New Clause 27 - Review of tax reliefs

Finance Bill – in the House of Commons at 12:49 pm on 2nd July 2020.

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“The Chancellor must lay before the House of Commons within a year of Royal Assent a review of the tax reliefs contained in this Act which must contain the following—

(a) the number of tax reliefs;

(b) the effect on taxation revenue of each of the tax reliefs; and

(c) an assessment of the efficacy of systems for designing, monitoring and evaluating the effect of the tax reliefs.”—(Bridget Phillipson.)

This new clause would require the Chancellor of the Exchequer to report to Parliament on the number and revenue effect of the tax reliefs contained in the Bill; and on the efficiency of systems for designing, and assessing the effects of, those reliefs.

Brought up, and read the First time.

Photo of Rosie Winterton Rosie Winterton Deputy Speaker (First Deputy Chairman of Ways and Means)

With this it will be convenient to discuss the following:

New clause 2—Review of changes to entrepreneurs’ relief—

“(1) The Chancellor of the Exchequer must review the impact on investment in parts of the United Kingdom and regions of England of the changes made to entrepreneur’s relief by section 23 and Schedule 3 of this Act and lay a report of that review before the House of Commons within six months of the passing of this Act.

(2) A review under this section must consider the effects of the provisions on—

(a) business investment,

(b) employment, and

(c) productivity.

(3) In this section—

‘parts of the United Kingdom’ means—

(a) England,

(b) Scotland,

(c) Wales, and

(d) Northern Ireland; and ‘regions of England’ has the same meaning as that used by the Office for National Statistics.”

This new clause would require a review of the impact on investment of the changes made to entrepreneurs’ relief.

New clause 4—Structures and buildings allowances: review—

“(1) The Chancellor of the Exchequer must review the impact on investment in parts of the United Kingdom and regions of England of the changes made by section 30 and Schedule 5 of this Act and lay a report of that review before the House of Commons within six months of the passing of this Act.

(2) A review under this section must consider the effects of the provisions on—

(a) business investment,

(b) employment,

(c) productivity, and

(d) energy efficiency.

(3) In this section—

‘parts of the United Kingdom’ means—

(a) England,

(b) Scotland,

(c) Wales, and

(d) Northern Ireland;

‘regions of England’ has the same meaning as that used by the Office for National Statistics.”

This new clause would require a review of the impact on investment of the changes made to structures and buildings allowances in Schedule 5.

New clause 17—Review of geographical effects of provisions of Sections 28 to 31—

The Chancellor of the Exchequer must within twelve months of the passing of this Act lay before both Houses of Parliament a report assessing the differential geographical effects, broken down by nation and NUTS 1 statistical region, of the changes made by sections 28 to 31 of this Act.”

This new clause would require a geographical impact assessment of the clauses of the Bill relating to reliefs for business.

Amendment 1, in clause 36, page 34, line 29, at end insert—

“(13) The Chancellor of the Exchequer must, no later than 5 April 2021, lay before the House of Commons a report—

(a) analysing the fiscal and economic effects of Government relief under the Enterprise Investment Scheme since the inception of the Scheme, and the changes in those effects which it estimates will occur as a result of the provisions of this Section, in respect of;

(i) each NUTS 1 statistical region of England and England as a whole,

(ii) Scotland,

(iii) Wales, and

(iv) Northern Ireland;

(b) assessing how the Enterprise Investment Scheme is furthering efforts to mitigate climate change, and any differences in the benefit of this funding in respect of—

(i) each NUTS 1 statistical region of England and England as a whole,

(ii) Scotland,

(iii) Wales, and

(iv) Northern Ireland;

(c) evaluating the lessons that can be drawn from the effects of the Enterprise Investment Scheme with respect to the encouragement of both private and UK Government-backed venture capital funds in the devolved nations of the UK.”

This amendment would require the Chancellor of the Exchequer to analyse the impact of the existing EIS and the changes proposed in Clause 36 in terms of impact on the economy and geographical reach; to assess the EIS’s support for efforts to mitigate climate change; and to evaluate the Scheme’s lessons for the encouragement of UK Government-backed venture capital funds in the devolved nations.

Photo of Bridget Phillipson Bridget Phillipson Shadow Chief Secretary to the Treasury

New clause 27 calls on the Government to lay a review before Parliament considering all the tax reliefs within this Act, their effect on taxation revenue and the effectiveness of systems to evaluate these reliefs and to ensure value for money. We know that there are real problems with how the Government monitor tax reliefs. Thanks to the outstanding work of the National Audit Office and its report from February this year, we can see how unwieldy the system has become over the past decade and how much this is costing the public purse. It shows that there are currently 362 tax reliefs, which support Government economic and social objectives. This is a huge financial undertaking. The cost of tax reliefs for 2018-19 is estimated to be £155 billion.

