Entrepreneur’s Relief: value for money

Finance Bill – in the House of Commons at 1:03 pm on 6 September 2016.

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‘(1) 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.

(2) The report shall have particular reference to—

(a) the cost to the Exchequer of the Relief;

(b) the number of individuals who have benefited from the Relief;

(c) the average tax deduction received by an individual as a result of the Relief; and

(d) the number of new business start-ups since introduction of the Relief.”—(Rebecca Long Bailey.)

Brought up, and read the First time.

Photo of John Bercow John Bercow Chair, Speaker's Committee on the Electoral Commission, Speaker of the House of Commons, Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Speaker of the House of Commons, Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee for the Independent Parliamentary Standards Authority, Chair, Speaker's Committee on the Electoral Commission

With this it will be convenient to discuss the following:

Amendment 174, page 167, line 40, leave out clause 82.

Government amendments 149 to 151.

Amendment 175, in schedule 14, page 481, line 36, at end insert—

‘(12) Section 169Z makes provision about the expiration of this Chapter.”

Amendment 176, page 499, line 15, at end insert—

“169VZ Expiration of Chapter 5 provisions

(1) The provisions of this Chapter shall remain in force until six 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 commissioned a review of the operation of Investor’s Relief and laid the report of the review before both Houses of Parliament.”

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee

I shall speak to new clause 14 and amendments 174 to 176. Amendment 174 would remove clause 82 from the Finance Bill, thereby preventing the proposed cut to the rate of capital gains tax. The cut will reduce the basic rate of capital gains tax from 18% to 10%, and the rate on most gains made by individuals, trustees and personal representatives from 28% to 20%. Gains on residential property and carried interest will still be charged at the higher rate.

I do not want to go over old ground, but I must emphasise the Labour party’s opposition to this reduction in the rate of CGT. I thank my colleagues from other parties for joining us in our opposition. At a time when our public services are stretched to breaking point, the NHS is on its knees, our education sector is over-stretched, housing is in a state of complete crisis, people across the UK are being forced to use food banks, some mothers are going hungry because they cannot afford to feed their children and themselves, and the wider economy is in desperate need of direct investment in skills, infrastructure and industry, it seems frankly absurd to give a tax break of £2.7 billion to the richest people in our society.

Let us not forget that this CGT giveaway hails from a Budget that also planned to take away billions in welfare payments from the most vulnerable people in need of state support. The Government seemed quite happy at the time of the Budget for 300,000 disabled people to lose more than £3,000 a year in their personal independence payments. In stark contrast, our own research has found that the CGT-cutting measures of the Finance Bill amount to a tax giveaway to 200,000 people of about £3,000 a year on average. I am pleased to say that due to Labour’s opposition and the support of some Members from other parties, the worst has not yet happened in relation to PIP, but that still does not justify this policy decision in the Bill. Labour party research shows that just 0.3% of the population will benefit, with those taxpayers likely to benefit to the largest degree being in London and the south-east. If the Government do not accept our evidence, perhaps they will listen to the Resolution Foundation, which said that the CGT cut was

“focused on those on higher incomes—unsurprisingly because in general better off households are the ones making capital gains in the first place.”

Photo of Jonathan Edwards Jonathan Edwards Shadow PC Spokesperson (Treasury), Shadow PC Spokesperson (Transport), Shadow PC Spokesperson (Foreign Intervention), Shadow PC Spokesperson (Business, Energy and Industrial Strategy)

The hon. Lady makes a compelling case. One of the major challenges we face in the UK is geographical and individual wealth polarisation. Based on what she says about where the likely beneficiaries of this tax system would be, what does she think that the policy will do to tackle the great challenge of wealth polarisation that we face?

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee

I certainly do not think that it will address the issue that the hon. Gentleman raises—quite the opposite, in fact.

The Prime Minister herself made the following commitment to the British public on the steps of Downing Street:

“The government I lead will be driven not by the interests of the privileged few, but by yours.”

Going back on this policy today would be a good place to start.

Photo of Robert Jenrick Robert Jenrick Conservative, Newark

Does the hon. Lady acknowledge that, even after this cut, CGT rates in this country will still be higher than they were for the majority of time under the previous Labour Government?

Photo of Rebecca Long-Bailey Rebecca Long-Bailey Shadow Chief Secretary to the Treasury, Member, Labour Party National Executive Committee 1:15, 6 September 2016

I note the hon. Gentleman’s point and thank him for making it.

If I could see some real benefit to the wider economy or society in these proposals, or if times were good for everybody, perhaps I could understand the Government’s rationale for making such cuts to capital gains tax, but as things stand, these proposals are not driven by the interests of the nation as a whole, but to be enjoyed only by the privileged few. I urge all hon. Members to vote with us to remove these cuts from the Bill because the provision simply has unfairness at its very core.

