34A (1) The Chancellor of the Exchequer must undertake an annual review of the effects of the provisions of this Schedule on corporation tax receipts.
(2) The report of the review under sub-paragraph (1) must be laid before the House of Commons before—
(a) in respect of the first review, within 12 months of this Schedule coming into force, and
(b) in respect of each subsequent review, within 12 months of the date on which the report of the previous review was laid before the House of Commons.”
This amendment requires an annual review of the revenue effects of this Schedule, in each year following the Schedule coming into force.
That schedule 5 be the Fifth schedule to the Bill.
New Clause 4—Comparative review of the expected effects of Schedule 5—
“(1) The Chancellor of the Exchequer must a review of the expected effects of the provisions of Schedule 5 on payments to the Commissioners, and lay a report of that review before the House of Commons within 6 months of the passing of the Act.
(2) The review under subsection (1) must in particular consider—
(a) the expected change in corporation tax receipts attributable to those provisions, and
(b) the expected change in corporation tax receipts if—
(i) the provisions in Schedule 5 were not brought into force, an
(ii) the rate of corporation tax were to be changed to 26%.”
This requires a review of the effects of Schedule 5, and a comparison of the effects of that Schedule to an increase of the rate of corporation tax to 26%.
Clause 17 and schedule 5 provide that a non-UK resident company that carries on a UK property business will be charged corporation tax, rather than income tax as at present. The provisions will deliver equal tax treatment for UK and non-UK resident companies that carry on UK property businesses. They will prevent persons from using the existing difference in treatment to reduce their tax bill on UK rental property or land through offshore ownership.
Until 1965 all companies were subject to income tax on their profits. When corporation tax was introduced in that year for UK resident companies and for non-resident companies trading in the UK through a UK permanent establishment, other non-resident companies remained chargeable under the income tax rules. From July 2016, non-resident companies that deal in or develop UK land were brought within the UK tax net under corporation tax, but for UK property businesses, two companies, one domestic and one offshore, currently have different rules for calculating tax from a UK property income, even if their property businesses are otherwise identical.
The clause provides for a more coherent and fair tax regime by bringing the UK property business income of non-resident companies into the corporation tax regime from
Amendment 39 would require the publication of a register of named individual non-UK resident companies who are charged corporation tax rather than income tax as a result of the measure. The Government do not identify specific individuals or companies that are brought within the scope of particular tax charges, and it would be inappropriate to do so. Amendments 35 and 38 would require a review of the impact of schedule 5 on corporation tax receipts. The OBR certified impact of the measure on tax receipts is set out in table 2.2 of Budget 2018. It will be updated in table 2.2 of Budget 2019 before the schedule comes into effect on
New clause 4 would require the Government to undertake a review of the effects of schedule 5, specifically to consider the effect of not bringing schedule 5 into effect and increasing the corporation tax rate to 26%. If schedule 5 was not brought into effect, non-UK resident companies with income from UK property would remain chargeable to income tax. In that situation, raising the corporation tax to 26% would create a clearly enhanced incentive for companies with a UK property business to set up offshore in order to benefit from paying the basic rate of income tax.
I urge the Committee to reject the new clause, along with the amendments, and I commend clause 17 and schedule 5 to the Committee.
I am grateful to the Minister for that explanation of the clause and schedule. As he explained, they set out new arrangements for non-UK resident companies that carry on a UK property business or that have other UK property income. The clause and schedule will shift those companies from the income tax regime into the corporation tax regime. The Government appear to intend the measure to deliver more equal treatment for UK and non-UK resident companies in receipt of similar income, and to prevent those that use the difference to reduce their tax bill on UK property through offshore ownership.
The measures were subject to consultation from March last year and the Government released their response in autumn 2017. In that Budget the Government announced they would make the change in two years’ time, in 2020. I anticipate that in our discussion we will return to some of the themes that characterised our discussion on clauses 13 and 14. The measure seeks to align the treatment of non-UK investors with that of UK investors in the field of real estate. On Tuesday we discussed some of the limitations that the Opposition believes there are with the Government’s approach.
We have tabled three amendments to this clause. First, amendment 38 seeks a review of the revenue effects of this measure within six months of Royal Assent. It is similar to the SNP’s amendment 35. Secondly, new clause 4 requires an analysis of the revenue effects of this measure, compared with the revenue that would be raised if the corporation tax rate for large companies was 26%. Thirdly, amendment 39 requires the Chancellor to publish a list of non-UK resident companies that are subject to corporation tax under the change within six months of this clause coming into effect, and annually thereafter.
