Clause 4 - Increase in Rates of Tax on Dividend Income

Finance (No. 2) Bill – in the House of Commons at 2:51 pm on 1st December 2021.

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

Photo of Eleanor Laing Eleanor Laing Deputy Speaker and Chairman of Ways and Means, Chair, Standing Orders (Private Bills) Committee (Commons), Chair, Standing Orders (Private Bills) Committee (Commons)

With this it will be convenient to discuss the following:

Clauses 6 to 8 stand part.

That schedule 1 be the First schedule to the Bill.

Amendment 5, in clause 12, page 10, line 44, at end insert—

‘, and at the end of section 32(1) insert “, but eligibility for the increased maximum annual allowance from 1 January 2022 to 31 March 2023 is available only to businesses which can demonstrate that they have taken steps to reduce carbon emissions within their own business models and have set out further steps for how they plan to reduce carbon emissions towards a net zero goal”.’

This amendment would restrict access to the extended temporary increase in annual investment allowance to businesses that support transition to “net-zero”.

Amendment 6, page 10, line 44, at end insert —

‘, and at the end of section 32(1) insert “, but eligibility for the increased maximum annual allowance from 1 January 2022 to 31 March 2023 is available only to businesses which do not have a history of tax avoidance”.’

This amendment would restrict access to the extended temporary increase in annual investment allowance to businesses that do not have a history of tax avoidance.

Amendment 4, page 11, line 10, at end insert—

‘(3) The Chancellor of the Exchequer must, no later than 5 April 2022, lay before the House of Commons a report—

(a) analysing the fiscal and economic effects of the temporary increase in annual investment allowance, 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; and

(b) assessing how the temporary increase in annual investment allowance 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.’

This amendment would require the Chancellor of the Exchequer to analyse the impact of changes proposed in clause 12 in terms of impact on the economy and geographical reach and to assess the impact of the temporary increase in the annual investment allowance on efforts to mitigate climate change.

Amendment 7, page 11, line 10, at end insert—

‘(3) In paragraph 2(3) of Schedule 13 of that Act—

(a) after “second straddling period is” insert “the greater of (a)”; and

(b) after “of that sub-paragraph” add “and (b) the amount (if any) by which the maximum allowance under section 51A of CAA 2001 had there been no temporary increase in the allowance exceeds the annual investment allowance qualifying expenditure incurred before 1 April 2023.”’

This amendment would amend the transitional provisions for the reversion of the AIA to £200,000 on 1 April 2023, to ensure that smaller businesses with lower levels of qualifying capital expenditure are not disadvantaged by having their effective AIA limit restricted to significantly less than £200,000 for a period.

Clause 12 stand part.

New clause 1—Review of the impact on revenues from tax on dividend income—

The Chancellor of the Exchequer must, within six months of the passing of this Act, publish an assessment of the impact on revenues from tax on dividend income of increasing the rates set out in section 8 of ITA 2007 by—

(a) 1.25%,

(b) 2.5%, and

(c) 3.75%.’

This new clause requires an assessment of what extra revenue would be derived by increasing the rates of tax on dividend income by different amounts.

New clause 2—Review of the impact on revenues from banking surcharge—

‘(1) The Chancellor of the Exchequer must, within six months of the passing of this Act, publish an assessment of revenues from the banking surcharge.

(2) This review must consider—

(a) the total revenue raised by the banking surcharge since its introduction,

(b) the total public expenditure on supporting the banking sector since 2008, and

(c) an assessment of risks to the banking sector in the future including the likelihood of further public support being required.’

This new clause requires an assessment of the banking surcharge in the context of the cost of public support to banks since the financial crisis and an assessment of the risk of the need for further public support in future.

New clause 3—Review of the impact of the extension of temporary increase in annual investment allowance—

‘The Chancellor of the Exchequer must, within three months of the end of tax year 2022-23, publish a review of decisions by companies to invest in the UK in 2022-23, which must report on which companies, broken down by size, sector, and country of ownership, have benefited from the annual investment allowance; and this assessment must also assess the merits of the existence of the superdeduction in light of the AIA.’

This new clause requires a review of which companies have benefited from the Annual Investment Allowance in 2022-23, broken down by size, sector, and country of ownership, and an assessment of the merits of the superdeduction in light of the AIA.

New clause 8—Review of changes to taxation of dividend income—

‘(1) The Chancellor of the Exchequer must, not later than six months after the passing of the Act, lay before the House of Commons a review of the fiscal and economic effects of the changes in the taxation of dividend income resulting from the provisions of section 4 of this Act.

(2) The review under subsection (1) must also include an assessment of the fiscal and economic effects of—

(a) removing the personal dividend taxation allowance, and

(b) amending the dividend income rates of taxation to match the existing rates of taxation of earnings.’

This new clause would require the Government to report to the House on the fiscal and economic effects of the changes made by clause 4 to the rates of taxation of dividend income, and also to assess the effects of other changes to the taxation of dividend income.