Speaking of policies for the privileged few, new clause 14 would require the Chancellor to publish a report giving the Treasury’s assessment of the value for money provided by entrepreneurs’ relief. When entrepreneurs’ relief was discussed in the Committee of the whole House earlier this year, the then Minister said:

“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.”—[Official Report, 28 June 2016; Vol. 612, c. 236.]

It would seem opportune, then, for the Financial Secretary to accept our provision tying her down to a deadline, given that the Department is already conducting some of the research needed. The Government do not have the best track record of publishing documents when they say they will, so a deadline enshrined in legislation would help. To help the Government in this endeavour, we have listed particular reference points. The report would specifically consider the cost of the relief, the number of individuals who have benefited from it, the average tax deduction received by an individual and the number of new business start-ups since the relief was introduced.

Analysis by Tax Research UK shows that 3,000 people benefited by about £600,000 each from entrepreneurs’ relief in 2013-14, at a total cost of almost £2 billion to the Treasury. Unfortunately, the most up-to-date figures for 2014-15 are not yet available, but I suspect that similar analysis will show the same results. As I said in my remarks about clause 82, this amounts to a large sum going into the hands of the very few, and it certainly seems like an inefficient use of public funds. Of course, Labour Members are in favour of supporting entrepreneurialism wherever we find it and we want businesses to grow and flourish in the UK. However, is simply offering a massive tax break years down the line when a business is sold the best way to achieve that? Should not the Government be providing support to entrepreneurs in the early stages of their business development? How on earth could an entrepreneur know if he or she wants to sell their business further down the line, when it is only starting off, so as to factor in the benefits of this tax relief? Let us see some evidence today. I hope that the Minster will commit to taking my comments on board.

The same principle goes for investors’ relief, which is the subject of amendments 175 and 176. Those amendments would introduce a sunset clause whereby the relief would expire in six years’ time. To extend it, the Government would have to introduce secondary legislation, but in order to do so, a review of investors’ relief would need to be laid before the House. When we debated a similar amendment in the Committee of the whole House, which would have brought the relief to a close after five years, the then Minister stated that the first set of data would not be available until 2020-21. We have therefore helpfully amended our amendment to suit the Government’s timetable. I hope that the Financial Secretary will now commit to this sunset provision. Without wanting to repeat the remarks I made in the earlier debate, I think that requiring a review of the scheme’s efficacy would represent good practice—for all reliefs, indeed, not just this one.

Too often, tax reliefs are provided with the admirable aim of incentivising a certain type of behaviour, but there is no analysis—published analysis, I should say—of whether the policy is achieving the desired aim. That means that the limited resources that the Government keep telling us about might be diverted away from our public services, or limits could be put on our capital spending, for reliefs that might not even be working. I will not press amendments 175 and 176 to a vote, but I really hope that the Minister will address the merits of including such provisions when future tax reliefs are introduced.

I will touch briefly on Government amendments 149 to 151, which will ensure that the upper rates of capital gains tax will apply to carried interest gains. In short, carried interest gains refer to the profits paid to investment fund managers from the fund that are classified as capital gains rather than income for tax purposes. We support the amendments.

I am sure that all hon. Members are aware of the 38 Degrees campaign on the Mayfair tax loophole, which filled up our inboxes over the weekend. I will briefly reiterate the Labour party’s position. Clause 37 provides for a tapered system of income taxation on carried interest gains received in respect of investments that are held by a fund for less than three years. As the Minister explained in Committee:

“If the average holding period is less than 36 months, the payment will be subject to income tax. If the period is more than 40 months, the payment will be subject to capital gains tax.”––[Official Report, Finance Public Bill Committee, 30 June 2016; c. 42.]

The Labour party supports that provision, but we would have liked all carried interest to be subject to income tax. We tabled an amendment in Committee that would have removed the taper completely, thereby ensuring that all carried interest was treated at 100%—in other words, taxed as if it were income. Unfortunately, the Government did not support us, but none the less we still support the steps they have taken towards closing the so-called Mayfair tax loophole.

I will press amendment 174 to a vote, because the Labour party cannot and will not agree to a measure that benefits so few by so much. We will divide the House to prevent the unfair cut to capital gains tax from going ahead.

Photo of Rishi Sunak Rishi Sunak Conservative, Richmond (Yorks)

I know that when I mention the word “investor” in this House, some Opposition Members get a little a bit excited: their pupils dilate, their pulses quicken and their minds race with images of plutocrats rolling the dice of financial speculation. The reality, however, is a little different. I have spent my own career investing in businesses, and in this country private equity-backed businesses now account for almost 1 million people in employment. The latest research shows that in the run-up to the last crisis, those companies’ sales, investment in research and development, and, indeed, exports grew at a faster rate than the national average.

Furthermore, I am sure that everyone in the House would welcome more money for charities, more research funds for scientists, more scholarships for students who need them and lower insurance premiums, and that is indeed what the private equity industry delivers. The funds that private equity companies manage benefit all of us through university endowments, charitable foundations, pension funds and the floats of insurance companies. When the private equity industry does well, the pensioner, the scientific researcher and the scholar from a disadvantaged background all benefit.

