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The Chancellor of the Exchequer was absolutely right to conclude that what we should seek to achieve in the Budget is that those who can afford it most should contribute most, with the vulnerable protected. Although I do not want to return to a Second Reading-type
debate and to relate this measure to all the other measures and to the public spending re-profiling or cuts that are due in the autumn, on which we are to get more detail, that is the context in which this issue has to be considered.
Amendment 50 is remarkably similar to amendment 34, tabled by the right hon. Member for East Ham (Stephen Timms). I tabled amendment 50 because we need to probe and fully understand the likely impact of the banking levy and the corporation tax cut on the banking sector. We need a better assessment of that. It was interesting that the hon. Member for Nottingham East, in response to proper and reasonable questions about the relationship between the impact of the bank levy, as opposed to that of the corporation tax cut, on the banking sector was unable to give a quantifiable answer. That is because the Treasury do not provide one. In the responses to the questions that I have asked on the issue, that relationship has not been clear. That is why it would be better for us to say honestly that if we are properly going to come to a measured conclusion, it would be far better to have the best possible estimates of the likely impact of both measures beforehand, so that we can measure one against the other and make a proper, balanced and reasonable assessment of the impact at the end of the process.
I do not wish to delve into the party politics of what people said and did not say prior to the election, although that adds to the excitement and interest in this Chamber, but the Business Secretary, my right hon. Friend the Member for Twickenham (Vince Cable), was right in predicting a lot of what needed to happen and in encouraging the then Government to take the action that they ultimately took on Northern Rock and in relation to other interventions. The hon. Gentleman was wrong to place the Conservatives and Liberal Democrats together in the previous Parliament as taking the same line on the issue. As a candidate in the last general election, I was particularly keen that we went into it seeking to ensure that the banking sector made a significant contribution to restoring the public finances. I was looking forward to that, and I was very pleased to see the banking levy in the Budget, along with a large number of other measures, such as raising personal allowance and the pension guarantee; the Liberal Democrats were pleased to see those. The hon. Gentleman is right, however, that one thing that came out the day after the Budget was the sense that the banking sector was breathing a sigh of relief.
Clive Efford: I apologise to the hon. Gentleman in advance for going back to what was said during the general election, but it is important in this context. The Liberal Democrats said that they were in favour of a banking levy, as he has just said, but they went further and said that it would be in addition to corporation tax. What we are debating is corporation tax that compensates the banks for the levy, cancelling it out. How can he possibly defend that position?
Andrew George: I am a free-ranging Liberal Democrat Back Bencher and I am quite clear that I want to probe this issue. I tabled my amendment because I want to ensure that we have the facts before we make what I hope will be a balanced decision on this important issue. If the hon. Gentleman does not mind, I will sidestep the tribal arguments.
Geraint Davies (Swansea West) (Lab/Co-op): The hon. Gentleman will be aware that there is a banking levy in the United States. Does he agree that if the banking levy in Britain is offset by the corporation tax reduction, our marketplace will reward bad bankers and encourage them to migrate here? At a time when the rhetoric is about creating a non-financial economy and building new strengths into the economy, we will be encouraging bad practice by rewarding bankers during the horrendous aftermath of what we have all had to witness, the costs of which are being paid by people across the country.
Andrew George: The hon. Gentleman's point is, in a way, a development of an argument that was made earlier, when he was not here, regarding the contrast between the proposed level of the banking levy in the UK and that in the US. That potential osmosis of banking activity and investment may or may not happen. The hon. Member for South Northamptonshire (Andrea Leadsom) argued that having differential rates of corporation tax would be anti-competitive, but, at the same time, Members on the Government Benches are arguing for differential rates in the sense that the banking levy differentiates between the banking sector and all other sectors. One of the purposes of my amendment is to probe the issue further.
It is often only one, two or three days, or possibly even a week, after the Budget announcement that people finally get the opportunity to scrutinise the Red Book and consider the issues and what the financial press have been saying. I have to say that after the Budget, my initial euphoria at the announcement of the banking levy was somewhat dampened when I looked into matters further. On 8 July I received an answer from the Financial Secretary to the Treasury to six questions that I had asked. Among other things, I asked about the discussions that the Treasury had had on this issue; the research that it had commissioned on the impact; the modelling it had done; the criteria that were used to determine the proposed rate of the banking levy; and the estimates that the Department had made of the revenue that would accrue to the Exchequer if the bank levy were set at various incremental rates from 0.05% to 0.15% over the forthcoming period. However, not much information is available in that regard. The Financial Secretary's reply states:
"No external research was commissioned in respect of the bank levy prior to the financial statement. The proposed rate reflects the risks posed by the banking sector to the financial system and wider economy, whilst taking account of current economic circumstances and the UK's competitive position."
