Mr.
Hands: A final question: has the Financial Secretary
considered giving grandfather rights to those who can currently take
advantage of their personal allowances, so that they may continue
before they are affected by the
measure?
Mr.
Timms: As I understand it from legal advice, there would
not be a legal basis for taking such action. We are not in a position
to discriminate in that way. The clause puts the position right and
removes the
discrimination. Question
put and agreed
to. Clause
5 accordingly ordered to stand part of the
Bill. Schedule
1 agreed
to.
Clause
6Additional
rate, dividend additional rate, trust rates and pension tax
rates
The
Chairman: It may be more convenient for the Committee to
debate clause 6 in tandem with schedule 2. I do not know
whether that will create problems. If it is difficult, we shall discuss
them
separately.
Mr.
Hands: Mr. Atkinson, I certainly prefer to
discuss schedule 2 separately. I have some technical points to make
that are specific to it. If it is possible to have a separate debate, I
should be grateful.
The
Chairman: In that case, I will accept a wide-ranging
debate on clause 6, and we can deal with the more technical matters
under schedule 2. I hope that everyone finds that
suitable. Question
proposed, That the clause stand part of the
Bill.
Mr.
Timms: I am happy to take your guidance, Mr.
Atkinson, and comment on both the clause and the schedule, but I shall
also be happy to have a separate conversation about the schedule when
we reach that stage.
Clause 6
introduces schedule 2, which provides for the additional rate of tax
from 2010-11. The rate will be set at 50 per cent. in 2010-11 and apply
to those with taxable incomes above £150,000 a year. As you will
recall, it was announced in the pre-Budget report in November that we
would be introducing a 45 per cent. rate in April 2011. However, the
global downturn has been worse than predicted and, as a result, more
consolidation is required. That is why the additional rate has been
brought forward and raised by five percentage points to 50 per
cent. Mr.
Mark Field (Cities of London and Westminster) (Con): In
view of the Budget’s optimistic projections for growth in the
next few years, on what basis did the Treasury feel it necessary to
change its proposal for a 45p tax rate? After all, if Government
figures are to be believed, we shall have growth racing away at 3.5 per
cent. within the next year or so. On the basis of that figure very
little obvious change has been made in relation to public expenditure,
so why the radical change on
taxation?
Mr.
Timms: Because, as I said, expectations for the world
economy have gone backwards—in an adverse direction—to a
significant extent since November of last year. The International
Monetary Fund has revised its forecasts two or three times in that
period—downwards in all cases—so what we needed to do was
what we put in place in the Budget: a trajectory that we could deliver
on, getting us back to balance by a later point than we said in
November, by 2017 rather 2015. The measure is an important contribution
to
that.
Several
hon. Members
rose—
Mr.
Timms: I have a rich choice of interventions to select
from—I shall take the hon. Member for Cities of London and
Westminster
first.
Mr.
Field: A choice made only in ascending order, obviously,
which I fully
understand. Those
concerns have been expressed to me. Do we have an assurance from the
Financial Secretary that there will be no further downward projections
regarding the world economy? Is the matter now set in stone?
The position has deteriorated appallingly since last
November—or so he would tell us. Is he now entirely clear that
the figures are final, and we shall have no further downward
projections in the months and years to
come?
Mr.
Timms: All I can say to the hon. Gentleman is that the
projection at the time of the Budget was the best available, given the
data at that point. I wish I could tell the Committee with absolute
confidence what will be happening in the next one, two or three years,
but in reality we are not in that happy
position. Mr.
Peter Bone (Wellingborough) (Con): The logic of the
Financial Secretary’s argument is that he cannot confirm the
figure for the top rate. If the growth forecasts are worse than
predicted, the logic is that he will come back and say, “Well,
it is 60 or 70 per cent.” Perhaps we shall go back to the days
of 98 per cent., or even the negative of 101 per cent., which we had
under a Labour
Government.
Mr.
Timms: The question before the Committee is whether it is
right to raise the level to 50 per cent., as in the clause and
schedule. My case to the Committee is that it most certainly is right.
I am conscious that, and pleased that, the hon. Gentleman’s
party has not dissented from that view, and I want to set out the basis
for that being the right
decision.
Mr.
Hands: The Financial Secretary is being most generous in
giving way. One of the most important things is surely the stability
and predictability of the UK tax system. In that regard, what kind of
message does he think it shows that the 45p tax rate has been abolished
before it has even been
introduced?
Mr.
Timms: The hon. Gentleman will, I think, have noticed that
there has been unprecedented turbulence in the world economy over the
past few months. I hope that that has not passed him by. Policy needs
to change in the light of circumstances. We have moved swiftly and
boldly—that is absolutely the right thing to do—to
maintain the stability of the British economy and to put the public
finances on the right trajectory for
balance. John
Howell (Henley) (Con): The point that many of us are
struggling to understand here—we all understand that the global
economic situation, and particularly the situation in the UK, worsened
between the pre-Budget report and the Budget—is that there is a
world of difference between those sweeping, global pictures that the
Financial Secretary has painted and the specifics of the difference
between the pre-Budget report and the Budget. What we would like to
understand is how he has got from one to the
other.