This is a Finance Bill from a Government who value their investors and will not demonise an industry, and who know that no contribution, however great, should be allowed to skew the scales of social justice. The clauses that involve changes to carried interest will ensure that the rewards that investment managers receive for their efforts are taxed not only correctly, but fairly. The clauses will introduce a 40-month holding period to ensure that capital gains tax treatment is reserved for genuinely long-term investments, as it should be. I know that Members on both sides of the House support the welcome change to remove the base cost shift loophole, which allowed costs to be advantageously offset against gains. The Bill will also consolidate Government action on disguised fee income that was introduced in the last Finance Bill and ensure that fund managers are paying income tax when appropriate. All in all, the measures will raise in the order of £200 million in the next financial year.

Those new arrangements are not only fair for British taxpayers and society; they will also ensure that we remain competitive internationally. Our general treatment of carried interest, which has been the subject of much debate in this House and various Committees, is actually in line with the treatment carried out in the United States, Germany, Australia and France. All those countries agree with the notion that carried interest is capital in nature and should be treated as such. If we look across Europe, we will see that our rate for carried interest will sit in the middle of those for comparable countries: it will be a little bit above that in Switzerland and Germany, and a little bit below that in France.

The clauses reflecting changes to capital gains tax will ensure that the UK remains a pro-enterprise, pro-growth nation. Small and medium-sized businesses of the kinds that I used to invest in account for more than half of private sector employment in the UK. They are responsible for three quarters of all jobs created since 2008, yet I know from first hand that small and medium-sized British enterprises still struggle to attract enough equity capital to grow. Adjusted for GDP, the size of the UK’s venture capital market is a seventh of that of the United States. Just 3% of British companies manage to expand from three employees up to 10, which is half the rate in America.

When I hear about changes to capital gains tax rates, I think about how they will benefit all those small businesses, helping them get the capital they need to grow and to increase investment and employment. Indeed, investors’ relief and the other changes to capital gains tax included in the Bill will build on the success of the seed enterprise investment scheme, the enterprise investment scheme, the funding for lending scheme and the British Business Bank, all of which are providing British companies with the capital that is necessary for growth.

The changes will ensure that Britain remains a competitive prospect for investment without compromising Government revenue. Rebecca Long Bailey mentioned the state of our finances and the need for revenue. I am sure that she welcomes the fact that the Office for Budget Responsibility projects that capital gains receipts will top £7 billion this year and increase to £9 billion next year, which is higher than in any other year in the past decade and a half. Rather than being a sweet deal for the rich, our capital gains tax rate actually sits in the middle of the OECD league tables of capital gains tax rates. Ten countries have rates of 0%, and our rate of 20% will sit two points above the average.

As we contemplate leaving the European Union, it will be vital that Britain’s economy remains dynamic, open and competitive to attract the investment we need and maximise the opportunities afforded to us. The clauses relating to capital gains tax and carried interest will ensure that the UK does exactly that, and I will support them later today.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (House of Lords)

I want to speak to the Labour party’s new clause 14 and amendment 174, which, as has been ably pointed out by Rebecca Long Bailey, would remove clause 82 and the increased nil-rate band for inheritance tax.

I will focus first on the entrepreneurs’ relief proposed by new clause 14, which makes a key point about the lack of Government transparency. When UK Governments of all colours introduce a tax change, they often do not return with the evidence to show that the policy has worked. They will implement the policy and say that it is wonderful, but they will not bring back the proof. The Minister was asked yesterday how many companies have benefited from the loan guarantee fund in relation to oil and gas, but she was unable to provide a detailed answer. I do not know whether she just did not have the answer at her fingertips or whether the Government have not actually sat down and worked it out. If Governments are going to make grand claims about what they are doing and how good their policies are, they really need to bring back their work and show it to us.

Photo of Mark Field Mark Field Vice-Chair, Conservative Party 1:30, 6 September 2016

It is important, particularly in relation to entrepreneurial relief, to point out that the last thing we want is an economy where there are quick-fire gains. One of the criticisms of the tax treatment in the area of private equity and venture capital is that there have been too many incentives for people to sell out too quickly.

The corollary of that surely must be that if an entrepreneurs’ relief is designed to encourage entrepreneurs to hang on to their businesses in the longer term, it is difficult for the Treasury to bring back, in a shortish period of time, figures that suggest that a scheme has been a success. We have to look at the general tenor of an economy such as the UK. To that extent, I think that positive changes are being proposed, but I do not think that it is realistic or fair to expect the Treasury to come back in double-quick time and say, “This has been a great success.”

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (House of Lords)

To be fair, the new clause does not ask the Treasury to come back in such a short time; it asks for a six-month review period. Instead of just saying that they will not do a review, the Government could quite easily say, “We will do a review, but we will do it in 18 months.” I would find that acceptable. I would like to see how the schemes are working. I am not necessarily saying that any of them are particularly bad, but the Government need to come back with their workings and tell us how those things are performing.