"No quantitative estimates have been made of the differential behavioural effects of setting the levy at these other rates. An impact assessment will be published alongside the forthcoming consultation document." -[ Official Report, 8 July 2010; Vol. 513, c. 412-13W.]
"The key behavioural changes that we have assumed will impact on the yield forecasts beyond the pre-behavioural effects are: a reduction in the tax base as a result of the potential incentive for banks to remove liabilities from the levy base; a further switch towards longer-term funding at a similar magnitude
to pre-behavioural estimates; the levy will further reinforce existing incentives for banks to increase their capital positions in anticipation of expected regulatory reforms...in terms of avoidance behaviour we have assumed avoidance activity will decrease the yield by 5 per cent in each year of operation. This assumption is made to allow for appropriate margin in the public finances and does not represent an official estimate of avoidance."
That goes back to an earlier debate. So, despite my having probed this matter by asking a number of questions, we do not have any clear answers on the balancing effects of the reduction in corporation tax against the banking levy.
"all other sectors to which corporation tax applies"?
Does he think it would be helpful if that assessment took into account, for example, the effect of the reduction in capital allowances when making judgments about whether that is a wise course to take?
Andrew George: I am not sure that I am qualified to advise, but I am sure that the hon. Gentleman is right. If the Treasury could be encouraged to adopt this approach, I hope that it would at least ensure that it was sufficiently free-ranging to deal with any of the consequential behavioural activities that might arise as a result of such proposals.
Mr Kevan Jones: Although we are rewarding the banking sector, the proposals on annual investment allowances, which are cut in the Budget from £100,000 to £25,000, will directly affect many small and medium-sized businesses. Surely it is wrong that we are rewarding the people who got us into this mess in the first place, but penalising small businesses, which are getting a double whammy, because they are penalised by the lack of lending from the very institutions that we are rewarding.
Andrew George: Opposition spokesmen and the Treasury Ministers will have heard that intervention, which further embellishes the point that the hon. Gentleman wishes to make. I have no further comments to add, and I look forward to the Minister's response.
Mr Kevan Jones: It is a pleasure to follow the hon. Member for St Ives (Andrew George), who has become a rather lonely figure on the Government Benches. Last week, he was the only Liberal Democrat who was not defending the indefensible, for which I pay him credit. At least he is prepared to come to the Chamber and argue against the measures in the Budget that will affect his very poor community in Cornwall, unlike some of his colleagues, who make comments in the press, but are absent from debates on the Finance Bill. I hope that on at least one or two occasions he will join us in the Lobby to stop the effects of the measure on his constituents and mine, although I know that he feels uncomfortable about voting against the coalition.
In 2008, in the run-up to the general election, bashing the bankers was something that everyone wanted to do. It is strange that we now have a Finance Bill that will reward them. There has been a change in the past few months from the stance that the Deputy Prime Minister adopted on 20 April, when he described bankers as "reckless and greedy" and holding
"a gun to the head"
I support the amendment tabled by my hon. Friend the Member for Nottingham East (Chris Leslie) and by my right hon. Friend the Member for East Ham (Stephen Timms), and the amendment tabled by the hon. Member for St Ives. I wish to deal with the effect on other sectors, which that amendment raises. We have discussed the banking sector a great deal, but it is important to look at other sectors, too. There has been a feeding frenzy, which suggested more or less that the previous Government got things wrong, and that we should be penalising the banking sector. That view was reinforced by the Prime Minister himself who, when he was in opposition, said on Channel 4 in December 2008 that
"more senior bankers should be sent to prison."
On another occasion, he should that they should do voluntary work rather than earn large bonuses in the City. The Conservative party went very quiet at the election, possibly because, as the Deputy Prime Minister said-and I agree with him-it is
"completely in hock to the City".
