Finance Bill

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Mr. Hammond: I am sure that my hon. Friend has discussed this matter with accountancy firms in the City; I certainly have. They tell me that management may be very comfortable with being in the UK, but that shareholders increasingly insist that regular analyses of the options are conducted. I was quite shocked to be told by one of the big accountancy firms at a meeting a few weeks ago that every single one of its FTSE 100 clients had sought advice at some time in the past year, or was currently seeking advice, on the options open to them. That did not imply that they were all moving, but that they were all alert to the need constantly to test the logic of their domicile in the UK.
Mr. Hoban: My hon. Friend makes two important points. First, the debate has evolved over the past two or three years from companies simply talking about that change to their spending serious money with their advisers in looking at how they might effect the change. Companies are much more up front about this matter. In the past, a number of them have relocated their tax domicile overseas as part of a wider transaction. The flotation of Experian is an example. It was listed in the UK market, and used flotation as an opportunity to move its tax domicile from the UK to Dublin.
The second important point made by my hon. Friend is that the barriers to moving have become much lower. One of the arguments that shareholders might have used in the past against changing domicile was that they could not list their shares on the UK stock exchange. However, as Experian showed, a company can have all the benefits of a London listing, but seek a low-tax domicile for its place of incorporation and its headquarters. It is much easier for shareholders to put pressure on management to look at their overall tax charge and at ways of managing it, in the knowledge that there are steps the company can take that do not require it to lose its listing in London. We must remember that important point, because it is another example of the mobility of multinational businesses.
On the issue of the mobility of multinationals, the UK is the location of choice for multinationals’ European headquarters. Google had its European headquarters in the UK. We have a common language and a common approach to many issues of regulation, so it was comfortable doing business here. However, Google, too, has moved its headquarters out of the UK and into Ireland. Kraft Foods has moved its headquarters from the UK to Switzerland. There is significant evidence of companies responding to those pressures and changing the location of their headquarters.
I accept that we cannot have a tax system that is skewed towards multinationals. We must have a level playing field. I well remember people highlighting the benefits of other jurisdictions in my days as a practising accountant. The example of Dutch mixer companies was trotted out on a regular basis. I am not sure that we will ever get to the situation where our tax regime is as favourable for multinationals as the Netherlands or Ireland. However, we need to think about what we can do to minimise the competitive disadvantage that we suffer, which is why we are keen to understand properly, through the proposed report, the impact of changes to the participation exemption on the attractiveness of the UK as a location for multinational headquarters.
I am conscious that this has been a longish speech, but this issue dominates the corporate agenda. It has been helped along by the Minister’s working group, but its importance means that we should have a considered debate, which takes into account the full consequences of the participation exemption. The area is clearly one in which both major parties have expressed a desire to see some form of change. It would be helpful for the long-term planning of businesses to have a much more open debate than we have had so far. I hope that the report that proposed in new clause 15 would create the backdrop for that debate. It would also ensure that the Minister’s working party has a deliverable objective, and does not just become somewhere where people have a chat about the issues. It could have an output, which could form part of the wider debate. With that in mind, I hope that the Minister is inclined to accept new clause 15 or, if nothing else, the spirit in which it was moved.
Jane Kennedy: The hon. Gentleman alluded to the forum that I chair and which met for the first time on 9 June. It allows business representatives at the highest level to provide input into the development of policy in the area. I am not going to be drawn on the detail and direction of our discussions. Any changes to the rules for the taxation of foreign profits will be taken forward in post-consultation with businesses, to produce a consultation document in due course. I am focused on that objective, and a report of the nature requested in the new clause is not necessary.
Mr. Hoban: I understand the Minister’s reluctance and I am disappointed by it. I think this is an important issue, and there is a lot of focus on it. I am concerned that the committee is a way of kicking the issue into the long grass of taxation.
Mr. Hammond: I am surprised by the Minister’s failure to take the opportunity to say something about the foreign profits taxation problem, which is clearly recognised by the Government. There is a feeling in the business audience, which the Financial Secretary and the Economic Secretary may have picked up in their dealings with it, that the Government have kicked the foreign profits taxation consultation into the long grass, because it had too many difficulties—it had ruffled the feathers of the business community—on too many fronts. What we need to establish for the interests of UK plc—the matter is not about the Labour party’s relations with business, but about the UK’s attractiveness to business as a location—is some clarity and certainty. Effectively deferring the issue for another year or 18 months leaves business in the same uncertainty that it has been in since the Government’s intention to look at the taxation of foreign profits was announced. For every person out there who hopes that the result of the exercise is a participation exemption, there is someone else who fears that there may be an even more heavy-handed treatment of taxation of foreign profits than we have now.