The UK tax system is incredibly, massively complicated, and there are tax reliefs and taxes for all sorts of things. I am not convinced that the majority of them are working as they were intended to, particularly those put in place 20 or 25 years ago. The whole thing needs looking at, and considering individual things is a sensible place to start. The new clause is about Government transparency, and anything we can to do increase Government transparency around tax reliefs, in particular, is great. It would be very good if the Government considered this for some point in the future, even if not exactly in the terms suggested.

The other thing I want to talk about is inheritance tax. The Conservative manifesto said that the party intended to

“take the family home out of tax for all but the richest”.

As I mentioned in Committee, I have a real issue with regarding £1 million homes, or homes that are worth close to £1 million, as normal family homes and not the preserve of the very richest. In Scotland, the average sale price in 2015 for a detached house was £238,000. In Edinburgh, which is at the higher end of the market in terms of price, the detached average sale price was £382,778. Those are detached homes—not family homes, necessarily—so they are specifically at the higher end of the market. In the most expensive place in Scotland to buy, we are looking at homes costing £382,778.

I have been looking at what someone could get for £1 million. In Orkney—fair enough, it is probably not the best example—they could get a six-bedroom home with an attached three-bedroom lodge and a guest wing for less than £1 million. Nobody would call that a normal family home. In Ayr, they could get a 10-bedroom detached category B listed mansion for less than £1 million. Also in Ayr, they could get a six-bedroom home, which seems relatively modest, in these terms, with a swimming pool for under £1 million. None of those could be classed as normal family homes. They are, in the main, homes that have been inherited—[Interruption.] Very few people will have just picked up these homes.

The other thing that the Conservatives said in their manifesto was, essentially, “You have worked hard for your money; we would like you to keep it.” The vast majority of the homes in question will not be first-generation owned. They will have been sold by the second or third generation because they have been owned by the family for a long time. They are not, by any stretch of the imagination, normal family homes. Even in the centre of Edinburgh someone could manage to get an eight-bedroom, detached, very large house for £1 million, and that is the most expensive place in Scotland to buy a home.

The problem—this applies to a huge amount of the Conservative manifesto—is that the Conservatives think that what happens in the south-east of England is normal for the rest of the UK. It is not normal for the rest of the UK. I know that the south-east is where the majority of the population are based, but some thought needs to be given to this. Members will expect me to say this as a Scottish National party politician who supports independence, but if decisions were made closer to home, they would be more appropriate for people in Scotland.

Photo of Mark Field Mark Field Vice-Chair, Conservative Party

I appreciate that my constituency is hardly typical as far as these matters are concerned —nor, indeed, is the Minister’s constituency on the other side of the river—but the logic of what the hon. Lady is saying is that we should move towards a regionalised tax system. I guess that she would quite like it to be a nationalised system, with the nation beginning on the other side of Hadrian’s Wall, but does she not recognise that the Barnett formula gives particular incentives to the nations of the United Kingdom, rather than to London and the south-east? I can understand the irritation that she feels about the fact that perhaps too much thinking is done for London and the south-east, but £1 million buys virtually nothing not only in my constituency but in many of the 73 constituencies in London, as well as those in the home counties. Short of regionalising our tax system, surely this is, at least, a sensible step forward to ensuring that those who have been able to bring up a family in a home are not forced to sell the home when a relative dies.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (House of Lords)

The right hon. Gentleman makes a good point. Perhaps we need to think about having differential policies across the UK, and possibly further devolution. That would be fantastic, and if he wants to support us in that cause, he is welcome to join us at any time.

This policy highlights a major difference between the south-east of England and the rest of the UK. The problem with Government being so far from people who are outside London is that policies are made for the benefit of the majority of the population—the people who live around here. That is really unfortunate for people in the north of England and in Wales, because the policies made by the national Government do not make sense for us.

Photo of Kirsty Blackman Kirsty Blackman Shadow SNP Spokesperson (House of Lords)

I will not take another intervention; I am sorry. I just want to mention briefly the Prime Minister’s statement that she will take “bold action” on tax. We have a big problem—we will still have a big problem after the changes that will be made by the Finance Bill, including the tax changes that we discussed yesterday—with the lack of parity and fairness in tax. Nurses, carers and people who work in all sorts of professions pay 20% tax. I acknowledge that the personal allowance has been raised, and that is very much appreciated, but those people pay the tax that is due on the majority of their income.

There are still too many loopholes in the rest of the system. I understand the point that was made about carried interest, and we need to see how that works going forward. I would love to see the Government’s working on that, and whether the policy has the effects that the Government intend. However, unearned income is still taxed at different rates from earned income. I understand the point that was made about private equity supporting our economy and supporting some of our community organisations, for example. However, the people in question are not paying the level of tax that they should be paying to the Government, so the Government do not have the funds to disburse that they should have to disburse.

We need to do something a bit more radical than tinkering around the edges. We need to look at making changes that actually bring about parity. We need to look at ensuring that the people who are making the megabucks in the City of London pay at least as much tax, and as high a percentage of tax, as our nurses and carers pay.