New clause 10—Assessment of annual investment allowance—

‘The Government must publish within 12 months of this Act coming into effect an assessment of—

(a) how much the changes to the annual investment allowance under section 12 of this Act will affect GDP in the event of the Finance Act coming into effect, and

(b) how the same changes would have affected GDP had the UK—

(i) remained in the European Union, and

(ii) left the European Union without a Future Trade and Investment Partnership.’

This new clause would require an assessment of the effects of the provisions in clause 12 on GDP in different scenarios.

New clause 11—Review of temporary increase in annual investment allowance—

‘The Government must publish within 12 months of this Act coming into effect an assessment of

(a) the size, number, and location of companies claiming the increased annual investment allowance,

(b) the impact of this relief upon levels of capital investment, and

(c) the percentage of total business investments that were covered by this relief in 2019, 2020 & 2021.’

This new clause would require an assessment of the take-up and impact of the temporary increase in the AIA.

New clause 16—Assessment of revenue effects of increases in the rates of tax on dividend income—

‘The Chancellor of the Exchequer must, no later than 31 January 2022, lay before the House of Commons an assessment of the effects on tax revenues of—

(a) the provision of section 4, and

(b) increasing the rates of tax on dividend income to the default rates of income tax.’

New clause 17—Review of impact of the abolition of basis periods—

‘(1) The Chancellor of the Exchequer must, within six months of the passing of this Act, review the impact of the abolition of basis periods.

(2) The review must consider the effects of the abolition on—

(a) farmers and other seasonal businesses,

(b) sole traders, and

(c) partnerships.

(3) The review must consider the effects of the abolition in respect of—

(a) each region of England and England as a whole,

(b) Scotland,

(c) Wales, and

(d) Northern Ireland.

(4) In this section, “region” has the same meaning as that used by the Office for National Statistics.’

This new clause would require a report on the effects of the abolition of basis periods on particular sectors, including farming and other seasonal businesses, sole traders and partnerships.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

In the Budget, the Chancellor set out his vision for an economy that will allow the UK to succeed. This was a vision of a fair, simple and modern tax system that enables our businesses to be world leaders. The clauses we are considering today, along with other measures in this Bill, will help us to achieve these goals. For example, on fairness, these measures will make sure that everyone plays their part in helping to fund new investment in health and social care. That is because the Bill provides that, in addition to the new health and social care levy, we will ask for an equivalent contribution from those who earn income through dividends. This will spread the burden more equally across society.

On tax simplicity, these measures will support the smaller businesses that are at the heart of our economy through reforming basis periods. That change will make the tax system easier and fairer for these firms.

On competition, we have set the rate of the bank surcharge to ensure that the UK remains internationally competitive while making sure that banks continue to pay their fair share of tax.

Finally, these measures will help businesses create jobs and growth by extending an increase in the annual investment allowance on plant and machinery assets. This will encourage firms across the country to invest more and earlier. I will now turn to each of these clauses in depth.

I shall start with clause 4. This increases the rate of income tax that is applied to dividend income by 1.25%. The increase will be used to help fund the health and social care settlement announced in the spending review. By way of background, dividend tax is paid by people who receive dividend income from shares. That income is not subject to national insurance contributions or to the new health and social care levy. The increase in dividend tax rates will mean that those with dividend income will also contribute to the health and social care settlement, just like employees, the self-employed and businesses.

As well as supporting the Government to fund this critical area of public services, the measure will deter individuals from cutting their tax bills by incorporating as a company and remunerating themselves via dividends rather than as wages. That is something that the Office for Budget Responsibility has pointed out as a potential risk. However, it is important to point out that many everyday investors will be unaffected by this change. That is because shares held in ISAs are not subject to dividend tax. In addition, because of both the £2,000 tax-free dividend allowance and the personal allowance, around 60% of those with dividend income outside of ISAs are not expected to pay any dividend tax or be affected by this change next year.

The measures contained in clause 4 are also progressive. We have calculated that additional and higher-rate taxpayers are expected to contribute more than three quarters of the revenue raised by the measures next year. In short, this clause supports the Government to fund public services and tackle the challenges in social care, but in a fair and progressive way.

I shall now turn to the proposed new clauses, 1, 8 and 16. These all call on the Government to publish information on the changes to dividend tax rates set out in clause 4 as well as on alternative potential changes to the dividend tax system. The Government have already published an assessment of the fiscal and economic impacts of the 1.25% increase in tax rates on dividend income. The fiscal impacts were set out in the Budget document and the fiscal and economic impacts were both set out in the taxation information and impact notes for that measure. Both of these are available for the public to consider on gov.uk. It is not standard, however, for the Government to publish assessments of the fiscal and economic impacts of measures that they are not introducing and it is not clear in this case that doing so would be a beneficial use of public resources. I therefore recommend that the House rejects the new clauses.

I now turn to clause 6. Before turning to the bank surcharge itself, it is important to remember the overall context for this clause. From April 2023, corporation tax will rise from 19% to 25%. That increase, combined with a current banking surcharge rate of 8%, would have led to banks paying an effective rate of 33% on their profits. That is not competitive. Such a rate would have put us at a competitive disadvantage in relation to other major financial centres, such as the US, Germany and France. Clause 6 makes sure that banks pay their fair share of tax while remaining internationally competitive, protecting British job and tax receipts.