The National Audit Office notes that this is not money that would simply be recouped in tax if these reliefs were abolished, but that is not the point that we are seeking to make. We on the Opposition Benches do not doubt that sometimes the outcomes from tax reliefs can be positive and that they can drive positive social and economic behaviour. The problem, as the NAO’s report makes plainly clear, is that we simply do not know enough about this, because the Government are failing to properly monitor and evaluate their effectiveness.

Of the 362 tax reliefs, only 111 have been costed by Her Majesty’s Revenue and Customs, and only 15 have had published evaluations since 2015. At the same time, on the Government’s watch, their cost has been rising since 2010. In normal times, such an enormous cost, without corresponding effective oversight, would be an area of real concern. As the Office for Budget Responsibility identified in July 2019, tax reliefs are considered to be a new fiscal risk to public finances, due to the Government’s not knowing their full cost and the lack of transparency built into the system. But of course we are not in normal times; we are living through an incredible economic crisis. The lack of effective monitoring and evaluation is hard to justify when our public services are under such enormous strain. The inattention shown by Ministers over the past decade must change and we need a much greater focus on ensuring value for money.

In Committee, we touched on one area where I ask the Minister to respond further today, namely the social investment tax relief, an area also pressed by my hon. Friend Wes Streeting and my Front-Bench colleague my hon. Friend Dan Carden. What further consideration has the Minister given to extending this relief from April 2021 to April 2023? Will he update us on what further consideration the Treasury has given to this arising from discussions we held in Committee? This important aspect has been raised by many charities. I know that the Minister is sympathetic to the concerns they raise and I am sure they will be grateful for any further updates he might be able to provide in this area.

Our new clause paves the way for a greater focus on value for money, by establishing a more systematic and transparent way for the Government to evaluate the cost of tax reliefs and to empower Parliament to scrutinise this more effectively. The limiting scope for amendments to the Finance Bill set by the Government means that we have been able to opt only for a review of the tax reliefs contained in the Bill. Many changes to tax reliefs—for instance, on the entrepreneurs’ relief and the annual allowance—will potentially have a significant impact on tax revenues. In other areas, there are concerns about whether tax reliefs are being abused.

TaxWatch UK has highlighted particular concerns about the future of research and development tax credits, given the evidence of abuse in recent years. It is therefore right that there is greater transparency and that Parliament can properly scrutinise whether the measures proposed by Government are having their intended effect. The Minister attempted to address some of these concerns in Committee, saying that the Government kept all these reliefs under review and that he has proposed a more systematic evaluation programme for tax reliefs. We would welcome any progress towards such a system. However, if the picture was so rosy, I doubt whether the National Audit Office would have painted such a concerning picture in its report. I also look forward to the Public Accounts Committee’s report on this issue to find out whether it agrees with his assessment or what further insight it might be able to offer.

None the less, this amendment attempts to get to a wider point, which is that Parliament currently has few proper and meaningful opportunities to scrutinise tax reliefs on an ongoing basis. The Minister will know of the 2017 joint report by the Institute for Fiscal Studies, the Institute for Government and the Chartered Institute of Taxation entitled “Better Budgets: Making tax policy better”. It states that the information publicly available to Parliament on the costs and benefits of tax expenditure is not sufficient for it to assess their value for money, pointing out:

“Although taxes constitute almost 40% of national income, Parliament has little standing support to help look at tax legislation, support general inquiries on tax issues or help with post-implementation reviews.”

The report had a clear recommendation:

“Increase support to Parliament on tax issues”.

That means going beyond the support currently available and the opportunities that exist, in Finance Bill Committees, through the Treasury Committee, through Public Accounts Committee and through other work in this House, and instead embedding a proper system so we can assess the value for money of past tax measures. That is hardly controversial. As the Resolution Foundation points out, the Governments of Canada, Australia and New Zealand produce annual tax expenditure statements, which can be accompanied by parliamentary debate.

We want to see improved scrutiny of whether money is being well spent, to ensure that the system is fair and helps those who need it most. When all the benefits and tax reliefs are taken into consideration, the Government provide more support to the richest fifth of non-retired households than to the poorest fifth, and that gap has grown since 2010. This is in part due to the system of tax reliefs that has flourished under this Government and previous Conservative Governments and is clearly not based on any genuine notion of fairness.