Photo of Mark Field Mark Field Vice-Chair, Conservative Party

I will speak briefly in favour of amendment 151 on carried interest. In my time as a Member of Parliament, I have sometimes been critical of elements of the tax regime that applies in the private equity and venture capital world. It seems to me that the generous tax regime, although it has been justified to support entrepreneurs, has often been misused by those in the industry—inadvertently; I am not suggesting that anything untoward or nefarious has taken place. I believe that many in the private equity field have, particularly in good times, in effect been financiers rather than risk takers. As such, it would surely be more equitable for their rewards to be treated more like income than capital gains. That has been at the heart of the whole debate about carried interest.

The Government have been aware of this issue. Let us give them some credit for that. To some extent, we are trying to play catch-up on it. Inevitably, there has been controversy about the treatment of private equity firms’ carried interest, which is levied as a capital gain, rather than as income. There was a time—pre-2010—when the difference between those two things was rather greater than it is today. That may be because capital gains tax has been raised, but the starkness of the problem is to some extent less pronounced now than it was during the time of the last Labour Administration in the noughties.

It is clear that the Treasury is doing the right thing in trying to provide a more favourable regime that is intended to reward genuine entrepreneurs. In principle, that must mean that where carried interest looks like income, it should be treated as such for taxation purposes. That is what we are slowly doing with amendment 151.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Has the OECD not recommended that all carried interest should be treated as income?

Photo of Mark Field Mark Field Vice-Chair, Conservative Party

It has, but there is a distinction between different elements of carried interest, and we are trying to get to the bottom of that. To be brutally honest, in the longer term I would be much happier to have a regime in which we treated capital gains and income identically. There would not then be any sense in trying to arbitrage one way or the other. In many ways, perhaps inadvertently, the coalition began to move in that direction.

I am sorry that I was not in the Chamber to hear the whole speech of my hon. Friend the Member for Richmond (Yorks) (Rishi Sunak), but he is absolutely right. Private equity has had a bad rap because of certain high-profile concerns—partly because of the misuse of tax to allow huge amounts of debt on to balance sheets—but a large number of businesses in each and every one of our 650 constituencies in the UK benefit from having private equity investors. Many jobs now exist because of the private equity investment that has come into play, particularly in growing businesses that will make a real difference in the future. The Government have broadly got this right, although I am sure we will have to come back and look at it again.

I would make one point to Kirsty Blackman. It is not about inheritance tax—we have had our joust on that—but on a more fundamental point, on which I think she is absolutely right: the more complicated a tax code, the more the door is open to tax avoidance of all descriptions. We very urgently need to begin to simplify our tax code. We will add yet more pages to it today. A lot of them are to apply Elastoplast in ways that we can all support for individual reasons, but we need to get back to the principles of a much simpler tax system.

I believe that one of the impacts of leaving the European Union will be not a race to the bottom in lowering tax, but a much simpler tax system. This is a wake-up call for all of us in the House—obviously, particularly for those in the Treasury—to have a much simpler tax code. Such a code will be readily understandable and supported by all our constituents, which is one of the issues we face. It will also say to those bringing in much of the inward investment that will come to the UK from across the globe that we have a simple tax code, which will not be tinkered with in successive Finance Bills because it is very straightforward, and they will be able to work on that basis. I know that may be wishful thinking—going back many years, most Chancellors have talked about having a simpler tax code—but this now needs to be looked at urgently. Urgent attention must be paid on getting simplicity. If we do not do so, we will all very much pay the price.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

I entirely echo the right hon. Gentleman’s comments about simplification. I may attempt to catch your eye, Madam Deputy Speaker, to address the House on that issue later. However, I caution him against linking that to Brexit, because almost all the complications, of which there are many in what we now call the tax code, are due to domestic legislation and are nothing to do with the European Union. Brexit may afford us an opportunity to start at the bottom on various areas of Government policy and endeavour, but leaving the EU will not provide such an opportunity in this case.

Photo of Mark Field Mark Field Vice-Chair, Conservative Party 1:45, 6 September 2016

Obviously, the hon. Gentleman does not know me, or indeed the Minister, well enough to know that we are both very much on the pro-European wing of our party. I was not in any way blaming the EU. I was simply trying to make the point that, in looking to get a new set of trade arrangements with dozens of countries across the globe, we should not rush headlong into making lower corporation tax the incentive for companies. One of the big factors for them will be the sense that there is a simpler and more straightforward tax code in the United Kingdom, and that will make us open for business in the way that we have traditionally been open for business during the past 200 to 300 years.

The Floor of the House of Commons is not the place on which to make such a policy, but I very much hope that we will keep this very firmly in mind. There is now an urgent case for having a more straightforward tax system, even if it is one that only says what we are aiming to achieve. It will obviously be difficult to unravel tax benefits created in the past. I accept that it will be difficult to unravel all the reliefs, not least because entrepreneurs in the future, like those in the past, will want to rely on them in making investment decisions.

