcomed these cuts as means to encouraging entrepreneurship and growth. A number of internal studies indicate that lower rates of CGT support equity investment in firms and promote higher-quality investment in start-ups. That is an important source of innovation and growth.

I do not accept the hon. Lady’s criticism that this is somehow just a tax cut for the wealthy. These changes will encourage wider public involvement in investment opportunities and help companies to expand and create jobs. By retaining the 18% and 28% rates for residential property, the Government are encouraging investment in shares, rather than property, thus giving the British economy a boost at a time of global uncertainty. At 20%, the CGT rate paid by higher rate taxpayers is still two percentage points higher than under the last Labour Government. For residential property and carried interest, the rate is 10 percentage points higher.

Photo of David Rutley David Rutley Conservative, Macclesfield 5:15 pm, 28th June 2016

I am sorry that my hon. Friend is in so much pain when he stands up.

I am surprised by some of the things said in this debate. We all recognise the importance of enterprise and of encouraging further enterprise, particularly in the northern powerhouse, as Rebecca Long Bailey recognised. We can achieve the aim of encouraging enterprise by using exactly the mechanism that my hon. Friend talks about. Does he agree that that is why the bodies he mentions have made this proposal? It will make a material difference to our enterprising spirit and economic growth.

Photo of David Gauke David Gauke The Financial Secretary to the Treasury

My hon. Friend makes an excellent point. We must create wealth in this country to be a successful economy. We need to have an entrepreneurial and dynamic economy. He made this point earlier in the context of corporation tax, but similar arguments can be made in the context of CGT as well.

On the criticism that entrepreneurs’ relief is badly targeted, I argue that, of course, as with all tax reliefs, it is entirely appropriate that the Government keep it under review to ensure that it is well targeted and not open to abuse, but we believe that it is right to incentivise individuals to set up and expand their businesses. Entrepreneurs’ relief plays an important part in our pro-growth agenda. It is a highly popular and widely used relief, which supports about 40,000 entrepreneurs a year, according to our latest data. We do not believe that this support should be withdrawn. The latest published cost of entrepreneurs’ relief is £3 billion, but that is a static figure; the true cost will be different, due to potential changes in the disposals and behavioural change. That behavioural change is very important. On when the data for 2014-15 will be released, these statistics are published annually, and the new release is due in October 2016.

On rates going up and down, let me point out that the 28% higher rate of CGT was introduced in 2010, by the coalition Government, and this is the first change since then. The Government have published the “Business tax road map”, setting out plans for business taxes over the entire Parliament and providing some certainty and stability to businesses.

On the argument that employee shareholder status should be withdrawn, we believe that ESS provides vital flexibility for early-stage firms and that it is right that employee shareholders receive tax benefits on shares awarded in exchange for relinquishing certain employment rights. The purpose of the lifetime limit is to ensure that small firms can offer attractive tax benefits to employees, while ensuring that the benefits are proportionate and fair.

I hope that, with those remarks, I can seek to dissuade the Labour party from voting against the reductions in CGT and the SNP from pressing its amendment to a vote, but if I have been unsuccessful in persuading them not to do so, I urge my right hon. and hon. Friends not to support such measures.

Question put, That the clause stand part of the Bill.

The House divided:

Ayes 308, Noes 264.

Division number 28 Finance Bill — Clause 72 — Reduction in Rate of Capital Gains Tax

A majority of MPs voted to reduce the basic rate of capital gains tax by 8%.

Aye: 308 MPs

No: 264 MPs

Ayes: A-Z by last name

Tellers

Nos: A-Z by last name

Tellers

Absent: 73 MPs

Absents: A-Z by last name

Question accordingly agreed to.

Clause 72 ordered to stand part of the Bill.

Schedules 11 and 12 agreed to.

Clause 73