Mr.
Timms: That is the very stuff of politics—to take
the grand sweep, to see what is going on in the world and to decide
what one will do in response. I shall set out the basis of what I want
to put to the Committee. As I said, I am pleased that the Conservative
party has not dissented from the view that this is an important
measure, contributing to the consolidation that is now required. We
have certainly looked carefully at the likely impact, on both
individuals and the economy, as a consequence of the 50 per cent.
rate.
What I can
say to the Committee is that the UK will remain a competitive place for
business—that, of course, is absolutely essential—with a
tax burden that compares well internationally. The UK tax to gross
domestic
product ratio, 37.1 per cent., continues to rank below the EU15 average.
UK top rates, taking into account social security contributions as
well, will continue to fall into the range of that of other G7
countries. Overall, the UK tax regime remains very competitive, with,
of course, the lowest corporation tax rate in the G7 and a capital
gains tax rate below that in the US and Germany, for example. I welcome
the international surveys consistently showing that the UK has a
business-friendly environment and a competitive tax system. The World
Bank’s study of 181 countries, “Doing Business
2009”, placed the UK sixth in the world and second in the EU for
ease of doing business. Stewart
Hosie (Dundee, East) (SNP): The Financial Secretary is
talking about the competitive tax rate. May I bring him back to the
clause for a moment? Subsection (4)(b) states:
“‘for 32.5% substitute 42.5%’”. If I have
read the Red Book correctly, table A3, annotation 2,
states: “The
rates applicable to dividends are 10 per cent for dividend income up to
the basic rate limit and 32.5 per cent above that.”
As I understand it,
that figure is now going from 32.5 to 42.5 per cent.—a rise of
more than 30 per cent. Does the Financial Secretary think it right that
basic rate taxpayers who have dividend income above the basic rate
threshold should be—if I have understood this
correctly—subject to an increase from 32.5 to 42.5 per
cent.?
Mr.
Timms: I shall come to the implications for some of the
other rates in a moment. The point I am making is about the 50 per
cent. rate on income above £150,000, but there are some knock-on
consequences, which I will spell out in a moment.
In answer to
the hon. Gentleman’s question, yes, this measure is consistent
with the competitiveness of the UK as a place for investment in
business, consistent with fairness, and consistent with the
consolidation that is needed over the next few years. The measure will
raise more than £6 billion in its first three years. That
estimate takes into account, as all our estimates do, behavioural
consequences of the change, about which we had some discussion this
morning. As I also mentioned this morning, the assumptions that
underpin our view of the yield coming from this measure were confirmed
by the Institute for Fiscal Studies in its post-Budget briefing as
“not unreasonable”.
Some have
suggested that the behaviour impacts are such that we should not make
that change. I do not agree with that, because without this measure,
focused on those with the very highest incomes, funding would need to
be found elsewhere. Our choice has been to look, in this clause, to
those who are in the best position, who are most able to afford to pay,
and whose incomes have risen a good deal faster than the average over
the last
decade. Mr.
Brian Binley (Northampton, South) (Con): I am a little
surprised that the Financial Secretary mentioned the Institute for
Fiscal Studies, because it also predicted that the tax would generate
almost nothing. I am wondering whether the definition of “almost
nothing” and agreement with the Financial Secretary coincide.
This causes me concern, and I am also concerned that the Chancellor
said that there was no science to choosing the 50 per cent. tax rate. I
want to be absolutely sure that this is a
revenue-raising measure. Will the Financial Secretary give me a total
assurance that that is the case and that it will not in fact diminish
revenues, which is a
possibility? 5
pm
Mr.
Timms: I simply refer the hon. Gentleman to the
post-Budget presentation by the IFS, which I have in front of me. The
IFS says on one of its
slides: “How
much will the 50% rate raise? HM Treasury says £2.4
bn.” A
little further down, it
says: “Government’s
assumptions not
unreasonable.” That
was my point, and it is certainly my view that the measure will raise a
substantial amount for the Exchequer and make an important contribution
to the consolidation that is required.
Let me move
on to the question put by the hon. Member for Dundee, East about some
of the consequences or knock-on effects of the change. The rate of tax
due on dividends over the same income threshold is raised, as he said,
to 42.5 per cent. The clause also raises the trust rate to 50 per cent.
and the dividend trust rate to 42.5 per cent., to ensure that there is
no incentive for somebody to put money into a trust simply to reduce
tax liability.
On dividend
income, let me be clear: dividend income over £150,000 will be
subject to the 42.5 per cent. rate; a rate of 32.5 per cent. will
continue to apply up to that amount. In other words, basic rate
taxpayers, about whom the hon. Gentleman is particularly concerned, in
receipt of dividends will not be affected.