Photo of Seema Malhotra Seema Malhotra Labour/Co-operative, Feltham and Heston

The right hon. Gentleman is making some very important points about simplification and its impact in ensuring that measures work in the way intended. Does he agree that simplification and clarification of the objectives of reliefs would go a long way to making sure that small enterprises or first-time entrepreneurs could understand and gain greater access to the available reliefs, which may be intended for them but are perhaps used by others with greater experience?

Photo of Mark Field Mark Field Vice-Chair, Conservative Party

I am sure there is a lot of truth in that. I was a businessman before I entered the House. It was a relatively straightforward business, based in the City of London, in the service industry, so there were not a huge number of reliefs available, although it may well be that 20 years of additional pages of the tax code have made it even more bloody complicated than it was for those working in and setting up businesses in the 1990s. I agree with the hon. Lady. Again, getting rid of reliefs and making the system more straightforward is the right way forward. Rather than having a whole lot of reliefs to recommend to would-be entrepreneurs, let us try to cut down the whole thicket.

Madam Deputy Speaker, I have spoken for long enough. I almost veered off the subject, but had I done so, I am sure you would have been the first to stand up and say so. I very much hope that amendment 151, among others, will be supported. It is definitely a move in the right direction, although I am sure we will have to come back to the issue of carried interest in the future.

Photo of Seema Malhotra Seema Malhotra Labour/Co-operative, Feltham and Heston

I am grateful for the opportunity to speak in this debate, which was opened by my hon. Friend Rebecca Long Bailey, on the new clause and amendments relating to capital gains tax. I will speak particularly about new clause 14, on “Entrepreneur’s Relief: value for money”, amendment 174, which would remove the capital gains tax cut, and amendments 175 and 176 on the investors’ relief sunset clause. Labour’s main issue of contention with the Government is the reduction of capital gains tax, the reasons for which have been well outlined. I want to highlight the very serious issue of value for money in public finances, and to continue to make our call for the Government to look at the way in which we scrutinise and review tax reliefs.

As we have argued since the Budget, the Finance Bill is inadequate if we are to rise to the challenges we face and to work towards a very strong economy in which we can all feel and believe that prosperity is shared by all. At a very tough time for the public finances, the Government have chosen to prioritise a corporation tax cut and a capital gains tax cut. Certainly while working on the Finance Bill, including as shadow Chief Secretary, I have had several conversations with business figures who quite openly said that they did not necessarily expect a corporation tax cut while other issues that are so important for their business success—investment in skills, housing, infrastructure and superfast broadband, and ensuring that we get the productivity shifts this country so desperately needs—require great attention. To purport that there is a simplistic link between a capital gains tax cut and a strong enterprise and investment culture is therefore not very honest, because it has not been proven that the cut is either necessary or sufficient to achieve that outcome, which we do indeed want.

Let us not forget that at the last Budget, the OBR took all the Chancellor’s measures into account and still downgraded the business investment forecasts. The latest figures from the Office for National Statistics estimate that business investment decreased by 0.8% between the second quarter of 2015 and the second quarter of 2016. Therefore, it continues to be a concern that the Government’s economic strategy does not take into account the wider needs of businesses beyond tax cuts.

It is the context of squeezed public services and lack of investment that leads me to raise the issue of tax reliefs, particularly those pertaining to capital gains tax, and the way in which we understand the needs of businesses. Tax reliefs are an important part of our tax system and have been needed for a variety of reasons, many of them extremely valid. However, after six years of this Government’s failure on the economy, in so many ways, with many people feeling the brunt of the cuts and with our public services under considerable strain, every penny of public spending should be going on much needed investment in our schools and hospitals and on supporting the most vulnerable. The figures got even worse this summer, with more than a third of children leaving school without the equivalent of five good GCSEs, and schools in my constituency tell me that they are giving out money every day to help parents buy school uniforms and shoes. We therefore need to justify every penny that is spent by the Exchequer.

That also has to apply to every penny that is not collected. Tax reliefs are effectively tax forgone. I firmly believe that we need to apply just as much scrutiny to relief as we do to expenditure. That is not to say that I am opposed to tax reliefs to incentivise good and positive business behaviours—far from it. For me, providing behavioural incentives to achieve economic and social goals is a central part of the role of Government, but they must use effective judgment that is based on the interests of fairness and prosperity. A Government who are working in strategic partnership with business and industry in the interests of the economy and society will actively consider such measures.

However, there is a serious paucity of scrutiny of whether and to what extent various tax reliefs are achieving those goals and whether they remain value for money for the taxpayer. The HMRC website lists 405 tax reliefs in the UK, but in reality there are many more. The Office of Tax Simplification has identified 1,140 tax reliefs. Of the 405 tax reliefs listed by HMRC, 102 cost more than £50 million, 84 cost under £50 million and there are 219 for which HMRC does not provide cost data.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West

Does my hon. Friend agree that of all those reliefs, the biggest scandal is tax relief on pension contributions, which costs more than £30 billion a year in forgone revenue and principally goes to the most well-off? For years, the Department for Work and Pensions has had no evidence that that tax relief produces a change in behaviour that results in more people making pension contributions. We are, in effect, handing out a lot of money mostly, but not entirely, to a lot of rich people to get them to do something, when there is no evidence that it does so.