I know that the Opposition may like to bash banks, but it is important to remember that the banking sector accounts for almost half a million jobs across the country, and 65% of those jobs are outside London. Let us not forget that the sector contributes around £37 billion a year in tax revenue, ultimately paying for vital public services. The changes made in clause 6 will therefore support those jobs and protect that tax revenue while making sure, as I said, that banks pay their fair share. A surcharge rate of 3% will mean that banks pay an overall rate of 28% on their profits. That is, of course, more than the 27% that the banks now pay and above the 25% paid by most other businesses. In combination, the changes to corporation tax and the bank surcharge will result in banks paying an additional £750 million in tax over the period to 2026-27 based on current forecasts.

I should also point out that none of our global competitors charges an additional rate on banking profit. Clause 6 also increases the allowance above which banks pay the surcharge—from £25 million to £100 million. This new, increased allowance will support growth and competition for smaller, retail and challenger banks, benefiting consumers and businesses.

New clause 2 would require the Chancellor to publish an assessment of revenues from the bank surcharge since its introduction, of public expenditure on supporting the banking sector since 2008, and of future risks to the banking sector. The Government already publish figures on revenues raised from the bank levy introduced in 2011 and the banking surcharge introduced in 2016 in the Red Book at each Budget. On state support, as of 27 October this year the independent Office for Budget Responsibility estimated an implied balance, excluding financial costs, of £13.5 billion for the net direct effect from the public finances of financial sector interventions made as a result of the 2007-08 crisis. We must also remember that the costs of the financial crisis would almost certainly have been more significant in the absence of direct interventions.

Since the financial crisis, we have introduced regulations that reduce the potential risk and shift costs away from the taxpayer. Indeed, today’s banking system is much stronger than at the time of the financial crisis, and banks hold three times more capital. The Bank of England’s Financial Policy Committee is required to publish two financial stability reports a year. The committee judged in September that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast—a judgment that is supported by the interim results of the Bank of England’s 2021 solvency stress test. New clause 2 would therefore provide no new information, so I encourage Members to reject it.

Let me turn to clauses 7 and 8 on the technical but important issue of basis period reform. Clause 7 and schedule 1 abolish the basis period rules, simplifying how the self-employed and partners allocate their profits to tax years. The rules remove complexity, and ensure that taxes are declared and paid closer to the actual trading period. Clause 8 legislates to allow property businesses to treat accounts drawn up to 31 March as equivalent to the tax year, reducing the administrative burden on such businesses and simplifying their reporting responsibilities. Together, these reforms will create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years. This will make tax affairs much easier for small businesses, particularly in the first years of trading. Under the current complex rules, firms at this stage would otherwise have to deal with double taxation and later overlap relief.

New clause 17 would require the Government to produce a report on the impact of the abolition of basis periods, but the Government have already published a detailed impact assessment of basis period reform, and more information on impacts in the summary of responses to the consultation on reform. I therefore encourage Members to reject this proposed new clause.

Clause 12 is another measure that supports business. In this Bill, we are extending the £1 million temporary level of the annual investment allowance or AIA for 15 months until the end of March 2023. The AIA helps to tackle the long-standing problem of under-investment by UK businesses, by providing businesses with an up-front incentive to spend money on new equipment. It allows firms a 100% in-year tax relief on qualifying plant and machinery investments up to an annual limit, and simplifies tax for many businesses. In 2015, the Government set the permanent level of AIA at £200,000. At Budget 2018, the allowance was temporarily increased to £1 million for two years from 1 January 2019.

At this year’s spring Budget, the £1 million level was extended for another year until 1 January 2022—a measure that was warmly received by businesses. The decision to continue this extension until the end of March 2023 reflects the pressing need to help the economy to recover from the coronavirus. As the Chancellor has said, now is not the time to reduce support for businesses investing in the UK’s future growth and prosperity. This measure will encourage firms across the country to invest more and earlier by providing them with greater up-front support. It will also make tax simpler for any business investing between £200,000 and £1 million. Ultimately, the £1 million AIA level will mean that more than 99% of businesses will have their plant and machinery expenditure covered. The extra investment will in turn help to spark growth, and create jobs and new opportunities around the country. I am not quite clear why the Opposition are opposed to the Government helping businesses to invest and grow.

New clause 3 would require the Government to review the investment decisions of businesses across the UK; classify businesses by size, sector and ownership; and assess the super deduction as a result. Moreover, it would require the Government to lay their findings before the House of Commons within three months of April 2023. Amendment 4, and new clauses 10 and 11, would also require assessments of the AIA for economic, geographical, environmental and Brexit impacts. The Government oppose these amendments on the basis that the Treasury carefully considers the impact of all measures on investment in all parts of the UK as a matter of course when preparing for the Budget.

At autumn Budget 2021, the Government set out detailed information on the Exchequer, macroeconomic, business and equality impacts of this provision. These assessments are not expected to change in the near future. Furthermore, the Government are already monitoring and evaluating the success of the reliefs, following the structured approach to evaluating tax relief, including capital allowances, that Her Majesty’s Revenue and Customs began to set out in October 2020. The Government will publish results from this approach in due course. As a result, a further review would not be useful.