Mr. Hoban: My hon. Friend made a series of points in that intervention. The one that I would focus on is uncertainty, because we are left in a degree of limbo. The Government had proposed some measures in the consultation document. We had expected a further consultation document to be published in June or July—I am not clear about the status of that consultation document now, given the Minister’s response. It is heard to see what lessons business should take away from that, and what they could expect, in terms of the future shape and direction of Government policy on the taxation of foreign profits. To leave people in that degree of limbo and uncertainty, given that the Government have progressed a certain way down the route, is regrettable. I appreciate that the Government have been facing some flak from business over recent months over taxation, but progress could be made by having a proper public debate. I am sorry that the Financial Secretary does not see the need to publish a report like this, but I suspect that the absence of such a report will cause a great deal more speculation, concern and uncertainty. It is disappointing. I beg to ask leave to withdraw the motion.
Motion and clause, by leave, withdrawn.

New Clause 17

PAYE reporting
‘The Treasury shall commission and lay before the House of Commons, within 12 months of the passing of this Act, an independent report into the feasibility and estimated cost of introducing a system of monthly reporting to HM Revenue and Customs of payments and deductions through the Pay as You Earn system.’.—[Mr. Hammond.]
Brought up, and read the First time.
Mr. Hammond: I beg to move that the clause be read a Second time.
New clause 17 would require the Treasury to commission a report and lay it before the House within 12 months on the feasibility and estimated cost of introducing a system of monthly reporting to HMRC of payments and deductions through the pay-as-you-earn system. I strongly suspect that the Government may already have done some work on that or are in the process of doing so.
The PAYE system was introduced broadly in its current form after the second world war. It was then an advanced system, but at that time all payrolls were, by necessity, manually accounted. Most people changed employment only rarely—perhaps once or twice in a lifetime, and there was no such thing as the migrant worker. We operated in a totally different employment environment. All that has changed. Nowadays, it is common for people to have many jobs during their working lives. In some industries—for example, catering and hospitality—it is not uncommon for people to have several jobs at the same time; and it is not uncommon for people to move fairly rapidly between jobs, perhaps making two or three moves in a year.
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The PAYE system has struggled to cope with the challenges of that changing environment. I am sure that the Government will have been looking at the architecture of the PAYE system and considering whether, in general, there is scope to change the way that it works. It is a fragile animal. I am conscious of what I know to be the guiding philosophy of HMRC; we have a pretty high level of tax compliance, based on the rather outdated PAYE system, and we must be extremely careful before making any changes to a fragile but none the less functional edifice.
We could probably have staggered on for decades with the PAYE system in its present form without too much trouble. There might be trouble at the margins over people who have frequent changes of employment, or very short periods of employment, but there would not be too much unmanageable trouble—were it not for the tax credit system. Although the scope of the new clause is more general, in introducing a broad review of the possibility of monthly reporting, when I develop my theme, it will become apparent to the Committee that the problems that have arisen over tax credits are of particular concern. It is possible—I do not know the answer, so it is a genuine question—that those problems could be addressed by the change suggested in the new clause.
The Chairman: Order.
Mr. Hammond: I cannot tell you, Sir Nicholas, how many conversations I have had over the last few years, with Members of Parliament in particular, but also with others who have not appreciated that the situation is as I have just described. Whether it is about tax credits or personal accounts, there is an understandable assumption that when national insurance and tax are deducted, and the employee receives a notification of that deduction, that information is immediately available to HMRC. I have heard all sorts of suggestions for improving the tax credit system, and indeed for improving the operation of personal accounts, another area which would be affected by this proposal. There is a real issue of understanding here, and I want to focus on the way in which the tax credit system has been working, or perhaps one should say not working.
Last month, HMRC released figures revealing that a further £1 billion in tax credits was overpaid in 2006-07, and £500,000 was underpaid. To be fair to the Treasury, this is not just because of incompetence or error. It is because the Treasury, through HMRC, has no way of knowing when people’s earnings and circumstances have changed unless the individuals concerned contact the authorities and make them aware of those changes. Since 2003-04, £6.7 billion has been overpaid. Households are disrupted and sometimes put in dreadful situations, particularly by the overpayments, which in many circumstances are then reclaimed by HMRC and have to be repaid, so that by definition people who may be under some income pressure are being asked to repay sums of money.