Today, as we grapple with the looming jobs crisis, the question of fairness is paramount. We need to create a recovery from coronavirus that benefits everyone in our society, from young to old and right across every region and nation. The Opposition do not doubt the scale of the challenge. Our public finances are enormously stretched, our public services have been pushed to the brink by the pandemic, and there is a risk of unemployment on a scale not seen since the 1980s. We have yet to hear anything about the economic support package that we need: a back-to-work Budget to help those at the sharp end of the looming jobs crisis—a Budget that creates jobs, supports people back into work and properly invests in our young people so that they have the opportunities they deserve at this challenging time.

When our public finances are under such enormous pressure, we can only do our best to ensure that there is genuine value for money and that every penny is spent fairly and wisely. A review of tax reliefs in the Bill is just the starting point. It is a step towards what we on the Opposition Benches want to see, which is a broad review of all tax reliefs. That will help us to know for sure who is benefiting from the hundreds of tax reliefs that exist, whether they are fair, whether they represent good value for money and whether they are having their intended effect. I hope that the Minister will respond to these points and give us some assurances that the Government will do a lot more in this area, so that as we start to emerge from this crisis we can have confidence that taxpayers’ money is being spent well.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton 1:00 pm, 2nd July 2020

I am keen to talk briefly about the future fund, which is dealt with in new clause 22. The new clause covers those who have benefited from tax relief under the enterprise investment scheme and the seed enterprise investment scheme, to ensure that those tax reliefs are not withdrawn. These are important tax reliefs. I have set up a number of companies—I declare my interest, Madam Deputy Speaker—and some of the capital needed to invest in them was solicited through the EIS and the SEIS. Those schemes are very effective in encouraging high net worth individuals and angel investors to invest in small start-up and scale-up businesses.

The future fund is really for bigger, high-growth businesses wanting to attract capital. It is a very effective scheme, in that the Government match the funding that is attracted from individual investors—often venture capital investors. It is incredibly important, as we start to recover from this crisis and seize the opportunities ahead, that we encourage more equity investment. The UK is particularly reliant on debt financing in how our businesses start up and scale up, whereas other countries are much more effective at delivering equity finance solutions. This is important because at the moment the Government are investing a huge amount—about £35 billion—through guaranteed loans in the bounce back loan scheme and the coronavirus business interruption loan scheme, which businesses are making decisions on in terms of debt finance.

However, on equity finance, the Government do not always have the best record on deciding which businesses to support. That is why the future fund is a good scheme, in that it fund-matches private sector investment, which is much better at determining which businesses are the right ones to support. Individual investors are much better at picking winners than are Governments. As we move forward, there are going to be some huge corrections in the private sector. Lots of businesses have borrowed money to get through this crisis and it is fair to say that many of them will not be able to pay that money back. My all-party parliamentary group on fair business banking has contributed to a report by the Recapitalisation Group, a consortium headed by Ernst & Young and TheCityUK, which states that there will be about £100 billion of unsustainable debt—not all connected to the Government schemes—by this time next year because of borrowing by businesses hit by the recession caused by the covid crisis.

To get us through that period and the subsequent period, and to prevent business failures—there is no question but that some businesses will fail and jobs will be lost as a result—we need to understand that it cannot be all about debt financing. The Government cannot be expected simply to give grants to keep businesses going. We need to find a different route to encourage private sector investment, which is good at picking winners, to invest in small and medium-sized enterprises and scale-up businesses. Equity finance will be critical to that. We need something different from the future fund, which is there to help to scale-up, high-growth businesses. Instead of the growth capital that characterises the future fund, we need equity finance for the restructuring, rescue and turnaround of good businesses that could get through this, but that are not big scale-up businesses. In the past, equity finance has been used for high-growth businesses rather than for restructuring and turnaround, and most equity finance is focused on London rather than the regions. I know, Madam Deputy Speaker, you are as keen as I am to ensure that our regions are well served by equity finance and support.

We need a discussion about the schemes that we could introduce. I am a big fan of the seed enterprise investment scheme and the enterprise investment scheme, and I think the tax incentives around them should be enhanced for a time. Clearly, the temptation for high net worth individuals will be to keep their money in the bank for 12 months rather than investing, and wait to see what happens the other side of the crisis. We have to encourage them to put money into businesses today. A doubling of the incentive for EIS relief would be very welcome, and a loosening of the restrictions on EIS investment—such as by enabling relatives to invest in businesses—would be appropriate for the next 12 months.