A number of banks have clearly made huge profits. Barclays, as has been mentioned, had a 92% increase in profits in 2009, and stand at £11.6 billion. The Royal Bank of Scotland-remember that?-paid its investment bankers £1.3 billion in bonuses, despite making just £1 billion in profit. Lloyds has made a profit of up to £1 billion. The proposals in the Finance Bill to reduce corporation tax rewards the banks for the mess they got us into, and do not acknowledge the fact that the individuals in question have been carrying on regardless, even though, as several hon. Members have said, the people who have suffered will have their services cut. The members of the public who are the victims are somehow to blame for the financial mess that we are in.
I do not understand how-well, I can, because they are called Conservatives-in the lead-up to the election, people can speak tough words against the banking sector, but one of the first things they do is to reduce corporation tax and reward the individuals who got us into the mess in the first place. Those same Conservatives-this was raised by my hon. Friend the Member for Nottingham East-opposed all the measures that we took not only to ensure that the banking sector did not collapse but to protect the British economy.
Chris Leslie: My hon. Friend is making an extremely strong case for the amendments. Is it not the case that the Government absolutely have to try their best to pin the deficit on the Labour party, rather than, correctly, on the banking sector? If they took the latter course of action, they would have to increase the banking levy and would not make these changes to corporation tax. They are clearly not prepared to see justice done to those truly responsible for the situation we are in.
That is true. The Government's drive to reduce public spending has very little to do with reducing the deficit. It is more an ideological move to reduce the size of the state. Unfortunately, like a boa constrictor, they have wrapped themselves round the Liberal Democrats, and will slowly squeeze the life out of them in the coming weeks, months and years. That is dawning on the hon. Member for St Ives, who does not want to be the mouse that gets squeezed at the end of the day. Let us hope that he will escape the clutches of the boa
constrictor, which is slowly strangling the lifeblood from the modern Liberal Democrat party. I should not be too sympathetic to the Liberal Democrats, however, because I have spent a lifetime opposing them both in local government and nationally, so their demise might not be an unwelcome consequence of that strategy.
My hon. Friend the Member for Nottingham East has tabled an amendment that suggests that there should be a 28% tax on the profits of the banking industry, as defined by section 2 of the Banking Act 2009. The reason for that is supported very well in the Red Book. Paragraph 1.63 on page 26, which is entitled "Bank levy" says that
"the Government will introduce a levy based on banks' balance sheets from 1 January 2011, intended to encourage the banks to move to less risky funding profiles. The Government believes that the banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy. Final details of the levy will be published later this year, following consultation. The levy will result in a rebalancing of the burden of taxation between banking and other sectors."
We have seen a very strange Finance Bill this year, with a very short preamble to be followed later by major changes. If we are going to have a major change which, in the Government's own words, is going to rebalance
"the burden of taxation between banking and other sectors",
I cannot understand why they are allowing the reduction in corporation tax for this year to apply to the banking sector. To me, it would seem right to wait for whatever the banking levy comes up with. That fits in very well with what my hon. Friend the Member for Nottingham East is proposing.
When people who are going to face higher rates of VAT and other taxation realise that this money is going to be given to the banking sector, they will find it very difficult to understand. Earlier, it was said that the banks will not get back all the money taken off them by the levy-no, but they will get a large portion of it back. [ Interruption. ] I will give way to the hon. Member for West Suffolk (Matthew Hancock) if he wants to intervene. Is he suggesting that they should get the money back pound for pound? If we are talking about rebalancing, it is not much of a rebalancing act to take money away from them at one point and give the majority of it back through the back door.
Matthew Hancock: I thank the hon. Gentleman for inviting me to intervene. He has just admitted something that the hon. Member for Nottingham East (Chris Leslie) could not deny, but did not admit. After this Budget, because of the banking levy, the banks will be paying more tax relative to other sectors of the economy, and that is stated on page 26 of the Red Book. I am very grateful for that important admission.
No, I am sorry, we do not admit that. I am not sure what point the hon. Gentleman is trying to make or whether when he went into the general election in May, he had on his election leaflets, "Yes, we will be tough on banks for the rhetoric in the lead-up to the election, but if we get into power we will do a con trick where we take the money with one hand and gave it back with the other." If, as the hon. Member for St Ives said, we do not know what the figures are, that makes it
worse. We are asking the public to take severe cuts in public services and higher taxation, while at the same time the people who are still being paid high bonuses will get money back. That was reflected in a comment made earlier about the increase in bank share prices that took place once the Budget had been announced.
