‘(3) The amendment made by subsection (2) may only have effect if the Chancellor of the Exchequer has laid before the House of Commons a forecast of the effect on the public revenue of that amendment coming into effect in the tax year 2019-20 and subsequent tax years.’”
This requires a review of the revenue implications of the provisions of this clause to be reported to the House of Commons before this section can have effect.
With this it will be convenient to discuss the following:
‘(3) The amendment made by subsection (2) may only have effect if the Chancellor of the Exchequer has laid before the House of Commons a report of a forecast of the effect of that amendment coming into effect on pension benefits to which the exemption in section 307(2) of ITEPA 2003 applies.’”
This requires a review of the effect on pension benefits of the provisions of this clause to be reported to the House of Commons before this section can have effect.
Amendment 16, in clause 11, page 7, line 39, at end insert “but only if the requirement in subsection (3) is met.
‘(3) The amendment made by subsection (1) may only have effect if the Chancellor of the Exchequer has made a statement to the House of Commons detailing discussions between Her Majesty’s Government and the Charity Commission regarding the provisions of this section.’”
This requires a statement to the House of Commons on discussions between the Government and the Charity Commission on this clause.
Clause stand part.
The explanatory notes state:
“This clause will amend the tax exemption which provides for employer paid premiums into life assurance products and employer contributions to certain overseas pension schemes to be paid free of tax. Currently, premiums and contributions are only exempt from tax if the beneficiary is the employee or a member of the employee’s family or household. This clause will allow the beneficiary to be any individual or registered charity.”
The explanatory notes go on in some detail, and I exhort hon. Members to read them because they are pretty important and give context to the clause. They state:
“The amended exemption will also allow employees to nominate a registered charity, which is consistent with existing government policy of providing tax relief on charitable donations.”
We tabled a number of important amendments to the clause to ensure it does not create any unforeseen issues with regard to charitable giving, which all parties have long supported. Amendment 14 requires the Government to review the revenue effects of the clause before it comes into effect. That is merely a matter of good practice. It seems that the Government are no longer willing to provide the Opposition with the full information that we need properly to scrutinise the measures they are introducing through Budget legislation, nor the legal means by which to amend them.
We are not asking for much—merely a simple statement setting out the cost of any measures introduced. We were kind enough to perform that exercise for our Conservative colleagues in our “grey book” ahead of the 2017 election, as they all know. It is a fantastic read, I have got to say, and I am happy to sign any copies of it. Unfortunately, the Government did not return the favour.
We are not alone in calling for such information. The amendment reflects the advice of the Chartered Institute of Taxation and the Institute of Government, whose report, “Better Budgets: making tax policy better”, states:
“we have heard that the exceptional processes around tax policy making—in particular, secrecy, more limited scrutiny and challenge, and the power of the Treasury—have led to an ever-lengthening tax code, beset by a series of problems: confusion for taxpayers, poor implementation, political reversals and constrained options.”
That just about sums up what we have been saying today. The report sets out 10 steps to make tax policy better. Again, I ask hon. Members to look through it. It says, for example, that the Budget process should contain fewer measures, and that those should be better thought-out and capable of being implemented efficiently by HMRC, with politicians making informed decisions. It asks for:
“Greater stability in the areas of the tax system where taxpayers—individuals and business—need to make long-run decisions. A tax system that commands public support—and is robust enough to raise the money we need to finance the state we want.”
We are particularly interested in step 9, in relation to this amendment:
“Enhance Parliament’s (and the public’s) ability to scrutinise tax proposals…Parliament needs to do a better job at scrutinising Finance Bills”.
That theme continues throughout the report. It sets out in some detail—I will not go into that now—the issues around the unclear value for money, which is also repeated time and again in the Public Accounts Committee report for 2015-16.