Amendment 5 would add a new requirement for companies to demonstrate to the Government that they are transitioning to net zero. I am pleased to say that the Government have championed greenifying our economy as a matter of priority. Dame Eleanor, you will be aware of Her Majesty’s Treasury’s work on net zero and its review, which is considering the costs and opportunities of net zero, how the transition could be funded, and how policy can help to maximise the benefits and minimise the costs of transition.

Amendment 6 would add an eligibility requirement that businesses must have no history of tax avoidance. Tackling tax avoidance and evasion, both nationally and internationally, is a priority for this Government. For example, we have introduced an additional 19 measures in 2021 to tackle avoidance, evasion and non-compliance that are forecast to raise £2.3 billion over the next five years. Having assessed the potential for fraud, abuse and tax avoidance, there are a number of safeguards in the legislation to prevent such abuse—for instance, the exclusion of connected party transactions. These amendments would create a compliance burden for businesses after such a tough year, and hold up the economic recovery for the purposes of objectives that the Government are already dedicated to working towards separately. As a result, they should not be added to the Bill.

Amendment 7 would make changes to the AIA’s transitional rules for firms whose accounting periods straddle the AIA’s £1 million limit. The limit and the super deduction are specifically aimed at helping the investment-led recovery, and giving businesses the confidence to bring forward their investment by March 2023. We are alive to the points raised by the Chartered Institute of Taxation, but we believe that businesses should have sufficient time to plan to take advantage of the maximum entitlement for the AIA for any investment.

I will not take up any more time. These measures support a fairer, simpler tax system that is globally competitive in an environment that allows businesses to continue to grow. I therefore move that clauses 4, 6, 7, 8 and 12 stand part of the Bill, and that schedule 1 be the first schedule to the Bill.

Photo of James Murray James Murray Shadow Financial Secretary (Treasury) 3:00 pm, 1st December 2021

The economy the British people need is one that works for all parts of the country, that meets the goal of net zero, and that improves people’s quality of life. To achieve that, we need strong economic growth, yet we have a Chancellor who is failing at this most fundamental of tasks. In the first decade of this century, Labour grew the economy by 2.3% a year. In the past decade to 2019, however, even before the pandemic, the Tories grew it by just 1.8% a year, and now the Office for Budget Responsibility has said that by the end of this Parliament the UK’s economic growth will have fallen to just 1.3% a year. If we had an economy that was growing strongly, we could create new jobs with better wages and conditions in every part of the country, but without that growth it gets ever harder to meet the challenges we face—and the truth is that low growth means that the Conservatives have had to put up taxes.

The tax burden in our country is set to reach its highest level in 70 years. Faced with the decision over which taxes to put up, where have the Tories chosen to let that tax burden fall? It is falling on the backs of working people who face a national insurance hike from this Chancellor at the same time as he cuts taxes for banks. In power, the Conservatives are showing themselves to be the party of low growth, high taxes, and the wrong choices for this country. The Tories are making the wrong choice by pressing ahead with clause 6, which cuts the rate of the banking surcharge and raises its allowance. That cut will see the corporation tax surcharge for banking charges slashed from 8% to 3%, with the allowance for the charge raised from £25 million to £100 million. It will cost the public finances £1 billion a year by the end of this Parliament.

We will oppose this clause and we have tabled new clause 2 to make sure that Members of this House do not forget why the banking surcharge was introduced in the first place. Let us not forget that following the financial crisis of the late 2000s, there was recognition that banks have an implicit state guarantee thanks to their central position in the UK economy. At the time, the Government seemed to realise that this guarantee should be underpinned by a greater tax contribution. Indeed, this has been a critical justification behind both the bank levy and the banking surcharge. The Government’s own policy paper published alongside the October Budget clearly stated:

“Since 2010, banks have been subject to sector-specific taxes. As a result they have made an additional contribution to public finances, reflecting the risks that they pose to the UK financial system and wider economy and recognising the costs arising from the financial crisis.”

Yet despite appearing to acknowledge the justification behind this surcharge, the Government are today pushing ahead with slashing it by nearly two thirds.

That is why our new clause 2 would require the Government to publish a review that considers the total revenue raised by the banking surcharge since its introduction, alongside the total public expenditure on supporting the banking sector since 2008, and an assessment of risks to the banking sector in the future, including the likelihood of further public support being required. I would welcome the Government’s support for such a review, but if it is not forthcoming, perhaps the Minister could explain why the need for banks to make an additional contribution to public finances is suddenly less now than it has been for the past decade. Without clear evidence from the Government, we can only go on what others say. Tax Justice UK has pointed out that

“it appears that the bank levy and bank surcharge will not even have fully repaid the public expenditure on the banking sector at the financial crisis;
let alone provided any insurance against a future crash, before being cut”.

It is clear that cutting this tax on banks is the wrong choice at the wrong time. At a time when the Government are being forced to raise taxes, it tells us everything we need to know about the Conservatives’ instincts—that they have decided to cut taxes for banks while raising them for working people.