We need to relax some of the restrictions on venture capital. There are annual and lifetime limits on venture capital in businesses, and they should be doubled, because lots of businesses need extra support at the moment and the venture capital companies that sit behind them did not expect to have to see them through this crisis. I am keen for the Treasury to relax some of the unreasonable restrictions on the amount of money that can be invested in those businesses.

We should perhaps consider loans that are based on a contingent tax liability—a kind of student loan system, whereby the loan is repaid through future profits. I know that Lord Bilimoria is keen to see a new 3i scheme, in which the Government put a significant amount of money—in his view, it should be £5 billion—into several different private equity organisations to sit behind UK businesses.

I will touch on something that is not directly related to tax reliefs, but that is very important in relation to finance. The Minister has been very good at engaging with me on clause 95, which I think unreasonably restricts the opportunity for businesses to get finance by putting HMRC up the ladder as a preferred creditor. That may mean that some lenders are less likely to lend, and I caution the Treasury to keep a close eye on that to make sure that debt finance is still made available to SMEs. I am very supportive of what the Government are doing with the future fund, but we need to go a bit further in certain other areas.

Photo of Stephen Flynn Stephen Flynn Shadow SNP Deputy Spokesperson (Treasury - Financial Secretary)

I rise to speak in support of the amendments tabled in my name and in those of my SNP colleagues. It is important to state from the outset that we hear regularly from across the Chamber—albeit not today, given that it is quite empty for this discussion of tax—that the UK’s tax relief system is full of inefficiencies.

Our core aim with the proposed new clauses is to be constructive and get to the root of that problem in respect of entrepreneurs’ relief by asking the Government to undertake a review of the impact on investment of the changes to the relief. As I said in Committee, that can only be a positive thing. After all, there remain varying views on the effectiveness and efficacy of entrepreneurs’ relief, and whether it delivers the necessary economic objectives or whether that could be done by other means. Those varying views are clear for all to see. For example, the IFS has been quite critical of the relief, highlighting that it is poorly targeted. On the converse, the Federation of Small Businesses has emphasised the importance of the relief for the retirement of business owners.

I have no doubt that we will hear much from the Minister about the fact that a review has already been undertaken. It has, but that was an internal review, which is not good enough. That is of particular importance when we consider that there was much talk in the public domain of entrepreneurs’ relief being scrapped entirely at the Budget. A Back-Bench revolt ensued and that position swiftly changed, so instead of the relief being scrapped, it has gone from £10 million back to the £1 million introduced by the Labour party in 2008. I am sure that even the Minister would agree that the tail should not be wagging the dog on such important matters. What we need is clarity—clarity on effectiveness, clarity of efficacy and clarity on direction. Those points have perhaps never been as important as they are now. As we rebuild our economy following covid-19, it is more important than ever that tax incentives go to those entrepreneurs who we know will rebuild the economy.

That takes me on quite neatly to the further new clauses that we have tabled in respect of tax avoidance, for as we rebuild the economy, the very last thing that we need is individuals and organisations dodging what they are due. On the Scottish National party Benches, we have been clear and consistent in highlighting our profound concerns relating to Scottish limited partnerships, yet despite the obvious manner in which these can be abused, we are yet to see any real action. I sincerely hope that in his contribution, the Minister will make a commitment to end the avoidance practices of such partnerships, but I hope he can go further, too.

For decades, we have seen consecutive UK Governments talk the talk on ending tax avoidance, but in 2017-18, HMRC still put the tax gap at £35 billion. I have some sympathy for the Government in this regard, for just as they legislate to close one gap, another one is opened by those who wish to cheat both the system and the public, but there is scope for a comprehensive anti-avoidance rule to be introduced. The Government will point to the general anti-abuse rule introduced in 2013, but this has been heavily criticised, not least by the TUC. What we need is workable general anti-avoidance rules that tackle avoidance in all its forms, including international tax abuse, and more than ever, we need real action to combat Scottish limited partnerships.

I am conscious of the fact that you wish to finish before 2 o’clock, Madam Deputy Speaker, so I intend to keep my contribution brief. I will move on to my closing remarks, in which I wish to highlight that more can be done to incentivise energy efficiency through tax reliefs and, similarly, to meet the needs and demands of the Scottish economy.