"Taking 2% off the 2012 tax rate for the five banks listed in the UK would increase profit by £1.16bn, that is it should almost offset all of the banks tax. Overall a good outcome for the banks."
"We'd expect most domestically-orientated banks, for example Lloyds, to be better off after four years than they were pre-budget".
Mr Jones: I am grateful for my hon. Friend's intervention, which completely blows a hole in the myth that this coalition Government are somehow being tough with the banking sector. Not for the first time, we are seeing rhetoric overtaking reality. The spin and presentation that is the hallmark of the Prime Minister is clearly catching up with him now he is in power and able to help his friends in the financial sector.
This policy also has an effect in terms of the banking sector itself, because the banks that are being rewarded are the ones that got us into the mess in the first place. Most people will rightly be horrified by that prospect.
Ian Lucas: Does my hon. Friend agree that what makes it even worse is the fact that the banks are still not lending? We all have examples in our constituencies of businesses that have good business cases but are not securing the lending from these banks that are making massive profits.
Mr Jones: That is a good point. We have heard about banking codes and other ways of forcing the banks into lending, but many small and medium-sized enterprises will be paying for this. They are facing a double whammy, because they are paying for it not only through the reduction in investment allowances but, as my hon. Friend rightly says, through not getting access to the lifeblood of working capital that they need.
"This section shall not come into force until the Treasury has laid before the House of Commons an assessment of the impact of this section on-
(a) the banking sector, and
(b) all other sectors to which corporation tax applies."
That makes an important point about how this cut in corporation tax is being paid for-that is, through the reduction of the annual investment allowances, which from 2010 will fall from £100,000 to £25,000. That will affect a lot of SMEs in the manufacturing sector. One need only look at some of the comments that were made on Budget day. The Engineering Employers Federation, representing manufacturers, said:
"Reducing the corporation tax rate over time was in principle the right course of action. But financing it, in part, by cuts to investment allowances will be a heavy price to pay, especially for smaller companies. It might be a positive signal for large companies, but not for their suppliers."
Even members of the coalition are feeling some concern about the corporation tax plans. The Secretary of State for Business, Innovation and Skills signalled a recognition that they could hinder the interests of British industry when he said in the Financial Times on 14 May:
"The one thing I would want to make sure is that the productive parts of the British economy are helped and not hindered by corporation tax changes...I will certainly make an input to the debate defending the interests of British industry and making sure there are proper incentives to invest."
We are now seeing this time and again in policy areas. The Liberal Democrats can protest all they wish, but they are being overruled on every single occasion, and this is clearly another example of that happening.
The Institute for Fiscal Studies and the EEF have both criticised the Government for reducing investment and capital allowances. The IFS's post-Budget briefing on business and capital taxes dated 23 June said:
"Biggest benefits go to low-investment, high-profit firms-banks and supermarkets rather than manufacturers".
The Budget talked about rejigging the economy away from the public sector and the banking sector into manufacturing, but this will not assist the manufacturing sector in any way at all. One can add to that the pressures that are resulting locally from the abolition of the regional development agencies and the nonsense that is going on with the freezing of grants for business investment. For example, Geka Manufacturing in my constituency, which vitally needs such a grant to secure 130 jobs in Stanley, has had it frozen by the Government. Local manufacturing SMEs are not only being hit by the corporation tax changes in the Budget but affected by the winding up of the RDAs in terms of the small business support that is vital for their investment decisions.
If we are to consider the effect on other sectors, as the hon. Member for St Ives suggested, we need to ensure that that includes not only SMEs but the manufacturing sector. If the Red Book is to be believed, I do not understand how the levy will result in a rebalancing of the burden of taxation between banking and other sectors. Clearly the SME sector will pay dearly, and that is in addition to some of the other matters that will affect it.