Elsewhere in the Bill, clause 4 also draws to our attention other choices the Government are making on taxes. Although the clause increases the rate of tax on dividend income, let us make no mistake over the context of this measure. When the Prime Minister set out the Government’s plans for their new health and social care levy in September, he was rightly criticised by Members in all parts of the House for funding it overwhelmingly through taxes on working people and their jobs. At the time, the Prime Minister tried to soften the blow by claiming that the Government’s tax plans were fair because the tax rise on working people would be accompanied by a tax rise on income from dividends. He said that a rise in dividend tax rates would mean the Government

“will be asking better-off business owners and investors to make a fair contribution too.”—[Official Report, 7 September 2021; Vol. 700, c. 154.]

The Prime Minister was desperate to give the impression that this tax rise is not falling overwhelmingly on working people and their jobs.

Now, I am sure the Prime Minister would never be loose with his language, nor the truth, but let us look at the facts. The reality is that the dividend tax rise in clause 4 would raise just 5% of the total revenue needed for the health and social care levy. The rest of that tax bill—95% of its total, or £11.4 billion a year—will land on working people and their jobs. The Government do not seem to have considered asking those receiving income from dividends to take a greater share of the burden, the impact of which our new clause 1 asks them to assess.

Whatever Ministers may say in this House, their own official documents make it clear that their approach is hitting working people the hardest. Just look at the Government’s policy paper, “Increase of the rates of Income Tax applicable to dividend income”, published on 27 October. We welcome the fact that it says:

“This measure is not expected to have a material impact on family formation, stability or breakdown.”

However, this stands in stark contrast to their policy paper, “Health and Social Care Levy”, published on 9 September, which says:

“There may be an impact on family formation, stability or breakdown as individuals, who are currently just about managing financially, will see their disposable income reduce.”

It is an insult for the Government to claim that these two tax changes are somehow fair and equal when, again, the truth is that the wellbeing of working people seems to be nowhere near the front of Ministers’ minds.

It is not just in relation to working people that we question the Government’s approach. We also question whether they are spending wisely and targeting business support towards the companies and traders who need it most. While we welcome the extension by clause 12 of the temporary increase in the annual investment allowance through to 31 March 2023, this raises questions about the Government’s wider approach to spending public money wisely. The Committee may remember that in May this year the Government introduced a new super deduction—a measure giving companies a 130% capital allowance on qualifying plant and machinery investments from April 2021 until the end of March 2023. At the time, I questioned the former Financial Secretary to the Treasury over who this expensive tax break was designed to help. We were concerned, because one thing was clear: it did not seem to be targeted at small and medium-sized businesses. Such businesses could already benefit from the annual investment allowance giving a 100% tax break on investment up to £1 million.

The previous Financial Secretary clearly stated in a written statement of 12 November 2020 that the annual investment allowance:

“Simplifies taxes for the 99% of businesses investing up to £1 million on plant and machinery assets each year.”

The current Financial Secretary has spoken in similar terms, and indeed the Treasury Committee concluded in its report published in February this year, “Tax after coronavirus”, that the annual investment allowance

“appears well targeted to promote growth in small and medium-sized enterprises.”

Through clause 12, the temporary increase in the annual investment allowance is being extended so that it will now end at the same time as the super deduction. With small and medium-sized enterprises now able to keep benefiting from the higher annual investment allowance until March 2023, it must surely be time for the Government to revisit and review the merits of the existence of the super deduction. When it was introduced, the Chancellor made it clear that it would cost £25 billion over two years. The very least the Government should do is to make sure they are spending public money wisely. That is why I urge Ministers to follow our new clause 3 and look again at the super deduction to be clear whether it offers value for money.

Clauses 7 and 8 and schedule 1 relate to the abolition of basis periods. In broad terms, we welcome steps that remove complexities and make it easier for taxpayers to understand their tax position. However, we are conscious of points raised by the Chartered Institute of Taxation, including the fact that HMRC estimates that 75,000 unrepresented sole traders do not have a 31 March or 5 April accounting year end. As the CIT makes clear, these people will be affected by the proposed changes and will have to decide whether to change their accounting period end in 2023-24. To make such a decision, it is important that they have the right level of support from HMRC at the right time. I would therefore welcome the Minister’s explanation of what support will be in place specifically to help people with their response to these proposed changes. We want to be reassured that support will be in place, that the traders who need that support most can get it and that the changes are fair.

The question of fairness is at the heart of this debate. Fairness is a fundamental British value, yet it is one that the Government just do not get. This Government’s decade of low growth with no end in sight is forcing them to put up taxes, and their tax rises are hitting working people hardest, when those with the broadest shoulders should be paying more. After the national insurance hike for working people that they pushed through in September, today we have a hollow attempt to make their plans look a bit fairer, but the truth is that the tax on working people and their jobs still amounts to a tax bill 19 times the size of that which falls on better-off business owners and investors. Today, we have a billion-pound-a-year tax cut for banks when taxes are going up for working people. We will be opposing those plans, as they are not what our country needs.

The British people need a Government who will tax fairly, spend wisely and, crucially, grow the economy in every region and nation. With the Tories, all we get is low growth, high taxes, and the wrong choices for our country.