Photo of Seema Malhotra Seema Malhotra Labour/Co-operative, Feltham and Heston

My hon. Friend makes an important point. The conundrum of how we fund, finance and incentivise pension savings needs to be thought about much more holistically. He highlights an example of incentives that reach not the majority, but a minority. We must keep that under review.

The Public Accounts Committee took forward the work of the National Audit Office on these issues and took evidence. Its report found that some reliefs

“costing some £100 billion a year, are designed to deliver a policy objective that could be met instead through spending programmes”, which would be more rigorous and more auditable. The report states that

HM Treasury and…HMRC do not keep track of those tax reliefs intended to influence behaviour. They do not adequately report to Parliament or the public on whether reliefs are working as intended and what they cost and whether they represent good value for money.”

Nothing has really changed since the report was published last year. That is why Labour continues to raise this issue during the passage of the Finance Bill.

We need to question the efficacy of tax reliefs such as capital gains tax relief and entrepreneurs’ qualifying business disposals, or entrepreneurs’ relief. There are clear reasons for entrepreneurs’ relief and it can be argued that it incentivises investment, but does it make a great enough difference to be worth £3 billion a year to the Exchequer? I do not claim to have all the answers, but we do need evidence to prove that it makes that difference and the Government need to be challenged to justify this and other reliefs.

In Committee of the whole House, the then Financial Secretary to the Treasury defended entrepreneurs’ relief and, as usual, did so without evidence, saying:

“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”.—[Official Report, 28 June 2016; Vol. 612, c. 245.]

I challenge the Government to say when they will do that. New clause 14 would make the Government and all of us turn those warm words into action.

Furthermore, the Finance Bill introduces a new relief, investors’ relief, which extends the low rate of capital gains tax to investors in an unlimited trading company for at least three years. In principle, I support the idea of a relief that is intended to incentivise investment and to support access to capital for businesses, particularly at an early stage in a business’s life cycle, if we can provide evidence that it will help turn those with initial ideas into the successful job creators and innovators of the future. That is extremely important in creating the economy of the future, with all the opportunities that new technology and other initiatives can bring.

However, it concerns me that this could end up being yet another tax relief that is introduced for a good reason, but then left to mushroom into a relief that is extremely expensive and difficult to remove. We need a mechanism to ensure that there is time to review whether it is achieving the desired effect, whether the costs are aligned to those that are forecast and whether it constitutes value for money. For that reason, I support the sunset clause for the relief in Labour’s amendment 176, which would ensure that after a number of years, when we have the evidence on which to base our conclusions, those questions will not go unanswered.

I call on the House and the new Treasury Ministers to take seriously our scrutiny of tax reliefs and to support the Opposition amendments, which would put in place proper mechanisms for reviewing the reliefs and ensure that they remain targeted at supporting businesses, while showing evidence of value for money.

Photo of Jane Ellison Jane Ellison The Financial Secretary to the Treasury

I will start by outlining the Government amendments in the group before responding to some of the points that have been made by hon. Members in what has been a thoughtful debate. As a new Treasury Minister, I have found a number of the speeches good food for thought as I look forward to a series of meetings into the autumn.

On Government amendments 149 to 151, the Finance Bill provides an incentive for people to invest in companies by reducing the main rates of capital gains tax from 18% to 10% and 28% to 20% on most gains made by individuals, trustees and personal representatives. We announced at the Budget that the 28% and 18% rates would continue to apply for carried interest. That is justified by the fact that carried interest is a performance-related award that is hybrid in nature, with characteristics that distinguish it from most other types of capital gain, as was alluded to by some hon. Members. We recently learned that it is possible to create an investment fund structure generating carried interest that, under clause 82 as it stands, would be taxed at 20% or 10%. That would clearly be unfair and contrary to policy. The amendments therefore ensure that the continuing 28% and 18% rates apply to all forms of carried interest.

I welcome the support of my hon. Friend the Member for Richmond (Yorks) (Rishi Sunak) for the general approach that we are taking in a number of measures in the Bill and in particular for his comments on this matter and the knowledge of it that he brings to the House. I also welcome the support of the Opposition Front-Bench team for the amendments, which we feel strike a sensible balance.

Labour’s amendment 174 would delete clause 82 in its entirety. The lower rates of capital gains tax introduced by the clause make it more attractive for people to invest in companies, helping those companies access the capital they need to grow and create jobs. The changes are part of this Government’s efforts to ensure that our tax system is competitive—never more important than now, as we head into a new future outside the EU—and encourages investment, which will help drive our economy forward into that new future. At 28%, our higher rate of capital gains tax was among the highest in the developed world. We do not want high tax rates to deter investment.

