Clause 8

Finance (No. 3) Bill – in a Public Bill Committee at 6:15 pm on 10th May 2011.

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

Photo of David Hanson David Hanson Shadow Minister (Treasury)

As the Committee will know, each taxpayer has an annual exempt amount before they have to pay capital gains tax. No tax is paid on total gains made over a year up to that amount and gains above it generally pay a rate of 28%. The clause confirms the annual exempt allowance for 2011-12 as £10,600.

The key point on which I want to question the Exchequer Secretary is the clause’s introduction of a mechanism for the annual exempt amount to be increased when there is an increase in the retail prices index, which is known colloquially to us all as RPI. The clause introduces that mechanism, but the Government announced in the 2011 Budget that indexation for direct taxes, including capital gains tax, will be moving to the consumer price index in 2012-13. Why does the clause use the RPI when the Government have indicated that future taxation will use the CPI? Will the provision have to be amended this time next year in a future finance Bill? If so, why is the RPI being attached to the appropriate level of assessment in this Bill?

There is an honest disagreement between the Government and the Opposition about the level by which we should judge the rate of inflation and there are different methods to do that. The Bill raises some questions. Why is it using the RPI rather than the CPI to date? Is that an indication that although there was a switch to CPI in the Budget, it was too late for it to be drafted in the Bill? I am interested, because that indicates a lack of transparency. The Government have said on the one hand that taxation will be indexed by CPI from next year, yet on the other, they include a measure in the Bill that uses RPI. They need to be open, honest and transparent about that. They appear to be hiding the RPI measure today, even though they will need to amend it—unless the Exchequer Secretary tells me otherwise—to CPI at some point in future.

The impression is of a stealth tax rise that was very much a last-minute decision. I would welcome some confirmation from the Exchequer Secretary about the measure under the exempt amount. Will it relate to RPI in perpetuity—for the duration of this Parliament, which would mean that no changes would be made next year in relation to indexing, or will the amount relate to CPI, as proposed for other measures? If so, the next Finance Bill will require a measure to amend the provisions of indexation under clause 8. Can the Government confirm that the annual exempt amount will, in future, increase by CPI rather than RPI? That would mean that more gains would be brought into the capital gains tax regime.  Why are the Government including RPI in the Bill as the mechanism for increasing the annual exempt amount when they know that they will have to amend it next year to CPI? Could that not have been done at once?

Those are my only questions on the clause. The Exchequer Secretary may be able to satisfy me about the machinations that have resulted in the clause as it stands, but there is an anomaly in the provision that he must explain and discuss in his approach to the debate.

Photo of David Gauke David Gauke The Exchequer Secretary

As we have heard, the clause makes a technical change to the procedure for indexing the capital gains tax annual exempt amount to ensure clarity in the process, particularly in circumstances when the inflation measure that is used to index the AEA is negative. The clause also confirms that the annual exempt amount for 2011-12 is £10,600.

The AEA is one of the tax allowances that are automatically indexed every year unless Parliament sets a different figure. Indexation works by reference to inflation over the 12 months to September in the previous tax year. In normal years, the Treasury makes an order to set out the exempt amount for the next tax year, following the rules for calculating the increased amount that are laid down in the Taxation of Chargeable Gains Act 1992, as the right hon. Member for Delyn knows. That is all that needs to happen for the amount to be indexed.

The 12 months to September 2009, however, were unusual, as inflation was negative. Indexation did not apply in that situation. The exempt amount for the following year, 2010-11, remained the same, and the Treasury made an order to that effect. However, detailed scrutiny of the rules suggested that that may not have been the correct procedure. The changes made by the clause will ensure that there is no doubt in future about what has to happen in such cases. If inflation is positive, the Treasury will continue to make orders, setting out the increased exempt amount for the following year, exactly as it does now. If inflation is zero or negative, the exempt amount for the previous year will be carried forward automatically to the following year. The Treasury will not be required to make an order confirming that there has been no change.

Clause 8 will not change how the increase in the exempt amount is calculated. It only puts right the way in which the indexed amount for the following tax year is fixed. Parliament will still be entitled to overrule indexation and set either a higher or lower figure. Members of the Committee will be aware that in the Budget we announced that indexation will in future be based on the consumer prices index, rather than the retail prices index, as the right hon. Gentleman pointed out. The clause will not make that change. The move to using the CPI will start from 2012-13 and will be included in next year’s Finance Bill. For the 2011-12 tax year, the clause sets the exempt amount at £10,600. That represents an increase from £10,100 in the preceding year, and the new figure is the normal indexation amount based on the RPI.

As for why we have not moved to indexation using the CPI this year, the answer is that we have decided to move to using the CPI for indexing rates and allowances  from April 2012 for all direct taxes, including capital gains tax. It is better for the CGT annual exempt amount to keep in step with the other changes.

Photo of David Hanson David Hanson Shadow Minister (Treasury)

Is the Exchequer Secretary’s assessment that the amount of capital gains tax payable will be significantly different if the CPI rather than the RPI is used?

Photo of David Gauke David Gauke The Exchequer Secretary

The impact of the change from the RPI to the CPI will depend on what those indices do in the years ahead. The RPI generally tends to be a higher than the CPI. For example, if we had an increased the figure of £10,100 by the CPI rather than the RPI, the result would have been £10,500 rather that £10,600.

Photo of David Gauke David Gauke The Exchequer Secretary

Well, we have been clear. As the right hon. Gentleman will remember, the Chancellor made clear in his Budget speech precisely what we are doing with the switch from the RPI to the CPI. It is the right thing to do. Yes, it will have an impact and create some savings for the Exchequer, but we have been absolutely upfront about that, so there is nothing stealthy about it. We have fully acknowledged the consequences of the change, and we believe that the CPI is consistent with what happens elsewhere in Government.

Clause 8 will make a simple technical change. It will also confirm that the annual exempt amount for 2011-12 is £10,600. I trust that it will be uncontroversial.

Photo of David Hanson David Hanson Shadow Minister (Treasury) 6:30 pm, 10th May 2011

It is indeed uncontroversial. I am grateful to the Minister for responding to my points. To be clear, he has confirmed that, next year, the annual exempt amount will be dealt with by CPI rather than RPI, which means, effectively, that there will be an additional cost to individuals who will have exempt amounts of capital gains next year. I want to place that on the record, because it is important confirmation that the clause will have a detrimental effect on that level of activity and that the CPI to RPI change will make savings to the Exchequer. It will, therefore, be another detrimental thing to add to the many detrimental things that are happening to people in our society at the moment in terms of their incomes and their ability to have positive gains in their community. I shall leave it at that.

Question put and agreed to.

Clause 8 accordingly ordered to stand part of the Bill.