The cuts in capital allowances will prevent many SMEs from investing in vital equipment. That is no way to grow the economy in the way that the Government are suggesting. Despite the rhetoric that we heard before the election about bashing the bankers- [Interruption.] I say to my hon. Friend the Member for Glasgow East (Margaret Curran), who looks at me in horror, that I said "Bashing the bankers". Instead, the Government are going to give back to banks the money that they will take from the levy. As my hon. Friend the Member for Nottingham East pointed out, it would have been right to wait for the results of the 1 January review, whenever they come, before introducing the decrease for the banks.
I ask hon. Members to support the amendment, which makes sense. Once the public recognise what the Con-Dem Government are doing, they will be disappointed that the Government are basically letting the banks off scot-free.
Sajid Javid: I shall keep my contribution brief. I congratulate my hon. Friend the Member for Lincoln (Karl McCartney) on making a very good maiden speech, and I draw hon. Members' attention to my entry in the declaration of Members' interests.
If we are to address the amendments properly and consider the changes to corporation tax that the Government have proposed not just for banks but for all companies, we cannot get away from the serious mess that the economy is in. As Members have heard on a number of occasions, as an inheritance from the previous Government, the Government are borrowing some £3 billion a week and our budget deficit is £155 billion, which is 12% of GDP-the highest in all G7 countries and the highest in Europe.
To address the issue, we need to consider how to restore growth to the economy and start paying back our debt. That will not just be through the changes in the Budget, such as raising extra taxes and cutting spending, but through restoring growth in our economy. That is at the heart of the changes to taxation, especially corporation tax, put forward in the Budget. The gradual reduction of corporation tax from 28 to 24% is all about giving business people and entrepreneurs incentives once again to take the risks that are always involved in starting and running businesses. It is such growth that will rejuvenate our economy and create the employment that we need to push up GDP and help us repay the debt that we have inherited.
Mr Kevan Jones: I know that the hon. Gentleman is a banker, and therefore possibly a bit detached from the SME sector and others, but how can cutting the investment allowances of SMEs and rewarding bankers with cuts in corporation tax make sense as a way to generate and grow new businesses?
Sajid Javid: I am not detached from small business, because my father was a small business man, I grew up in a small business and I know what it takes to make a small business grow. As well as hard work, it takes low taxes, less regulation and a desire for Government to get out of the way of business people. That is what this Government are desperately trying to restore after 13 years of the opposite.
To return to banks and how to get our economy going, as well as restoring incentives we need to get banks lending again. That was the only vaguely accurate
or factual point that I could pick up from the speech of the hon. Member for North Durham (Mr Jones). If we are to do that, we need to understand why they are not lending at the moment, and the major reason is a lack of capital for British banks. Banks across the world face the same problem. As a Government, we need to work out a way to restore the capital positions of banks so that they are willing to take the risks that are a necessary part of making lending decisions.
There are only three ways for banks to try to raise capital. The first is through the free capital markets, but today those markets are effectively closed to virtually all banks. Prior to the financial crisis, there were many instruments that banks could use to try to raise capital, including types of subordinated debt, hybrid equity instruments, tier 1 and 2 securities and common equity. Not only are those markets closed to banks today, but if Opposition Members have watched carefully what has happened in the financial markets over the past three or four months, they will know that banks cannot even raise senior debt effectively, let alone capital. Banks throughout Europe-especially those on the continent, but British banks included-are in many cases unable to raise that type of debt, let alone equity. The capital markets as an avenue to raise capital are closed.
The second option is for the Government themselves to give capital to banks. After the £70 billion-odd injection made by the previous Government, I do not believe that any Member of any party is advocating the Government injecting more capital into the banking system.
There is one final way left, which is to allow banks to hold on to some of their profits, if they are in a position to generate profits. No matter what Opposition Members would like to think, unless we create the conditions inside a bank that make it want to lend, there is no way to force it to do so.
Stewart Hosie: Technically, those are the three ways in which capital can be raised. Is the hon. Gentleman making a case, then, to oppose the Government's bank levy, which would keep an extra £2 billion in the banks and perhaps allow an extra £40 billion of lending?
Sajid Javid: No, not at all. We have to separate the two issues. The levy is about working towards a way of taking something back from the banks to build an insurance-type system, so that if things such as happened during the financial crisis happen again, the Government will have a mechanism to withdraw some capital from the banks. However, if we are to cut corporation tax on all companies, it would be madness to leave out the banks. They need to be allowed to build capital, not just for the sake of getting them lending again by putting them in a comfortable enough position to make that decision, but because of the impact on their competitiveness.