I shall now explain the reasoning behind each of these amendments. First, as mentioned, we seek a more thorough review of the revenue effects of this measure, because of the lack of information provided to us thus far. The Government’s assessment suggests that the immediate impact of the measure will be an additional £690 million in 2019-20, but the measure will flip into a loss to the Exchequer of £310 million from 2020-21 and of £25 million from 2021-22. No predictions are provided from 2022-23 onwards. It would be helpful if the Minister could indicate the basis of those projections. Are they related to his Government’s determination to press ahead with lowering corporation tax rates, even though the lowerings they have already undertaken have not resulted in the increase in business investment that we so desperately need?
The gulf between corporation tax rates and income tax rates has become wider over recent years, and it is set to grow even more. Colleagues know that in the summer Budget 2015, the Government announced a reduction in corporation tax from 20% to 19% for the financial years beginning
In the Government’s own tax information and impact note on that reduction in corporation tax, there was an acknowledgement that that would have a negative impact on revenue. The Office for Budget Responsibility analysis that was presented there rather contradicted the claim—we have heard it in our debates on the Bill—that a reduction in rate will lead to an increase in tax take. That claim is not supported by the TIIN for the reduction in the corporation tax rate.
I should mention that the OBR’s assessment that the policy will reduce the size of the public purse includes
“a behavioural response to account for changes in the incentives for multinational companies to invest and to shift profits in and out of the UK.”
It also includes the impact of the measure on encouraging incorporation, which we know is already occurring to a greater extent than one might have anticipated, or indeed desired. Forced incorporation has been identified by many tax experts as a significant problem.
New clause 4 pushes in a similar direction by requiring Government to analyse the revenue that is likely to be lost as a result of this measure, in comparison with the situation that would have existed if the Government had not cut corporation tax so extensively, but had maintained a rate of 26%. That is, of course, Labour’s policy, albeit with a differential rate for small businesses. We believe that that approach is sensible, especially when many businesses are concerned about the sunk costs that they face, from business rates to insurance premium tax, the apprenticeship levy and many more, as well as about factors such as the availability of skilled labour or the quality of local and transport infrastructure, which require sustainable public finances if they are to be paid for. Those factors are often far more of a concern than the corporation tax rate, which is scaled to profits and therefore not a sunk cost.
Finally, amendment 39 requires the publication by Government of a list of those affected by the change, in the absence of sufficient information from Government about the ownership of property by non-UK residents. As we have discussed before in this Committee, although the Government have finally committed to introducing a register of foreign-owned property, the timetable for that has been substantially delayed, even though we in the Opposition have indicated that we strongly support the measure and would not oppose it. Therefore, it could be brought in expeditiously. That is not happening, so we need to use every mechanism possible to derive an understanding of the true size and impact of non-UK property ownership. The amendment would help us in that endeavour.
I understand from the tax information and impact note for the clause and schedule that the measures are
“expected to affect approximately 22,000 non-resident company landlords”.
It would be very helpful to know who they are or, if not that, at least where they are located. HMRC will need to identify them anyway. It would not mean additional work, because I understand that HMRC will write to them next summer to tell them about the change of tax regime and let them know their new reference number for corporation tax.
The response to a similar previous Opposition amendment—the Minister has used a similar form of words this time around—was that from the Government’s point of view it is a matter of principle that those subject to specific taxes should not be put on a register. However, is not clear to me how that differs in kind from the Government’s commitment to a foreign-owned property register. Also, I gently draw the Government’s attention to the fact that we are talking about companies, not individuals. I doubt whether any arguments about privacy would apply to any extent.
It is a pleasure to take part in the debate with you in the Chair, Mr Howarth. It is good to take part in this interesting debate on the changes that the Government propose.
We are happy to support Labour amendments 39 and 38. If it is pushed to a vote when the time comes, we shall support new clause 4, but I make it clear that it is not our position that corporation tax should be changed in the way the Labour party suggests. However, the new clause asks for a review of the effect of the potential change and we think it is reasonable that Opposition policies, as well as the Government’s, should be scrutinised. It is, I think, fairly reasonable for us to support the review on that basis.