We believe that the amendment, which requests a Government analysis of the cost of these new relief proposals, would help the Government to progress towards enhancing parliamentary scrutiny of the measures that they are introducing, as described in the report that I mentioned. After all, we know that the clause will have some revenue effects as it would introduce a tax relief, under certain circumstances, where there was not one before. It is also in the Government’s interest, surely, to provide such a figure, as that would show the impact of their attempts to boost charitable donations, for example. The Government may, of course, be attempting to support additional revenue streams for charities, but we must consider the wider aims of charities.
The original intention of the big society, for example, was to slash formal public expenditure as part of the proposal—whether it did is a matter of conjecture—but there is a question about how the Government plan to pay for the measures introduced in the clause. I note that the Chancellor is currently unable to pass any tax increases for fear of the immediate loss of support from the Brexiteers, but it is important that we focus our attention on the impacts of continued or further relief being introduced in the clause. If the measure introduced in the clause had been in our manifesto platform, revenue effects would have been included in the costings, and we ask the same of the Government. Let us put the figures in; that is what the amendment seeks to do.
Amendment 15 is an important one, which requires a review of the effects of the provisions of the clause on pension benefits to be reported to the House of Commons before the section takes effect. The precise impact of the provisions on pension benefits is unclear, and I hope the Minister can clarify that. As she will know, our current pension system operates an “exempt, exempt, taxed” system. The House of Commons Library explains that system well in its briefing on reform of pension tax relief. I will quote a bit of it, because it is important:
“The tax treatment of pensions follows an ‘exempt, exempt, taxed (EET) model’…Pension contributions by individuals and employers receive tax relief and employer contributions are exempt from national insurance contributions”,
and it goes on,
“but individuals are able to take up to 25% of their pension fund as a lump sum on retirement.”
I quote that only to give a flavour of the context. Under the previous arrangements for the tax-exempt employer-provided pension benefit, some taxation would have been paid on employer contributions to certain overseas pensions systems, where the beneficiary was an individual or a charitable organisation which was not one of those listed in the original Income Tax (Earnings and Pensions) Act 2003. Those tax-exempt beneficiaries were listed on that legislation as follows:
“‘Retirement or death benefit’ means a pension, annuity, lump sum, gratuity or other similar benefit which will be paid or given to the employee or a member of the employee’s family or household in the event of the employee’s retirement or death.”
The amendment poses a question about the impact on the overall pensions benefits if taxation is not being paid because of the exemptions the clause introduces, and asks whether an analysis of that impact has been done and, if not, why the Treasury has not looked into the matter. The clause makes a broad reference to overseas pension schemes, and it would be helpful if the Minister listed which schemes the clause would affect, and specified where they are actually based overseas. The overseas element is important, especially in the light of the Government’s decision not to uprate the state pensions of British overseas residents, which, in many cases, leaves many older people abroad destitute.
The current system of pension taxation clearly has many inequalities, which means that the way that taxation is applied to pension benefits tends to favour the wealthiest. Top rate tax payers only have to contribute 60p of every £1 saved. Meanwhile, those on low incomes have to pay 80p for every £1 saved. That is a factor in the pensions system.
The impact of taxation on pension benefits was touched on by the House of Commons Library, which stated:
“People with annual incomes of over £50,000 accounted for 11% of income tax payers, but over half, 52%, of private pension contributions attracted tax relief. The 1% of income tax payers with incomes of £150,00 and above accounted for 15% of pension contributions attracting tax relief. Conversely, while those earning less than £20,000 a year are 40% of taxpayers, they account for just 7% of personal pension contributions.”
That demonstrates the urgent need for review of the impact of tax relief on pension benefits, along with a wider distribution analysis of this measure. We also seek more information on exactly which schemes this would benefit and where they are based.
Amendment 16 requires a statement to the House of Commons on discussions between the Government and the Charity Commission on the clause. We would like to be absolutely certain that the introduction of tax incentives for the donation of employee-provided pension benefits would not lead to an increase in pressure being placed on older people, or widen opportunities for fraudulent activity in nominating a charity to receive such benefits.