In respect of structures and buildings, it is clear that the Government are making an attempt to amend the system to incentivise capital investment, but they can and should go further. At the risk of repeating myself once again, the easiest step they could take is to scrap VAT on building repairs. In my constituency of Aberdeen South, I have been struck by just how many homeowners, who often live in some of the most beautiful granite buildings, are unable to undertake the repairs and improvements that they either want or need due to the high costs involved. As we seek to improve energy efficiency in our homes, particularly in often old and cold buildings, surely the Government should be assessing every measure to incentivise progress, not just to help rid us of fuel poverty, but to protect both the environment and the future of our planet. Cumulative action to combat climate change is needed, and I would welcome a firm commitment from the Minister in this regard.

On the issue of tax reliefs, it would be remiss of me not to highlight to the Chamber the proposals put forward in recent days by my colleagues in the Scottish Government. I think that everyone—even the most ardent of UK Government supporters—was deeply underwhelmed by the plans announced by the Prime Minister to restart the economy, and that collective sigh from across the UK was entirely justifiable, because £5 billion will likely work out to be less than the cost of renovating the very building that we are in, and it is a far cry from the £80 billion of investment called for by the Scottish Government. Importantly, however, my colleagues called not just for capital investment, but for tax relief. Indeed, they were clear that reducing VAT must be an urgent act of this Government, both in terms of reducing the general rate of VAT from 20% to 15% for six months and, importantly, reducing tourism and hospitality VAT to just 5%. On top of that, a 2p cut in employers’ national insurance contributions to reduce the cost of hiring staff was also identified.

Unfortunately, as with all too many matters, the hands of the Scottish Government are tied on such issues. The power lies with the UK Government, a Government who Scotland neither supports nor votes for. I hope that the Minister is listening and the wider Government are listening too, because now is the time for them to introduce the tax incentives that the Scottish economy needs; to deliver the investment that the Scottish economy needs; and to provide the Scottish Parliament with the borrowing powers that it so desperately needs. If they do not, they should be ever mindful that they are only doing further damage to the very Union that they claim to support.

Photo of Ben Lake Ben Lake Plaid Cymru, Ceredigion 1:15 pm, 2nd July 2020

Diolch, Madam Deputy Speaker, for calling me to contribute to this important debate, the importance of which is perhaps not reflected in the attendance in the Chamber today, but as the shadow Minister, Bridget Phillipson rightly said in her opening remarks, reviews of tax reliefs tend to be important not just for improving the transparency of their effectiveness but, as Kevin Hollinrake said in relation to the enterprise investment scheme and the future fund, for their transformative impacts on policy. I agree with him that one of the key things that we need to consider as we move ahead is how we can encourage greater investment, especially equity investment, in regions other than London. I hope to dwell a little on that point later in my remarks.

It is a pleasure to follow my hon. Friend Stephen Flynn, who not only laid out effectively the inefficiencies of the tax reliefs system but raised the important question, which I would like to address, of whether reliefs achieve their economic objectives in the current climate and context, as we try to rebuild or at least begin to consider how we can rebuild after covid-19. Tax reliefs will have an important part to play, and it will be vital that they are channelled to those who will rebuild the economy.

I wish to speak at greater length to amendment 1 and new clause 17, both of which are tabled in my name. Both are probing amendments. I seek to probe the Government’s commitment to levelling up every nation and region of the UK by requiring them to report on the differential territorial impacts of the changes that the Bill introduces to certain reliefs and tax incentives.

Most hon. Members will welcome the Conservatives’ efforts to see balanced economic growth throughout the UK and in particular to move away from what I consider to be a hub-and-spoke approach to economic development. Over the past decade, the Government have mainly concentrated on improving connectivity between rural areas and smaller towns and the supposed economic engines of the larger cities, as opposed to incentivising and supporting economic growth in those areas themselves.

Such a centralised model has inevitably concentrated economic activity in London and the south-east. As a consequence, Wales’ potential and that of other regions and nations of the UK has been overlooked. That is perhaps most apparent when we consider the way in which public funding for certain development has been allocated. Between 2001 and 2017, London R&D funding per head totalled almost twice the UK average— £3,900 per head compared with a national average of £2,300. What is more, the trend worsened in that time. The share of the core research budget spend across the three cities of Oxford, Cambridge and London—also known as the golden triangle—rose from 42.1% in 2002-03 to 46% in 2017-18.