Our amendment 35, as the hon. Member for Oxford East said, is similar to one of the Labour amendments. Its aim is to have a review of the effect on public finances of the expected change, including in relation to the tax gap. I do not want to contradict the hon. Lady, but the Government have put out two sets of contradictory figures on the revenue implications for the Exchequer. The Government’s
The policy document does not have the £690 million figure; it predicts an increase of £700 million in 2020-21, a reduction of £300 million in 2021-22, a reduction of £15 million in 2022-23 and, crucially, a reduction of £20 million in 2023-24. The previous set of figures said that the impact would be negligible in the fourth year. Now the Government are suggesting that there will be a decrease in the amount of money coming into the Exchequer as a result of the change. Presumably, we may imagine that the reduction will continue in future years, whereas the Government previously argued that their previous figures were correct, when they predicted not much of an increase or decrease either way in future years.
I was slightly confused by the information that the Government provided, and it would be useful to have clarity about which figures are correct, and why the policy document contains one set of figures but links to a different set on the website. Possibly a change needs to be made there, as the link to more information takes people somewhere that does not give more information—it contradicts the original information provided. I found it quite difficult to wade through that. Given what I have outlined, it is even more important that our amendment should be accepted. We need clear information from the Government, and a clear idea of what revenue effects are, or are not, expected.
Another thing that was mentioned in an earlier consultation document is the expectation that it will cost HMRC £160,000 to make the changes necessary to put the new system in place. That also needs to be teased out in the information provided. The amendment would reduce the effect on public finances, and that would include any additional spend required by HMRC staff as a result of the suggested changes.
I am concerned that there is a lack of transparency about the conflict between the two sets of figures provided, and that the Government have not been particularly clear about their intentions behind the change. I understand that they feel that making the change would put everyone on a more level playing field, but surely they should do that only if they expect a change to have a positive impact. There is no point in moving people from being liable for one tax to being liable for another tax to reduce the impact on the Exchequer, if that is the only predicted change.
Perhaps the Government want the extra money in year one, because they feel that Brexit will be such a disaster that we could do with extra money in year one, and they are willing to take the hit in future years. Given the potential impact on future years, the change will not be revenue-neutral in future. If the Government think that it will be, it would be useful to know that.
Having said all that, I am not clear about the Government’s intentions behind the change; it would be good if they could explain the rationale behind what they are doing. I have looked at the explanatory notes and they do not make it much clearer. The Government may think that this system is fairer. If that is their view, it would be useful for them to explain that.
I am not sure whether we will press the amendment to a vote; that depends a lot on the Minister’s response, the information he provides and any follow-up information he commits to providing.
I thank colleagues for their contributions. The hon. Member for Aberdeen North asked about the rationale for making this change, and whether it was simply to treat everybody equally—there is clearly a point to that, but is it sufficient to justify the change? Equality of treatment has its merits, but, as I explained in my opening remarks, there is the issue of bringing into the corporation tax regime those who hitherto have been engaged in activities that fall due to income tax rather than corporation tax. With that come all the anti-avoidance measures, including the corporate interest restriction, the hybrid mismatch regime, the carried-forward income loss restrictions and the capital gains and loss restrictions that were set out in the recent Budget. That is quite an important point.
I thank the Minister for attempting to explain. Pulling those people into all those anti-avoidance measures still results in a negative impact on the Exchequer. I contend that there may be no point in pulling them into these different measures if there is no positive benefit to be had from doing so.
The latest OBR estimate is that the changes will raise £365 million across the forecast period, although I will come to the issue raised by the hon. Member for Oxford East about the timing of the figures. She referred to the consultation that we carried out between March and June 2017; we came back with our report on
On the timing issues raised by the hon. Lady, the way in which the Office for National Statistics tax accounting treatment works means that increased corporation tax receipts are scored in the year of implementation, but the corresponding reduction in income tax receipts is scored in a subsequent year. There is a mismatch between the moneys coming in under the CT arrangements and the moneys that have been transferred into that regime, which do not go into the scorecard until a year later. That would largely explain the profile to which she referred.
With new clause 4, we seek to analyse the impact of not going ahead with the measure, assuming at the same time that corporation tax was at the 26% rate that the Labour party is suggesting, were it to be in government. In the absence of the measures, those currently under the CT regime would be allowed to escape that regime by going offshore. Putting up tax rates to 26% would simply increase the incentive for them to do precisely that. Businesses facing a rate of 26% instead of our rate of 19%, going down to 17%, would say, “Ah—there is an element of treatment here that I can benefit from. I will go offshore and I will fall within the income tax regime.” That would be the effect.