This is not an insurmountable issue, but it requires the Treasury and the Charity Commission to enter into a discussion to ensure that no additional risks are created, not necessarily by design, but by omission. We have seen a fair amount of that recently.
Will the hon. Gentleman clarify that when he says Charity Commission, he also means OSCR, which is the relevant body in Scotland?
Yes, I agree to that point of clarification. That is the intention. The Charity Commission and the Scottish body would no doubt recognise the seriousness of this problem, and in their strategy for dealing with fraud, they make the following point:
“The commission continues to see, and has to act on, serious problems arising in charities in relation to poor financial management and inadequate financial controls, accounting and record keeping. In 2010-11, out of 1,912 completed compliance assessment cases, the proportion involving serious concerns about fraud, theft and other significant financial and fundraising issues increased from 16% the previous year to 26%.”
Figures for subsequent years can be found in the commission’s annual publication “Tackling abuse and mismanagement”. The commission goes on to say:
“The National Fraud Authority in its annual fraud indicator report of 2012 estimated annual losses of £1.1 billion, or 1.7% of annual charity income during 2010-11.”
There is therefore a problem, because that is cash not going where it was intended. The impact of fraud and financial crime on a charity, particularly smaller charities, can be significant, going beyond financial loss and the impact of the financing of a charity’s planned activity. These crimes cause distress to trustees, and so on, and have an adverse effect on the charity. It is important to deal with them, says the Charity Commission.
If the Treasury is going to offer tax incentives for charitable donations, it is vital that the proper safeguards are in place to ensure that tax forgone does not act as an incentive to other risks. For example, from my understanding, the Charity Commission holds the only centralised list of registered charities; therefore a clear procedure for HMRC and the Charity Commission to communicate would be necessary to guarantee tax exemption. That is important.
My hon. Friend is making an excellent speech and raising some excellent points. Does he agree that there is a need for further transparency on how these proposals were put together by the Treasury? Does he agree that there is a case for a public register of charities that benefit from this tax exemption?
If the Government decided to listen to us and undertake such a review, they would have the ability to tease out—to use that phrase—to check, to put into the mix all these important issues. We do not claim to have absolute authority on how this should be done, which is why we think wider consultation and an extensive review are absolutely appropriate. We all want the £1 that someone gives to a charity to go to the charity, and not be siphoned off in some fashion.
What procedures does HMRC already have in place for instances in which a nominated beneficiary turns out not to be a registered charity, but the person who nominated it assumed that it was? It is an important question, and it surely presents ethical issues if someone chooses to donate their benefits on the basis of fraudulent information. That is not what we want. Clearly, in the event of their passing on that information, it would not be changeable. Does HMRC plan to apply tax in those circumstances?
This will be made all the more difficult by the Government’s repeated attacks on the Charity Commission, which has been attacked time and again. Six years of cuts have led it to repeatedly warn that its ability to properly regulate the charity sector is being limited. We must take that factor into account. As reported by Devex, the news website for the global development community:
“The commission has a staff of 290 and a budget of £21 million, and while budgets have declined, the number of charities it oversees has grown by around 5,000 since 2009. The charity income it regulates has jumped from £52 billion in 2010, to more than £74 billion in 2017.”
Former Charity Commission board chair William Shawcross wrote in a 2014 report that,
“our funding position remains unstable, a matter which has been recognised by many in the charitable world and which I have raised with Government. We cannot absorb unending cuts to our budget and may have to consider alternative sources of funding.”
What assessment has the Treasury made of the impact of this measure on the struggling, underfunded commission? I hope that this matter was discussed with the Chancellor when the clause was prepared. I do not expect so, but I hope that it was.
Finally, it is clear that the measure could represent yet another injection into some private schools that operate as charities under Charity Commission guidelines. That has been recently confirmed by the House of Commons Library, which stated:
“The Government has stated that there are about 1,300 independent schools which are registered as charities and that there is a great variation in size of school across the sector: There are approximately 2,300 independent schools in England, ranging in size from the very small…Many of them are very small…The fees range from £20k per year in a prestigious day school…to far smaller amounts…Similarly, quality varies from world-leading education to some small, poorly-resourced schools”.
