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Session 2008 - 09
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Finance Bill

Finance Bill

The Committee consisted of the following Members:

Chairmen: Mr. Peter Atkinson, †Mr. Jim Hood, Sir Nicholas Winterton
Bailey, Mr. Adrian (West Bromwich, West) (Lab/Co-op)
Barlow, Ms Celia (Hove) (Lab)
Binley, Mr. Brian (Northampton, South) (Con)
Blackman, Liz (Erewash) (Lab)
Blizzard, Mr. Bob (Waveney) (Lab)
Bone, Mr. Peter (Wellingborough) (Con)
Breed, Mr. Colin (South-East Cornwall) (LD)
Brown, Mr. Russell (Dumfries and Galloway) (Lab)
Browne, Mr. Jeremy (Taunton) (LD)
Cable, Dr. Vincent (Twickenham) (LD)
Dobbin, Jim (Heywood and Middleton) (Lab/Co-op)
Duddridge, James (Rochford and Southend, East) (Con)
Engel, Natascha (North-East Derbyshire) (Lab)
Field, Mr. Mark (Cities of London and Westminster) (Con)
Flello, Mr. Robert (Stoke-on-Trent, South) (Lab)
Gauke, Mr. David (South-West Hertfordshire) (Con)
Hands, Mr. Greg (Hammersmith and Fulham) (Con)
Hoban, Mr. Mark (Fareham) (Con)
Hosie, Stewart (Dundee, East) (SNP)
Howell, John (Henley) (Con)
Jenkins, Mr. Brian (Tamworth) (Lab)
Joyce, Mr. Eric (Falkirk) (Lab)
Moffatt, Laura (Crawley) (Lab)
Pearson, Ian (Dudley, South) (Lab)
Pugh, Dr. John (Southport) (LD)
Robertson, John (Glasgow, North-West) (Lab)
Roy, Lindsay (Glenrothes) (Lab)
Seabeck, Alison (Plymouth, Devonport) (Lab)
Soulsby, Sir Peter (Leicester, South) (Lab)
Stuart, Mr. Graham (Beverley and Holderness) (Con)
Syms, Mr. Robert (Poole) (Con)
Timms, Mr. Stephen (East Ham) (Lab)
Todd, Mr. Mark (South Derbyshire) (Lab)
Ussher, Kitty (Burnley) (Lab)
Liam Laurence Smyth, Committee Clerk
† attended the Committee

Public Bill Committee

Thursday 18 June 2009


[Mr. Jim Hood in the Chair]

Finance Bill

(Except Clauses 7, 8, 9, 11, 14, 16, 20 and 92)

9 am
The Chairman: I understand that the Minister has a short statement to make.
The Financial Secretary to the Treasury (Mr. Stephen Timms): I bid you a warm welcome to the Chair, Mr. Hood, on this beautiful morning. I have a couple of points to make. First, I would like to correct a misleading impression that I gave the Committee at the end of our previous sitting during the debate on clause 70 relating to the costing of the £45 million expected to be yielded as a result of that clause, which dealt with accommodation costs. I said, correctly, that the costing was based on 47 cases of those arrangements being used by 19 employee benefits trusts to gain a tax advantage, but it was not based on 47 individuals, because each case involved a number of different individuals. Due to the way in which information about trusts using lease premiums has been corrected, the number of employees benefiting is not recorded, but it is certainly a good deal more than 47, which helps to explain the large yield score for that measure.
Secondly, as the Committee will be aware, my hon. Friend the Member for Burnley has stepped down from her role at the Treasury, and I would like to say how much we will miss her. We had already been working with gusto on the Bill in the short time she was back at the Treasury as a Minister. We of course look forward to welcoming my hon. Friend the Member for Portsmouth, North (Sarah McCarthy-Fry), when she joins us later and congratulate her on her appointment. I think that the Committee will understand what I mean when I say that I am sure she would have wished her appointment to have been in circumstances other than those we find ourselves in today. I express my thanks to my hon. Friend the Member for Burnley for her help over the past week.