To put these large sums of money into context, in terms of individual awards, last year, 1.3 million awards were overpaid, and 838,000 awards were underpaid out of a total of 6.5 million awards made. That means that a third of all awards were wrong. The reported overpayments for last year occurred even after the Government made changes to the system in 2006 in response to previous, even larger, overpayments.
Instead of fixing the underlying problem, the Government increased to £25,000 the annual income increase that could be disregarded. That has had the extraordinary effect that it is possible—though I admit it would be unusual—for someone earning £93,000 to be in receipt of tax credits for at least part of the year. That person would have had a base income of £68,000, which is at the very top end of the range for tax credit taper and then, receiving a £25,000 per annum in-year increase, they would continue to receive tax credits, although their income at an annualised rate would be £93,000.
The Treasury has announced a review of the scheme, so it is probably timely to consider if changes to the PAYE system are possible and affordable, both in terms of the impact on costs of operating HMRC and, of course, in terms of costs to business.
If we were in an environment in which most businesses produced their payrolls manually and had to forward them manually to HMRC, I would not be pursuing the question implicit in the new clause, because the answer would be obvious; the new measure would impose a significant additional burden on business. However, we are in an environment these days in which most businesses, probably all businesses—that would be one of the issues that we would hope to discover from a report laid by the Treasury under the terms of the new clause—including even quite small ones and perhaps even the smallest, process their payroll on a simple computer programme. I would be surprised if there were very many businesses running manual payrolls, because they are quite complicated and time-consuming to operate.
The thought behind the new clause is that, if most payrolls are now being operated on computer software packages, would it really be a major additional imposition on businesses to return that payroll data electronically to HMRC on a monthly basis rather than on an annual, in-arrears basis? Perhaps that is something that the Government have already looked at.
What would be involved in gearing up HMRC to receive electronically monthly data on PAYE deductions that had been made? What would be the potential for using that data so that we have something much closer to a real-time response to the changing income patterns of individuals in the way that we operate things such as the tax credit system, so that HMRC, in dealing with tax credit awards, has income data lagging only by one month rather than income data lagging by as much as 15 months? The Minister may wish to confirm this, but I think that that long time lag is the essential underlying problem with the way that the tax credit system operates. It is dependent on individuals notifying the tax authorities, rather than being dependent on payroll deduction data that are reported.
Indeed, many individuals ask—you will have dealt with such questions from your constituents, Sir Nicholas, and I certainly have—“Why are they asking me these things? They already know”. They assume that the data on their weekly or monthly payslip are already available to the authorities, and they expect that the authorities will have acted accordingly.
Then there is the issue of personal accounts. The operation of the personal accounts pension system, which will be introduced by the Government in 2012, has been dictated, in significant part, by the constraints imposed by the architecture of the PAYE system. It would only be possible if contributions were collected through payroll to attribute them to individual employees with a lag of as much as 15 months from the date of monthly collection. That would probably give rise to some insurmountable issues. However, if monthly PAYE deduction data were available, it would be possible to attribute personal accounts contributions collected through the PAYE system to individuals’ personal accounts on a monthly basis, making the system much simpler. As a result, the system would probably have a higher take-up rate and it would be simpler to run for both employers and whoever was operating the personal accounts system.
That seems to be a pretty big win. I suspect that many other areas of policy could be revisited if we had monthly income data. Given the priority that the Government have attached to dealing with poverty, particularly child poverty, I suggest to the Financial Secretary that having that data available on something approximating a real-time basis could make a significant new policy tool available to the Government.
The new clause is deliberately phrased in interrogative terms asking the Treasury to commission a report and lay it before Parliament, because we do not want to propose such a measure if it would impose significant burdens that were not justified by the benefits. I will be interested to hear whether any of that work has already been done in the Treasury, whether some of my questions are answerable and whether the Minister will choose to answer them. Has that area not yet been looked at, perhaps because it is considered too complex?
I ask the Minister to consider this proposal as a genuine contribution to the debate on how we tackle targeting to deal with issues of poverty. While we only know what people in work have earned a year or so after they have earned it, we will always have the kind of problems that have become apparent in the operation of the tax credit system when we try to target financial support.
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