Perhaps just as relevant to this debate is how public spending on transport infrastructure is allocated. I note that per-head spending in London in the past decade has averaged nearly three times that spent in the rest of the UK. During the same period, the city has received five times the average per-head spend on culture. It is perhaps unsurprising, therefore, given that disparity, that the golden triangle of London, the south-east of England and the east of England also attracts the lion’s share of venture capital. Indeed, the region received 73% of all venture capital between 2016 and 2018, according to the British Private Equity and Venture Capital Association. When we reflect on this concentration of venture capital in one region of the UK, as with R&D, not only are the failings of past economic development policy laid bare, but it is difficult to deny a popular saying in Ceredigion, “I’r pant y rhed y dŵr”—or in English, “To the hollow the water runs”.

It is clear that as the world moves increasingly to a knowledge-driven economy, expenditure on R&D will be vital not only as a source of innovation that can be commercialised to form the basis of the next generation of business, but as a means of equipping people with the requisite skills for the new economy and, as my hon. Friend the Member for Aberdeen South said, the post-covid economy. It follows, therefore, that the economy of any nation or region that does not receive the right level of support will be hindered in its attempt to adjust to the challenges of tomorrow. Government support for R&D is essential for Wales in particular, to address problems that range from a low-wage economy to a looming demographic time bomb, while also building an economic platform to take advantage of trends, including automation, that could otherwise cause quite a serious long-term social risk.

New clause 17 would require the Chancellor to report on the geographical impact of changes to several tax rules, including R&D expenditure credit. It would ensure that the UK Government consider how different geographic areas benefit from taxpayer-funded reliefs so that the financial incentives can be better tailored to overcome the UK’s chronic regional inequalities. I have previously drawn attention to the concentration of R&D funding in the golden triangle, but assessments might also provoke a debate within Government about how public spending on other priorities is allocated.

In a similar vein, my amendment 1 would require the Government to consider the unsustainable concentration of private investment in one region of the UK at the expense of the devolved nations and other regions of England. As the UK Government narrow the applicability of the enterprise investment scheme, they need to consider how that will affect firms in different areas of the UK. The EIS benefits us in a great many ways—the hon. Member for Thirsk and Malton outlined them effectively in his remarks. The ways in which the UK Government can encourage the establishment in the devolved nations of venture capital funds, and therefore private investment, is so important. The geographic disparities to which I have already referred are reflected in the EIS. To pick just one example, between 2015 and 2018, only 210 Welsh firms benefited from EIS, receiving just 1.3% of the total investment. By contrast, to pick on the golden triangle again, that area received 67% of all investment. The average UK business angel investment per firm has been some 40% greater than that in Wales.

Modern advanced economies such as Germany, the Netherlands and even the USA have ensured a better geographic spread of economic prosperity, so the Government’s intention to address this policy failure is to be welcomed. However, we must make sure that the rhetoric is backed up by the reality and that the measures designed to realise such lofty ambitions are fit for purpose. My amendment and new clause would require the Government to report on the effectiveness of some tax relief schemes in this regard, and I hope that the Minister can give them some serious consideration.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

I am grateful to everyone who has contributed to this short but interesting debate. As colleagues have noted, when we think about tax transparency, we are in what might these days be referred to as a niche area of taxation—technical, but no less important. In some respects, it is more important that we do not get lost in the detail but can come back and talk about the issues more widely. If I may, I will address the different clauses and then come to the specific points raised in the debate.

New clause 27 would require the Government to review all

“tax reliefs contained in this Act”.

It states that the review must contain

“the number of tax reliefs…the effect on taxation revenue of each of the tax reliefs…and…an assessment of the efficacy of systems for designing, monitoring and evaluating the effect of the tax reliefs.”

It asks the Government to publish the number of tax reliefs in the Bill and their effect on taxation revenue.

As the House may be aware, the Government already publish tax changes and estimates of the Exchequer impacts of policy changes in the Budget documents at each fiscal event. Moreover, Her Majesty’s Revenue and Customs monitors the effect on taxation revenue of tax reliefs after they are introduced and issues an annual tax relief statistics publication—I am sure that is closely scrutinised by all Members—which includes estimates of the costs of tax reliefs. Building on this, HMRC is also undertaking a project to expand its published costs information. I remind the House that in May HMRC published cost estimates for a further 47 previously uncosted reliefs.

New clause 27 also asks for an assessment of the efficacy of systems for designing, monitoring and evaluating the effect of a relief. As the House will know, the Government consult on new tax reliefs and proposed changes to tax reliefs, bringing in external expertise as part of the policy making cycle wherever possible. Officials are constantly working on ways to improve the policy on development, administration and continuing management of reliefs. As colleagues will know, the Government, and particularly the Treasury, keep all reliefs under review.