Photo of Richard Thomson Richard Thomson Shadow SNP Deputy Spokesperson (Treasury - Financial Secretary), Shadow SNP Spokesperson (Wales), Shadow SNP Spokesperson (Northern Ireland) 3:15 pm, 1st December 2021

It is a pleasure to speak in this section of our consideration of the Finance Bill. At the outset, may I just say that notwithstanding the valiant efforts of the Minister to try to persuade me otherwise, I will still be pressing amendments 5, 6 and 7 and new clauses 10 and 11 in my name and those of my colleagues?

Before I get to the nub of amendment 5, it is always important to place on record, when dealing with matters such as finance, that we are also dealing with a climate emergency. It is very important that we are using every single resource and every single incentive that we have at our disposal to encourage a move to net zero across the public sector and the private sector, and as quickly as possible.

Amendment 5 would restrict access to the extended temporary increase in the annual investment allowance to businesses that support a transition to net zero. To go back to a previous life, I was once the joint leader of Aberdeenshire Council. I think I am right in saying—I have no objection to being corrected by anyone in the Chamber, or anyone outside the Chamber who happens to be watching this—that we were the first local authority in the UK to introduce a carbon budget and to put it on an equal footing in governance with the capital budget, the revenue budget and the housing revenue allowance budget. It was therefore considered on exactly the same basis, and every single measure we were taking, whether in policy or budgetary terms, was worked through so that the carbon impact was understood and the emissions that resulted from activities were always on a downward trajectory.

That is exactly the sort of net zero philosophy that needs to be baked into the private sector. One way we could do that is by making qualifying for the allowance contingent on companies having taken steps to reduce carbon dioxide in their business model and how they go about their business, but we could also challenge companies on how they will build further on the progress they have made in reducing carbon dioxide. That seems to me a sensible measure and a proportionate approach, and I commend it to colleagues.

I will move on to amendment 6. I do not doubt the good intentions and best endeavours of the Government in trying to address tax evasion at any level, but it was nevertheless extraordinary to hear the Minister suggest that requiring companies to demonstrate their tax compliance would represent an onerous burden on them. This is pretty basic, baseline, default stuff. We should expect businesses to comply with the tax code and to pay their taxes in full and on time to the best of their abilities and not to try to avoid that. People want to see businesses and others succeed, but they also want to know that others are playing by the rules, and that is particularly the case for businesses. We want businesses to do well by competing and being the best that they can be, but we want to see them succeed on the basis of the quality and effectiveness of what they do, rather than by being incentivised perversely not to contribute to the common good and to undercut their more scrupulous competitors.

We often hear from the Government Dispatch Box that there is no such thing as tax revenues without businesses, but we miss the other side of the balance sheet and the other side of the equation: it is much, much harder for businesses to succeed without the high quality of the public goods that they consume, whether that is an educated population, a health service, investment in our infrastructure, the provision of a stable market, law and order and the emergency services—everything else that is fundamental to underpinning the activities of the society we live in. Fundamentally, tax cuts of this kind should be going to businesses that play by the rules and do not undercut their competitors by not playing by the rules. It is important to incentivise and reward that good behaviour, and that is precisely what amendment 6 would do.

We tabled amendment 7 to ensure that smaller businesses with lower levels of qualifying capital expenditure were not disadvantaged in any way by having their annual investment allowance limits restricted. Again, the amendment would ensure that we are playing fair for those who play by the rules.

Moving on to new clauses 10 and 11, it is very important that the measures we have in the Finance Bill or any legislation have the intended effects, that we can see whether they are having those intended effects and that we can quantify that and ensure, so far as is possible, that we are avoiding any adverse, unforeseen consequences. New clause 11 would insist that the Government publish within 12 months an assessment of the size, number and location of companies claiming the increased annual investment allowance; the impact of the reliefs on levels of capital investment, to see that we are getting the desired outcome from that reduction; and the scope of total business investments that are being covered by the relief, to see whether it is helping to drive investment and growth in the economy. That should be a fundamental set of baseline assessments that the Government should wish to undertake. New clause 11 would ensure that happens.

Moving on to new clause 10, and from unforeseen adverse circumstances to entirely foreseeable adverse circumstances, Brexit continues to be a millstone around the neck of businesses and families, and it is important that we understand the continued consequences and ramifications of choices that have either been made freely or, in the case of the area I represent and the people of Scotland, been forced upon us.

A programme I used to like watching on television on a Sunday afternoon was “Bullseye” with Jim Bowen. I do not know if anyone remembers that. His catchphrase at the end when the contestants did not do nearly as well as they had hoped—they had gone for that 101 with six darts and had sadly fallen short—was, “Let’s have a look at what you could have won.” New clause 10 is about having a look at what we could have won. It would ensure that the Government carry out an assessment of how the changes in the annual investment allowance would have affected our GDP had we remained in the European Union and had we left with that future trade and investment partnership in place.