The hon. Member for Oxford East also mentioned the register of the businesses that would come within the scope of the measure. She raised the figure of 22,000 businesses. There is a general principle about going out and publicly holding up those who fall within the scope of particular taxes, but there is also an element of proportionality. She raised the figure of £160,000, as the cost of making the technology changes that would be required to introduce the measure. [Interruption.] I apologise—the hon. Member for Aberdeen North made that point. Perhaps I can unite the Opposition parties by saying that clearly there has to be an element of proportionality when it comes to getting all this information together, then getting the register together and keeping it up to date, and asking the question, what is the particular value of doing so?
The Minister is trying to suggest that it would be a great cost, but I made it clear that HMRC would have to compile a list of these individuals anyhow in order to inform them of their tax liabilities. There would not be a collation cost. There may be a cost from other aspects of it, but not from the collation.
The hon. Lady is right that HMRC will be privy to the information, but there is a difference between being privy to the information and treating with individuals and companies in terms of their tax return. Collating all that information and presenting it in the form that she envisages is a distinct activity.
I undertake to write to the hon. Member for Aberdeen North about the online number that she discovered and the numbers that were provided in the policy document. I wish I was so good that I just knew all the answers and was over the detail to that degree, but I will certainly write to her on that, and on the cost of making the changes to the system. I am happy to have a look at the £160,000 figure that she raised and see how it breaks down.
If possible, it would also be useful to know before we come back on Report whether the Government expect the revenue impact for the Exchequer to be negative in future years, beyond the four-year timescale that is predicted. That makes a difference in terms of whether it is, as the Minister says, a good measure across the four years or a really bad measure across 10 or 12 years.
I think I am right in saying that over the longer term, in revenue terms the measure is likely to be broadly neutral. The OBR, of course, will only cast out across the scorecard period. It will not analyse the fiscal impacts beyond that, but if the hon. Lady would care to write to me with any questions on that, to the extent that I can answer them of course I will do so.
I commend the clause and the schedule to the Committee.
I am grateful to the Minister for his comments, but we will press amendment 38 to a vote. Although I took on board his responses, I am concerned that we have a lack of clarity about the revenue impact of a measure, which means that as a Committee it is difficult for us to make a judgment on it. When he tried to explain why there might be a negative amount on some projections of the impact in subsequent years, he stated that that was due to the different timing of reporting of corporation tax revenue and income tax revenue. That would explain a difference for one year, but not for subsequent years, so I am still concerned about why there might have been a negative suggested figure into subsequent years.
In addition, it is not clear to me whether the figures that have been set out, whether that is one set or another, take into account the impact of coming within the scope of anti-avoidance measures and so on. That would obviously just be a projection in any case, but we surely need to have more information before we can take an informed view.
On a slightly wider but, I think, pertinent point, in the Red Book for this year, corporation tax for 2019-20 is £60 billion and by 2023 it is £66 billion. Does the hon. Lady find that her concerns about this specific thing are compounded by the uncertainty about, for example, the deal we will be debating in the not-too-distant future?
I agree with my hon. Friend. When we are talking about this sector in particular, we must always bear in mind the impact not only on revenue but overall on investment and the need to ensure that high-quality infrastructure is provided. I know that that is enormously important and something that the Minister is concerned with and working on. For the reasons I have set out, we will press amendment 38 to a vote.
On new clause 4, I say in response to the hon. Member for Aberdeen North that there may be some agreement on some issues, but on corporation tax rates there is a difference to the extent that Labour feels that we need to work with other countries to prevent a race to the bottom. That is something we have already been doing. A race to the bottom is damaging, particularly when many businesses tell us that the corporation tax rates do not drive their decision to locate in the UK; they may be one of a basket of factors, but other matters, particularly sunk costs, are important. Therefore, we are happy for our proposals to come under scrutiny at every point, and we hope that in doing so we might persuade the SNP to come to our view as well.
To be totally clear—I am sure the hon. Member for Oxford East did not mean this—we do not support a race to the bottom either. Our manifesto position was that we supported no further reductions in corporation tax, which is slightly different from the Labour party position.
In the spirit of trying not to take up too much of the Committee’s time and the fact that amendments 35 and 38 are broadly similar and we have covered the ground of both amendments quite a lot during the course of the debate—although the answers we received could have been clearer—we are happy not to press amendment 35 and to support Labour party amendment 38.