The Government also do evaluations of different forms. This work has included evaluations of a number of significant reliefs—some 15 since 2015. These include our R&D tax credits and entrepreneurs relief, on both of which I will say a few words later. In 2015, HMRC published an evaluation of R&D tax credits. In 2017, it commissioned an evaluation of entrepreneurs relief that led to a series of reforms, most recently the significant reduction of its lifetime at spring Budget 2020, which is legislated for in this Bill. Stephen Flynn picked up on the point about entrepreneurs relief, which he somehow regards as “the tail wagging the dog”. What he calls “the tail wagging the dog” other people would call consultation across Parliament and discussion with stakeholders. Since the measure resulted in a 90% reduction in the scope of the relief, I do not think he can claim that there is any lack of ambition in it.

HMRC will continue to monitor and evaluate reliefs and will bring forward a pipeline of further evaluations in due course. It will also consider a proposal to which I have already said I am quite sympathetic—I thank Bridget Phillipson; we have discussed this before: a more systematic evaluation programme for reliefs. In the light of all this, the Government do not believe that the new clause is necessary.

New clause 2 would require the Chancellor of the Exchequer to review the impacts of the reduction in the lifetime of entrepreneurs relief that is being legislated for in this Bill within six months of Royal Assent, and specifically to review the impacts on business investment, employment and productivity in the constituent nations and English regions of the United Kingdom. I would first highlight to hon. Members that the Government have already conducted an internal review of this relief that built on the 2017 independent research commissioned by HMRC. That review considered the distributional effects and benefits of the relief against its cost in order to better understand the targeting of the relief. This, in turn, has been used to inform the reform that is being legislated for in this Bill. It ensures that the majority of entrepreneurs are unaffected. A lot of the concern about entrepreneurs relief historically has been that it is not well targeted, and this measure greatly improves the targeting. Unfortunately, the effects of the changes to the relief will not be visible in six months’ time, and for that reason I urge the House to reject new clause 2.

New clause 4 concerns the structures and buildings allowance. It would require the Chancellor to review the impacts of clause 30, which makes miscellaneous amendments to the SBA, within six months of the passing of the Finance Act. Specifically, it would require the Chancellor to review the impacts on business investment, employment, productivity and energy efficiency. Again, I reassure Members that both HMRC and the Treasury already monitor tax reliefs according to the level of risk that they are deemed to pose. It is in the nature of a structures and buildings allowance that it is configured to reflect the fact that it can take many years to erect new buildings. Claims under the SBA are ordinarily settled when businesses bring buildings into use and submit tax returns at year end. For that reason, it would be neither possible nor appropriate to try to draw conclusions on the productivity or energy efficiency impacts of these changes within such a short period.

New clause 17 would require the Government, within 12 months, to assess and report on the geographical effects of changes to business reliefs across a variety of areas. There is a concern, which I recognise, that there are geographical disparities that reflect the historical evolution of our economy in different areas. It is by no means a uniform picture, even outside London.

HMRC does not routinely require businesses to provide geographical information about where expenditure is incurred as part of claims for the R&D expenditure credit, structures and buildings allowance or intangible fixed assets. To do that, changes would be required that would create additional burdens on businesses. Those claiming the reliefs, of course, could only provide information after the year end. For that reason, it would not be possible for HMRC to have information within the 12 months stated in the amendment, even if the amendment were passed. It is not capable of being fulfilled.

HMRC does, in fact, already publish annual statistics on many tax reliefs, including a detailed breakdown of R&D tax relief claims, that analyse both by region and by sector the number of claims and the amount of relief received. That said, this regional analysis is based on companies’ registered offices, not necessarily where expenditure is incurred, and although HMRC will publish the next set of annual R&D relief statistics in the autumn, companies can claim R&D tax relief for up to two years after the end of their accounting period. For that reason, the 2020 release will only include claims up to 2018-19 and therefore will not include claims for the increased 13% rate.

As the House will know, the Government remain firmly committed to levelling up across the regions and nations of the UK, and the spring Budget provided a £1.14 billion increase to block grant for the devolved Administrations to spend on their own priorities, in addition to £2.7 billion invested in city deals, of which £800 million will support four deals in Wales alone, and a further £1.4 billion provided for 10 deals in Scotland. We fully recognise the importance of supporting regional and devolved Administration growth.