Finally, I turn to clause 6 and the banking surcharge. My party was happy to support the increase in corporation tax generally, but people still bear the scars of the 2010 banking crisis. They believe that, in the spirit of fairness, the banks should make a fair contribution, not just to help businesses to grow and develop to make sure that the economy is growing and that they are making the best contribution they can, but to ensure that they are repaying some of the harm caused by the reckless approach to banking in the lead-up to the financial crash. Many people will look askance at the reduction in the surcharge, notwithstanding the increase in the corporation tax rate generally, and will feel that banks are not fulfilling their proper roles as prudent lenders or their social responsibilities but seem to be getting off the hook.

To take an example from close to home, yesterday, TSB Bank announced a series of branch closures across my constituency and further afield. The retreat of banks from the high street is highly regrettable, especially as it has happened while the Government have had a share in their ownership. If banks are going to behave in that way, it is imperative that we make absolutely certain that they make the fullest possible financial contribution to not just the health of the economy but the common good.

On the national insurance hike, it has been said many times—I make no apology for saying it again—that it breaks a clear manifesto promise of the Conservative party. Even with the increase in dividend taxes in the Bill, the burden still falls disproportionately on the shoulders of the lowest earners, the youngest and those with the fewest assets. We have to ask ourselves whether the Government are on the side of those who work hard, play fair and appreciate the urgency of the climate emergency that we face. Sadly, given the Bill and their opposition to the amendments that have been tabled, I have to say that the answer is no.

Photo of Christine Jardine Christine Jardine Liberal Democrat Spokesperson (International Trade), Liberal Democrat Spokesperson (Exiting the European Union), Liberal Democrat Spokesperson (Treasury) 3:30 pm, 1st December 2021

I confirm that the Liberal Democrats will not be supporting the Bill and will be supporting the Opposition amendments. There are several specific reasons for that, which I have expressed previously, including that the Bill fails to address the cost of living crisis in this country and fails to adequately address the need to have and to shift to a greener, more sustainable economy. It also fails to address the concerns that Richard Thomson expressed about the changes to the banking surcharge, which strike many people in the country as inappropriate at the moment.

I will focus on one issue that is dealt with by new clause 17, which has been tabled by my party. The Minister mentioned the innocuously titled basis pay rate and the basis period reform. One of the frustrating things about the Bill is that the more we look into the detail, the more we find to object to. Hidden in it are huge accounting changes that will make life much harder for tens of thousands of farming businesses, and other partnerships and sole traders around the country. Under the basis period reform, farmers will have to submit two tax returns instead of one, doubling their administrative burden.

Proud farming communities from Shetland to Shropshire are worried about the costs and burdens that will come with those changes. In Shropshire alone, there are more than 6,000 partners and directors in the sector who are likely to be affected by the reforms. Like many others from communities in the so-called blue wall, they find that the Government are taking them for granted and saddling them with administrative burdens and costs—and yet more promises that somehow seem to be ignored. They will force farmers to submit estimated tax returns when there is no good way of knowing the value of a crop yield when it is still in the ground.

We would like Ministers to put those plans on hold immediately and listen to farmers’ concerns. They should at least offer them an extended deadline, so that they do not have to estimate their profits but can submit just one final tax return. They should also explore the options laid out by the Office of Tax Simplification about changing the tax year to a 31 December end date. Farmers across the country have already seen their basic payments cut by at least 5% and could be facing even more costs. They deserve better. This is unfair and counterproductive, and it is yet another reason why people are disappointed with what they have heard about this Finance Bill.

Therefore, the Liberal Democrats will not vote to support the Bill, but we will support the Opposition amendments.

Photo of Richard Burgon Richard Burgon Labour, Leeds East

As always, it is a pleasure to serve under your chairship, Dame Eleanor. I wish to speak in support of new clause 16, which is in my name, and new clause 8, which has been tabled by my hon. Friend Jon Trickett.

Both new clauses aim to tackle the gross injustice of taxes on share dividends being set at less than income tax rates. They are both part of a wider push for tax justice and wealth taxes—a push made ever more urgent by the growing inequality that we have seen throughout the pandemic. I also support the new clause on this issue from the Leader of the Opposition and the new clause on the banking surcharge. It is shameful that the Government are cutting taxes for banks while increasing the tax burden on working families.

Faced with a backlash over their plans to impose tax rises on working people, the Government made a very limited change, increasing the taxes on share dividends by 1.25%. That was done to try to give the impression that they were sharing the burden of the so-called health and care levy equally between ordinary working people and those lucky enough to live off their wealth. But that was just smoke and mirrors, done solely to deflect the media and distract the public, not to help to actually secure economic justice. That is obvious from the amounts that will be raised by the so-called health and social care levy. The national insurance increases will raise £11.4 billion a year, while the increases in tax on share dividends will raise just £600 million a year. We need to be clear about this: the Government’s change is woefully inadequate.

However, this can act as a watershed moment when we finally get to grips with the great injustice in our tax system that wealth is often taxed at much lower rates than income tax. It is clear, is it not, that our economy is rigged in the interests of the 1%? That has become even clearer during the pandemic, when we have seen the corrupt contracts that have been handed out or the fact that the billionaires have increased their wealth by £290 million a day while food bank use has hit record levels. How completely grotesque.