What assessment has the Treasury made of the amount of tax that will be forgone owing to the nomination of those particular schools?
I thank my hon. Friend for his scintillating speech, which is so full of detail and which I think everybody appreciates. Far be it from me to be a class warrior, but given yet another tax giveaway to the independent schools, which he mentioned, many Opposition Members would say that it is high time that those independent schools had their charitable tax status ended, and that omitting them from this measure would be a good start to that process.
In relation to the amendment, it is important to ensure that, where charitable donations are given—whomsoever they are given by and to—the giver knows, in good faith, that the cash that they give will go towards genuine charitable purposes. That is the key issue. Whether the definition of “charity” is open to debate in relation to any organisation is another matter. The key, and the point I think my hon. Friend is trying to make, is that charities really ought to be charities.
We hope that a statement on the discussions between the Charity Commission and the Chancellor would address some of these issues. It continues to be a big issue in this country that people who can afford to pay their taxes should pay their taxes. It is important that anybody who gives to a charity can rest assured that their charitable donation, won through their hard work, will be used with the best intentions. Our amendment would, in all good faith, ensure that.
The Committee will be glad to hear that I will speak only briefly. I am happy to support the Opposition’s amendments. I want to focus on amendment 16, which deals with the communication that is needed between HMRC and the charities regulator. That is incredibly important. We need such communication for individuals to be assured that their money will go to the right place and that the correct tax exemptions exist for that.
Amendment 16 would require the Chancellor to make a statement to the House
“detailing discussions between Her Majesty’s Government and the Charity Commission regarding the provisions of this section.”
If the Minister is minded not to accept the amendment, which is very sensible and the provisions of which it would be easy for the Government to carry out, is he willing to write to Opposition Members about the discussions between the charities regulators in England and Scotland and the Government, the nature of those discussions and the advice the Government have received from charities on the potential impact of the clause? Will he also cover the eloquent point made by the hon. Member for Bootle about ensuring that protection from fraud is built into any changes that are made under the clause?
If the Minister is minded to accept the amendment, that would be grand. If he is not, will he commit to contacting us with those details so that we are aware of the discussions the Government have had and we can be both comforted that our constituents who decide to give their benefits to charity can do so knowing they are less likely to be the victims of fraud as a result, and aware that HMRC is across the issue and ensuring that people do not unintentionally become victims as a result of the changes?
I must admit that I am a little surprised by the clause, because it looks to me like the Treasury is giving away money. These days, many people are in pension schemes and, when they die, there is some money. That might go to a relative, but they might wish for it to go to a charity. The Government are being big hearted—dare I say big societied—with the clause, in that they want the individual who goes to meet their maker to leave some of their resources to a charity that is dear to their heart.
My guess is that Cats Protection and various dog charities will be the biggest beneficiaries of the clause, but it will come down to either an employer making a judgment depending on what their employee wanted, or, in the process of probate, a solicitor taking a decision that a particular charity should get that money. In most cases, we probably are not talking about multi-millionaires, and sadly, not enough people have sufficient pension or death benefits. We are probably talking about small sums of money. The simplest solution, given that there is already quite a wide definition, is to widen that definition a little more to allow someone who cares passionately about heritage or pets or some inner-city regeneration scheme to direct the money to their cause rather than to Her Majesty’s Treasury.
I am a bit worried about Treasury Ministers being so generous in introducing the clause, but it probably makes sense on better regulation terms—on reducing some of the red tape when people end up dying. It will give a little more scope for people to dispose of the money that they have earned, because they have worked all their lives for that pension, and when they die, I think it not unreasonable that they should leave it to the cause that they particularly want to support.
