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
17PAYE
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.
7
pm 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.
For the
convenience of the Committee, I should outline how the system works
now. It is not something that everybody appreciates, but when an
employee gets their pay slip at the end of the month and it shows the
amount of pay they have received, the amount of tax deducted and the
amount of national insurance deducted, that information is not
communicated immediately by the employer to HMRC. All the employer has
to do on the appropriate date—which is, I think, the 19th of the
following month—is account to HMRC for the total amount of tax
and national insurance deducted. Not until the following July, the end
of the tax year, will the employer account to HMRC on an
employee-by-employee basis for the individual amounts of tax and
national insurance deducted during the course of the year.
[Interruption.] There seems to be another Member on his feet in
the Committee
Room. 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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