Whether we like it or not, our financial sector is a huge part of our economy, and it is much bigger as a percentage of GDP than that of many of our international competitors, even after the financial crisis. It accounts for thousands of jobs up and down the country, not just in the City but probably in each and every constituency.
If we are to restore some health to our financial sector, it makes no sense to make it uncompetitive when compared with other sectors in our economy and with other countries. The banking and financing sector is one of the most mobile of all our economic sectors. If we have differentiated tax rates for one sector of the economy compared with others, that will only make matters worse. I therefore oppose the amendments.
Stephen Timms: I am grateful to the Exchequer Secretary for his kind remarks on my return to the Dispatch Box. He, along with many Members of all parties, was good enough to write to me after I was attacked and injured. I greatly appreciated all the messages of good will that I received, and I would like to put on record my thanks to all those from across the House who got in touch; I think that those messages have accelerated my recovery. I am grateful to the Exchequer Secretary for his words.
My hon. Friend the Member for Nottingham East (Chris Leslie), in an excellent speech when moving the amendment, raised some important points. I was also encouraged by the comments of the hon. Member for St Ives (Andrew George). I am pleased that he described himself as free ranging, and I hope that his freedom of ranging includes joining us in the Lobby. I am particularly keen to have the opportunity to vote on amendment 34.
The Chancellor told us in his Budget speech that he was being tough on the banks. Listening to some Conservative Members' speeches, I wonder whether they heard that part of his speech. He explained rightly:
"The failures of the banks imposed a huge cost on the rest of society, so I believe that it is fair and right that in future banks should make a more appropriate contribution, reflecting the many risks that they generate."
At that stage, it could well be that the Chancellor's words were consistent with the comment in the Red Book, to which the hon. Member for West Suffolk (Matthew Hancock) drew our attention. It states:
"The levy will result in a rebalancing of the burden of taxation between banking and other sectors."
Who knows to what a "rebalancing of the burden" amounts? It could mean something pathetic and small. However, the Chancellor went further in his Budget speech. He said that the introduction of the bank levy would entail
"a greater contribution from the banking sector-one that far outweighs any benefit that it will receive from the lower tax rates that I have just announced." -[ Official Report, 22 June 2010; Vol. 512, c. 175.]
The Chancellor told the House that the cost of levy to the banks would "far outweigh" any benefit that the banking sector received. Listening to the speeches of the hon. Member for West Suffolk and the hon. Member for Bromsgrove (Sajid Javid), I do not think that they heard that part of the Chancellor's speech.
My hon. Friends the Members for Nottingham East and for North Durham (Mr Jones) queried whether the levy, in so far as we know about it-the hon. Member for St Ives told us something about it-would fulfil the Chancellor's words and far outweigh any benefits that the banks receive from the reduction of corporation tax. It is odd, as my hon. Friend the Member for Nottingham East pointed out, that for all the appearance of toughness in the Chancellor's speech, bank shares actually went up after his announcement.
Matthew Hancock: The right hon. Gentleman may have misheard my earlier comment. Can he be surprised about the Chancellor's comments when page 101 of the Red Book states that the bank levy raises £2.5 billion and the corporation tax cut in 2013-14 will cost £700 million? It is therefore no surprise that the bank levy raises more than the cut in corporation tax to the banks. That is precisely the point that I made earlier.
Stephen Timms: I am not sure about the figure of £700 million. I hope that the hon. Gentleman is not telling us that the reduction in corporation tax will decrease that tax take by £700 million. That is incorrect-perhaps he was citing a partial figure. However, that is why we need a report. I would genuinely like to know the impact specifically on the banking sector of a four percentage point reduction-it was not long ago that the banks accounted for a quarter of all the corporation tax receipts that the Exchequer collected-compared with the £2 billion cost of the levy.
Andrew George: The Red Book costings on page 19, in table 3 refer to the yield from the bank levy across fiscal years. In 2011-12, the figure is £1.15 billion, and in 2012-13, it is £2.32 billion. It is important to clarify that for the record.
Stephen Timms: I am grateful for that clarification. However, my hon. Friend the Member for Nottingham East described the background, pointing out the rather surprising fact that, after the tough talk, banking shares rose. He cited some of the analysts and mentioned the note from BNP Paribas, entitled
"UK Bank Levy: Bark Worse Than Its Bite?"