Another
consequence of the 50 per cent. tax rate is the impact on special rates
of tax in the pensions tax rules. Those rules operate on the basis that
individuals receive tax relief at their top tax rate on pension savings
up to prescribed limits. If those saving limits are exceeded, tax
charges are applied to recover tax relief on contributions. The clause
puts in place powers to vary the rates for those special pensions tax
charges in regulations, a point that is mentioned in the letter that
has been circulated this afternoon.
We have
thought very carefully about how the further money required for fiscal
consolidation should be raised. We are clear that it is right to
require those who benefited most in the last decade and who are in the
best position to pay to contribute more. That is the basis for the
clause. I will now give way to the hon.
Gentleman.
Mr.
Hands: The Financial Secretary really is being very
generous in giving way. Can he just tell us how he thinks he will
present to the electors of East Ham at some point within the next 13
months the fact that he has broken his own general election manifesto
pledge from 2005? Perhaps he thinks otherwise, but the manifesto said
clearly: “We
will not raise the basic or top rates of income tax in the next
Parliament.”
Mr.
Timms: The measure is rather popular among my constituents
in East Ham. They look to the Government to take the right decisions
for the future of our country. In extraordinary circumstances, of the
sort that we have seen in the world economy in the past few months, it
is right of the Government to put in place the measures that are needed
to safeguard the economy, families and businesses, and to secure the
consolidation that will be needed in the next few years. The measure is
an important step towards doing that.
Mr.
Hands: I thank the right hon. Gentleman for that response.
I think that he is saying that the measure will be popular in East Ham
and that he will campaign on that basis. Is he also saying that he will
campaign nationwide on the basis that the measure will be
popular?
Mr.
Timms: I believe that it is a popular measure
nationwide.
Mr.
Hands: We have got to the heart of the matter. I am now
going to talk at some length about the 50p tax rate and ancillary
matters. I hope to cover quite a wide range of topics, including,
first, the reactions to the proposed 50p rate and, secondly, a question
that we have not really covered yet, which is whether the proposed 50p
rate will be a temporary measure or permanent. Thirdly, I will examine
whether the measure will raise the amount that it is claimed it will
raise, and whether it might not be beyond the point of revenue
maximisation. Fourthly, I will look at the UK’s overall economic
competitiveness. Fifthly, I will look at the political background and
reasons for introducing the 50p tax rate and some of the other
measures. I will also look at the complexity that the abolition of the
45p tax rate—before it was even introduced—will add to
the unpredictability of the UK tax code. Furthermore, I will discuss
some of the more technical provisions relating to trust dividends and
pensions before drawing some
conclusions. This
is the first rise in the top rate of tax since 1974, after 35 years of
it either being stable or reduced. It is worth reiterating that the
Government estimate that the new 50p rate on earnings above
£150,000 will raise £1.13 billion in 2010-11, rising to
£2.52 billion in 2011-12. However, the new tax rate’s
implementation is largely the result of political posturing. The change
sends the wrong signal to entrepreneurs who are in the UK and to those
who might be attracted to come here, and it will lead many to question
the UK’s economic competitiveness, especially in relation to its
tax code. The proposal also adds to massive uncertainty about the UK
tax system and is a reminder of the importance of predictability in
that system. Moreover, it adds significantly to UK tax complexity,
which, as we heard this morning, is already a developing theme in our
deliberations on the Bill. The 11 different marginal tax rates that
have been created in recent years are incredibly
complex. Questions
remain about whether the proposal will raise anything like the amount
that has been suggested, and I am disturbed by the earlier evidence
that, in the Treasury’s assessment of what the measures will
yield, it did not separate the phasing out of allowances on the one
hand, and the introduction of the 50p tax rate on the other. There
seems to be an assumption that those two factors will prompt the same
behavioural reaction, but people’s reactions may well be very
different. For example, somebody who currently earns £95,000 but
may expect to earn £105,000 might go about not earning that
extra £10,000, but doing something else; on the other hand,
somebody who earns £250,000 might decide to relocate. It is
fundamentally flawed to throw two kinds of consideration into the same
estimate of
revenue. The
ancillary changes to pension and dividend rates act as a severe
disincentive to save and they send the wrong message on
saving—my hon. Friend the Member for South-West Hertfordshire
spoke earlier about the importance of our savings culture. Also, the
change to
the trust rates might have a perverse impact on many who are not well
off and are about to suffer undue hardship as a result of the
Government’s
measures. Reactions
to the 50p tax rate announcement were very interesting. We will turn to
focus groups in due
course. Mr.
Jeremy Browne (Taunton) (LD): From the tenor of the hon.
Gentleman’s introductory remarks, one could be forgiven for
thinking that he is opposed to the 50p tax
rate.
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