I do not see this as some kind of evil tax evasion, or even a secret plot to subsidise public schools. It actually allows people who might not have relatives—or might have relatives whom they do not think deserve their money—but who want to give something so to do, which will allow them to feel that, after their death, a good cause will be looked after. I congratulate the Chancellor and his Ministers on being so big-hearted and generous, and such nice people.
I thank the hon. Members for Bootle and for Aberdeen North for their contributions, as well as my hon. Friend the Member for Poole for his congratulations, which should largely be for me, because I am the Tax Minister and this is, after all, a tax measure, but we will leave it at that.
Clause 11 makes changes to modernise the tax exemption for premiums paid by employers to provide their employees with retirement and death benefits in life assurance products or certain pension schemes. Employers can provide death benefits for an employee through a life assurance policy or a retirement benefit through pension schemes. The employee will receive a pension out of those payments when they retire, or they can name a beneficiary to receive any payment of retirement benefit after they die.
Currently, most premiums or contributions paid by employers into these schemes are exempt from income tax. However, for certain types of scheme, as we have been discussing, this is the case only if the beneficiary is the employee, a member of the employee’s family or a member of their household. “Family” and “household” cover spouses, civil partners, parents, children and their spouses or civil partners, and dependants, domestic staff and the employee’s guests. The premiums paid by the employer for these schemes are treated as a taxable benefit in kind, if the eventual beneficiary is not covered by this definition, such as a charity or a friend. The changes made by this clause make the exemption fairer by extending it to cover premiums for policies where the beneficiary is any individual or a charity. The legislation will apply to premiums paid from
I will deal with amendments 14 and 15 together. Amendment 14 would require a review of the revenue implications of the provisions of the clause, to be reported to the House before this change can have effect. Amendment 15 would require a review of the effect on pension benefits of the provisions of the clause, to be reported to the House before this change can have effect. These amendments are unnecessary.
As with other tax measures, the Government have already published a tax information impact note for this measure. This shows that the changes are expected to have a negligible impact upon the Exchequer. Premiums paid by employers to almost all UK pension schemes and overseas pension schemes are already covered by separate tax exemptions, which apply regardless of who the beneficiary is. Therefore, the change introduced by the clause applies only to certain niche overseas pension schemes and employer-financed retirement benefit schemes.
The hon. Member for Bootle asked for specific examples of which schemes fell within the scope of this particular measure. I am afraid that we are unable to provide that information, because it depends what the terms and conditions state within each scheme.
In essence, this is a welcome change, but it affects a small number of schemes and a relatively small number of individuals. As a result, our assessment, supported by the Office for Budget Responsibility, is that the revenue implications are negligible. I think that answers the question raised by the hon. Gentleman on what the impact will be on the Exchequer and whether this has been taken into account. It certainly has been looked at and agreed upon by the Office for Budget Responsibility. The impact on pension benefits will therefore also be relatively minor. This change simply ensures that the benefits-in-kind rules apply in the same way across pension schemes and life assurance policies. I therefore urge him not to press his amendments.
Amendment 16 would require a statement of the House on discussions between the Government and the Charity Commission on this clause. HMRC does, of course, liaise with the Charity Commission and others, wherever appropriate, so such a statement would not be necessary. However, it might be helpful if I explain the position in relation to charities. The exemption will apply only where the beneficiary is recognised by HMRC as a charity for UK tax purposes. These will include charities registered with the Charity Commission in England and Wales, the Office of the Scottish Charity Regulator and the Charity Commission for Northern Ireland. The hon. Member for Aberdeen North asked whether I might write to the Committee with further information on discussions that may have been held, and I would be happy to do that. In the first instance, it might be helpful if she were to write to me, setting out exactly what she would wish me to respond to.
Not all charities need to be registered in England and Wales. Some are exempt or excepted from registration, but most charities will be recognised by HMRC in order to claim tax relief such as gift aid. Employers will need to check with the charity that it is either registered or recognised as a charity for UK tax purposes when it is named as a beneficiary.
I hope that explains the position and that the hon. Member for Bootle might consider withdrawing the amendment.