Our tax system is also rigged in the interests of the top 1%. One obvious way in which that happens is that those with wealth get special discounts on their tax rates. They pay lower tax rates than the vast majority, who have to go out to work day in, day out. My new clause seeks to put a stop to that racket, to that injustice. Why on earth is someone lucky enough to have inherited millions of pounds of shares and who now lives comfortably off their annual share dividends allowed to pay a lower rate of tax than people who have to go to work day in, day out? That is completely unfair and completely unjustifiable. It needs to change. Economic justice demands change, and my new clause would deliver that. It would raise tens of billions of pounds that could go towards funding a national care service, for example, in a progressive way by taxing wealth and not by hitting the pockets of working people.

Let us look at how this rigged system works in practice for those lucky enough to be in the top 1% of incomes. They currently have to pay a 45% rate of tax on income but pay way less on earnings from share dividends: just 38.1%. That tax discount applies even though payments to shareholders primarily go to a very wealthy minority. One quarter of the total income of the richest 1% is generated from dividends and partnership income alone.

The Government try to give the impression that we somehow live in some kind of shareholding democracy where everybody has an equal stake in owning shares, but I am afraid that that is just not true. TUC research shows that UK taxpayers earning over £150,000, which is just 1% of all taxpayers, captured about 22% of all direct income from UK dividends, so the wealthiest accumulate their money from share dividends instead of working, and the Government reward them for this with a tax discount. That is totally unjustifiable, totally unreasonable and totally indefensible.

The changes I have called for in new clause 16 would raise billions for the Treasury—billions that could go towards funding a national care service. Institute for Public Policy Research calculations in 2019 estimated that this would raise £29 billion over the lifetime of this Parliament, even after accounting for behavioural changes. But I am afraid the Conservative party does not want to tax the income of the super-rich who bankroll the party. This new clause has been tabled as an opportunity for the Government to really tackle the injustice in our taxation. It is absolutely outrageous and it needs to change, and that is why I put down this amendment.

Photo of Lucy Frazer Lucy Frazer The Financial Secretary to the Treasury

I will take the opportunity to respond to some of the points that have been made on the Bill, and I will start with those made by James Murray. He started by suggesting that there was not a sufficient growth rate in the economy, but what the Budget documents show and the OBR has said is that there will be growth year on year for every year in the Budget forecasts.

The hon. Gentleman asked me to come back to him on cutting taxes for banks. I do not think he heard some of the points I made in my speech, because I did mention that the tax the banks are paying is not actually reducing, but increasing. I think he did not hear me say that they will be paying an additional £750 million in tax over the period to 2026-27, based on current forecasts.

The hon. Gentleman talked quite a lot about fairness—fairness to working people—and he suggested that the rise in the dividend payment was not fair. I do not accept that. What we have calculated is that the additional higher rate taxpayers are expected to contribute over three quarters of the revenue raised by this measure next year. It is interesting to note that the Resolution Foundation thought that this measure was indeed fair. It said that it welcomed the

“moves to address some of the fairness problems” that came with choosing to focus on the tax increase on national insurance by raising dividend taxation.

The hon. Gentleman asked me a specific practical question on what support will be provided to traders who are affected by basis period reform, and I am very pleased to get back to him on that. I would like to reassure him that more than 80% of affected businesses are represented by a tax agent, but HMRC is currently exploring how best to help unrepresented taxpayers through basis period reform.

Richard Thomson rightly talked about the importance of getting to net zero. He will know—he will have attended many debates in this House and I am sure he will have read our net zero strategy—about the emphasis the Government place on net zero. He talked about his work in Aberdeenshire, so I hope that he welcomes the investment we have made in that area in Scotland. We continue to deliver on important existing commitments in Scotland, including £27 million for the Aberdeen energy transition zone and £5 million for the global underwater hub, which will help support Scotland’s standing as a world leader in clean energy.

The hon. Gentleman also mentioned the important issue of playing by the rules, which Conservative Members think, as he does, is very important. I am sure he will be pleased to know that, since 2010, the Government have introduced over 150 new measures and invested over £2 billion extra in HMRC to tackle fraud.

Christine Jardine mentioned the cost of living. Obviously, many of the spending measures are in the spending review, rather than in the Finance Bill, so I hope she will not mind my mentioning some of our spending measures. The significant tax cut for people on universal credit, and the raising of the national living wage, are two measures that are really helping those on lower incomes.

The hon. Lady also mentioned the abolition of basis periods, and our basis period reform, and one of the first decisions I made as Financial Secretary to the Treasury was to extend the period before we bring in that measure, to ensure that everybody is ready for it. The measure has considerable support among stakeholders. Indeed, the Low Incomes Tax Reform Group, which does a lot of work to help those on low incomes, said:

“We support the general principle of these new proposals as they mean complicated rules around basis periods become obsolete…This is a simpler concept to understand for unrepresented taxpayers.”

Before I conclude, let me mention one point raised by Richard Burgon, who went on and on about how the wealthiest should pay the most. Of course those with the broadest shoulders should pay more, and indeed they do, as the top 50% pay 90% of tax in this country. For all those reasons, I commend clauses 4, 6, 7, 8, 12 and schedule 1 to the Committee.

Question put and agreed to.

Clause 4 accordingly ordered to stand part of the Bill.