Clause 71

Special annual allowance charge etc
Question proposed, That the clause stand part of the Bill.
I want to take the debate on the clause as an opportunity to set out some of the background to the changes we will discuss in more detail when we come to schedule 35 and to lay the trail that might put in context the amendments we have tabled to that schedule. When the Committee’s proceedings started four weeks ago, I said on a point of order that it was the fourth Finance Bill Committee on which I have sat as a Front Bencher, but it also happens to be the fourth Finance Bill in which the A-day rules, which were established in the Finance Act 2004, have been unpicked. We have seen changes twice to alternative secured pensions, the removal of residential and other property from self-invested pension plans, rules restricting recycling of cash lump sums and the abolition of pension term assurance. That set of proposals on A-day had been hard fought for, and it has caused a great deal of concern in the industry that so many changes have been made. Of course, the changes being made in schedule 35 are a precursor to wider changes planned for 2011-12.
The problem arises in the following way: there is logic behind some of the individual measures and some of the changes may be justified, but they send a message to potential savers that they cannot rely on a pensions tax regime being in place for the long term. Indeed, during the 2004 Finance Bill debate, my hon. Friend the Member for Tatton (Mr. Osborne) voiced concerns about the inclusion of residential property in SIPPs. We encourage people to save for the long term for their pensions through the personal accounts, which will be introduced in 2012, but people have no certainty about the tax treatment of their contributions or about how future contributions will be dealt with. That is a disincentive; why would people want to lock up their money for the long term if they are not entirely sure how the Government will tax current and future contributions?
The genesis of the anti-forestalling measures was the Government’s announcement in the pre-Budget report 2008 of the 40p tax rate from 2011-12. One of the concerns about the tax’s revenue yield expressed at the time was that people would use the generous reliefs available for pensions to off-set their increased tax bill. That point was widely flagged and the provisions under discussion, as well as the other changes announced in Budget 2009 about pension contributions, are a good example of “be careful what you wish for”, because the concerns have now been picked up by the Treasury and translated into the provisions under discussion.
The Bill offers an additional layer of complexity, because the clarity set out in the A-day rules is now going to be replaced by a second test relating to people who earn more than £150,000. Their contributions will receive a reduced tax relief of 20 per cent. depending on—we will come back to this on a later group of amendments—the previous pattern of pension contributions, which is not a straightforward issue. The contributions made by individuals to their pension funds are not the only ones affected; employer pension contributions are also affected, and contributions based on relevant income will lose their exempt status and be classified as a taxable benefit.
A defined-contribution scheme is straightforward as it is easy to define an employer’s contribution. However, it is more difficult to assess the value of an employer’s contribution to a defined-benefit scheme of the nature that we in the House are fortunate enough to enjoy. The Treasury has set up a working party with the industry to work out how to value the contributions that businesses make, because, quite often, a global contribution, rather than an amount per individual, is made to such schemes. Then we get into the issue of how we apportion it and how we value the impact of the increase in contributions.
People may think that they can wait until 2011 to plan their futures so that they can see what happens with the scheme that the Government intend to introduce. However, the Government are concerned about people taking advantage of the gap between now and 2011, so have introduced the anti-forestalling measures in schedule 35 which cover the tax periods between now and the introduction of the new regime.
In the number of representations that hon. Members from all parts of the House have received, there have been some recurrent themes. Concerns have been expressed not only by individuals who have written to us about the particular impact on their circumstances, but by the pensions sector. Some comments have been made about the feasibility of the anti-forestalling measures.
Let me turn now to the concerns about how the changes may affect savings, particularly the issue around complexity leading to discouragement. The A-day regime was a very serious piece of work, which involved compromises on the part of both HMRC and the pensions industry to sweep away the eight different tax regimes that then existed for pensions, to move to a much more simple and straightforward system that people could understand. It was hoped that the regime would lead to more people increasing their contributions. However, now they see the anti-forestalling measures, and they know about the changes that are coming in 2011. We have a situation in which there are more complex rules in place. As part of the anti-forestalling measures, which run to some 18 pages, we have the prospect of future regulations. Clearly, there are issues around the valuation of employers’ contributions. The complexity of the changes could act as a further disincentive to invest in pensions. Tim Breedon, the chief executive officer of Legal & General, said:
“The planned cut to tax relief on pension contributions made by higher rate taxpayers would deter saving and would also erode recent efforts to simplify the system. To make savings attractive to people you want simplicity not complexity. And you want stability, not change.”
Nick Prettlejohn, CEO of Prudential UK businesses, said:
“The proposed changes announced in the Budget will reintroduce complexity and further confusion to the pensions landscape and erode consumer confidence.”
Rachel Vahey, head of pensions at Aegon—it was the head of Aegon, Otto Thoreson, who led the Government’s review of financial advice to encourage people to save more for their future—said:
“This undermines the A-day agreement which was designed to promote long-term pension saving, using the standard Lifetime Allowance to prevent abuse of the system by the rich. That major overhaul of the pensions tax rule was meant to last 30 years rather than three years. Pensions are for the long term so consistency is essential to give people confidence to plan for the future.”
As ever, the issue is not just the proposals themselves but the way in which they are introduced. The proposals were sprung on the industry. In the days before the Budget, one or two people suspected that there might be some cap on the higher rate tax relief, but they did not expect to see changes of such a nature.
The Government have broken a hard-earned concordat with the industry on the A-day regime. They have moved away from the concept that underpins those reforms of EET: exempt contributions; exempt investment income and taxable benefits).
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Prepared 19 June 2009