Photo of Rob Marris Rob Marris Labour, Wolverhampton South West 2:00, 6 September 2016

The Minister says that the measures will drive investment. What evidence is there for that?

Photo of Jane Ellison Jane Ellison The Financial Secretary to the Treasury

That point has been made repeatedly. Contributions from those critical of the policy often miss the way that measures interact. We are trying to create a climate that encourages investment. A number of international studies have indicated that low 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. The evidence is there. The measures are part of a package that is trying to create a climate that makes our country attractive to invest in and enables domestic investors to invest in company growth. At the same time, as we have stressed and as other measures in the Bill stress, taxes must be fair and must be paid; the hon. Gentleman took part in a good debate last night about some of those measures.

A number of external bodies have expressed support for clause 82—that also goes to the hon. Gentleman’s point. The CBI and the Institute of Economic Affairs have both welcomed the cuts as a means of encouraging entrepreneurship and growth, and, as I have said, there is a body of evidence, not least internationally, to indicate that lower rates support equity investment in firms and promote higher-quality investment in start-ups. Again, I welcome the support of and international perspective given by my hon. Friend the Member for Richmond (Yorks) on this subject.

The changes made by clause 82 are about encouraging investment where we want businesses to expand. As I have said, they are very much a part of a general pro-business agenda, but we have also been clear that we want fair and competitive taxes and that taxes must be paid. We addressed that in a good debate last night, when there was a good degree of cross-party consensus.

Rebecca Long Bailey mentioned the geographical distribution of the CGT cut. HMRC publishes national statistics on CGT each year that include a breakdown of its payers by geographical distribution, so there is transparency on that. It is also worth saying that it has been estimated that up to 130,000 individuals will pay lower taxes as a direct result of these changes to CGT, including 50,000 basic rate taxpayers.

Seema Malhotra made a typically thoughtful speech, not just on CGT but on her general thoughts on tax reliefs and how we review them, as well as on tax simplification. Again, I felt that she did not perhaps entirely address the interaction between the various measures—they cannot be seen in isolation. The other issues she mentioned are hugely important; for example, the investment in skills, but I did not think she was fair about what the Government have done on that agenda, which has resulted in record levels of apprenticeships. She is right to say that there are other issues such as that one, but these measures are part of a general package and are not the whole picture.

Amendments 175 and 176 were also tabled by the Opposition. In the 2016 Budget we announced the introduction of investors’ relief, benefiting long-term investors in unlisted companies. As has been explained, the amendments seek to end that new relief after a period of six years, with the option of an additional 12-month extension if agreed by both Houses, and ask the Chancellor to lay a review of the operation of the relief before both Houses.

The amendments are unnecessary as the Government keep all tax policy under review in line with normal tax policy making practice. Kirsty Blackman again, I thought, did not really give credit to the interaction of different measures nor to the wider point that, given that the Government are bringing the measures forward to stimulate economic growth, there is absolutely no incentive for us not to keep a very close eye on them and review them at regular intervals. We do so all the time because we want measures to work—we want our measures to stimulate economic activity, and we do not in any way want them not to work. Indeed, there are a number of measures in the Bill to correct things that have been done in the past, where we feel that an improvement could make something work better.

We feel that there would be limited merit in conducting a review within six years as the first data on the uptake of the relief in its first year of operation will not be available to HMRC until 2021. Amendments 175 and 176 are neither needed nor useful, and we ask the Opposition not to press them to a vote.

New clause 14, again tabled by the Opposition, proposes that the Chancellor should publish, within six months of the passing of the Bill, a report of the Treasury’s assessment of the value for money provided by entrepreneurs’ relief. As I have just said, the Government keep all tax policy under review because we want it to do what we have set out as the intention behind it, namely to stimulate economic activity and to make investment in business attractive to people. That review includes entrepreneurs’ relief, as demonstrated by recent action taken to ensure that the relief is effective, well targeted and not open to abuse. We will continue to act, where appropriate.

My predecessor as Financial Secretary has already informed the House of this, but it is worth reiterating, as it is germane to this point, that HMRC officials have commissioned an in-depth survey of taxpayers’ reasons for using entrepreneurs’ relief and its effects on behaviour. We expect the results of that survey, which will be published at some point in 2017, to inform future changes to the relief. I hope that that gives Members some comfort that the relief is being looked at very closely.

In our wider debate, some general points were made about the Budget being tilted towards the south-east of England. A number of points could be made in rebuttal, not least the debate we had last night, which touched on support for the oil and gas sector in Scotland. More generally, some interesting points were made about having a simpler tax system. In the next part of our debate on the Bill, there will be an opportunity to discuss the Office of Tax Simplification, but as this point came up during the current debate it is worth noting that the Bill puts the OTS on a statutory footing. Around half of the OTS’s 400 or so recommendations to date have already been taken on board. I again take on board the point made by my right hon. Friend Mark Field. I feel sure that this a topic that we will return to over the coming months and years.

I thank all Members who have spoken in the debate.