Finally, on the enterprise investment scheme, amendment 1 to clause 36, would require the Government to review the economic and geographical impact of the existing EIS. We considered this in Committee, of course, and I appreciate the intention of hon. Members to use the EIS more strategically, but it has been specifically designed to address a market failure for young innovative UK companies that seek to obtain patient equity finance in order to grow, and we would not wish to pull it away from that important national function. Companies that use the EIS can register wherever they please in the UK, and again the registered office does not need to be in the same place as where the bulk of the staff are employed.

With permission, Madam Deputy Speaker, I will spend another minute or two addressing the specific points. The hon. Member for Houghton and Sunderland South described the tax relief system as unwieldy. It is a view I would share. It is unwieldy. I think more work needs to be done. It has grown up over time. Certainly no one in government would regard the position as rosy. The House will know that we received many billions of pounds, including one just recently, in requests for VAT relief alone. Everyone seems to be terribly keen on improving tidying up reliefs, but they are also terribly keen on increasing the number of reliefs in their particular area or sector—for perfectly good, democratic reasons, we understand, but it does create a natural tension. As relief costs rise, of course, that is sometimes a very good thing—for example, with R&D expenditure credits, which we know support high value for money investment—but sometimes it might not be such a good thing.

I will just pick up on the point made by my hon. Friend Kevin Hollinrake—[Interruption.]—before he intervenes. He has jumped the gun a little bit on me, because we will be discussing new clause 22 in the next debate, so if he really wishes to land his point, he only has to hang around a little bit longer. I can give him a sneak preview, though, by saying that new clause 22 makes sure that people who have made investments under EIS or SEIS schemes do not lose reliefs on those investments. Recapitalisation is an important issue that the Government are closely attending to, and my hon. Friend is right to focus on it.

Finally, Ben Lake made a point about the importance of greater equity investment in the regions. I very much agree with him.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

With permission, Madam Deputy Speaker, I will give way to my hon. Friend.

Photo of Kevin Hollinrake Kevin Hollinrake Conservative, Thirsk and Malton

I declare an interest as somebody who has benefited from entrepreneurs’ relief in the past. Is the Minister considering extending the reduction in entrepreneurs’ relief, which I support, to investors’ relief, which currently stands at the same figure as entrepreneurs’ relief used to stand at—£10 million?

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

If my hon. Friend is asking questions, he ought to stay for the next debate, because he is abusing the privilege of this debate. I thank him for his suggestion of a revenue-raising possibility for the Government; we take all those in great heart.

Photo of Bridget Phillipson Bridget Phillipson Shadow Chief Secretary to the Treasury

Could the Minister say a little more about the social investment tax relief? I am not aware that he responded on that point.

Photo of Jesse Norman Jesse Norman The Financial Secretary to the Treasury

The hon. Lady is absolutely right. Let me address that. As she knows, the relief remains in place until next year. Even its doughtiest supporters would agree that so far it has not been anything like as effective as anyone would have liked or as had been projected or anticipated. Only £11.2 million has been raised under it in the period 2014 to 2018-19.

We are looking at it closely. As I mentioned in Committee, I am in discussions with leading figures across the social investment world about whether we can get some more visibility on the sources of funds that would use such a relief and the sources of projects that those funds would support. If we do not get that and we cannot have that in a slightly more concrete form, it looks like quite an empty request, but there may be other things that we can do to support social investment. As the hon. Lady knows, I have written a book on the big society. It is an area that I care deeply about, so I am happy to respond and I am grateful for her question.

Photo of Bridget Phillipson Bridget Phillipson Shadow Chief Secretary to the Treasury

We do not intend to divide the House on the new clause, but I will make a few brief points in response to what the Minister has said. I am glad that he shares our assessment that the current situation and system are unwieldy, and therefore we look forward to seeing real progress in that area. Frankly, it is not good enough that of those 362 tax reliefs, only 15 have had published evaluations since 2015, at a time when costs have risen.

During these extraordinary times, we need to see much more from the Government, not just on tackling tax avoidance, as we discussed at some length yesterday. There needs to be a renewed focus on taxpayer value for money, with greater opportunities for scrutiny of tax reliefs in this place and from external experts. Although we are not seeking to divide the House, I hope that we will see progress in that area. It is an issue to which we intend to return. I beg to ask leave to withdraw the motion.

Clause, by leave, withdrawn.

Photo of Rosie Winterton Rosie Winterton Deputy Speaker (First Deputy Chairman of Ways and Means)

We will have a three-minute suspension.

Sitting suspended.