"As things turned out for all the pre-election vitriol aimed at the UK banking system, the impact of today's measures appears materially lighter than expected."
The ratings agency Fitch said the levy would have "no impact" on the ratings of any UK bank. FT.com reported ideas being developed by the Swiss bank, UBS, to reduce the impact of the levy through some careful so-called "balance sheet management." My hon. Friend the Member for North Durham pointed out that the banking levy is supposed to be based on bank balance sheets, so I suppose that it is no surprise that organisations such as UBS are thinking about what they can do to manage to balance sheets in such a way as to reduce the impact of the levy. That takes us back to our earlier debate on avoidance and evasion, and why legislation often turns out to be more complex than people originally intend: it has to address such behaviour.
My hon. Friend the Member for Nottingham East also rightly made the point that several banking analysts were quoted after the Budget as saying that the cut in corporation tax from 28% to 24% would "negate" the impact of the levy on bank profitability. We need to know the truth of the matter, and that is why the amendment calls for a report. It is certain that the amount payable under the levy will be offset-at least in part and possibly wholly-for banks making a profit by the reduction in corporation tax in the next few years. It is entirely plausible for the amount due under the levy to be more than offset for some banks-possibly for all banks-by the reduction in corporation tax under the clause, together with reductions over the next few years.
The Chancellor said in his Budget speech that the contribution under the new levy would "far outweigh" the benefit from corporation tax reduction, but to put it kindly, it is by no means clear that that will be the case. I would not favour a different, higher rate of corporation tax for the banks. That would raise several difficulties, but given that the Chancellor has made clear his view that the banks should make a larger contribution in the light of what has happened, that the increase in the tax they bear should "far" outweigh the reductions they enjoy-of which the clause outlines the first-I hope that the Exchequer Secretary will agree that a report along the lines suggested in the amendment, and in the strikingly similar amendment that the hon. Member for St Ives tabled, would be a valuable contribution to transparency and to understanding the impact of the Budget measures. I also hope that the Minister sets out as much information as possible to illuminate the impact of the corporation tax cut on the banks in comparison with the bank levy.
The nub of the issue is this: can the Minister substantiate the Chancellor's claim that the impact of the bank levy will "far outweigh" the impact of lower corporation tax? If the Minister is unable to accept amendment 34, I should like to press it to a Division.
Matthew Hancock: I shall keep this contribution extremely brief, given the hour. I was surprised by some of the arguments made by Opposition Members. I am not all that surprised that the right hon. Member for East Ham (Stephen Timms), the shadow Minister, does not support amendment 21, which was moved by the hon. Member for Nottingham East (Chris Leslie), not least because before the election he said we would need any bank levy to be globally agreed. Indeed, the current shadow Chancellor, the right hon. Member for Edinburgh South West (Mr Darling), said:
"Countries can't go it alone. It is very important that we do this internationally".
Conservatives and Liberal Democrats campaigned during the election for a unilateral bank levy, no matter what happened in the rest of the world, so it is not surprising that we do not listen to Opposition Members who argue that they are now in favour of one. They have performed a U-turn in an extremely short time.
Another point I want to make is that the shadow Minister said that his party's policy is that corporation tax should be the lowest in the G7, but Italy's corporation tax is now 27.5% and Canada's is set to be reduced to 27.2%, which means that Labour's policy is to reduce corporation tax, including on the banks, as he just confirmed, without the bank levy. A bank levy would more than offset the corporation tax reductions, so Labour Members are in all sorts of a tumble on this.
Everybody will note the difference between the Government, who argued before the election that we needed a unilateral bank levy and who are delivering it within seven weeks, and Labour Members, who argued that we should not have a bank levy, before performing a U-turn within 10 weeks.
"main rate of corporation tax for financial year 2011...at 28%"
The proposals are helpful. Understandably, there is a frustration with the banking sector and a desire that it pay a fair share. The Government share that belief. We think that banks should make a fair contribution in respect of the risk that they pose for the UK financial system, which we have seen in the past few years. That is exactly why we announced in the Budget the introduction of a bank levy from 1 January 2011. Tomorrow, my hon. Friend the Financial Secretary to the Treasury will announce a public consultation with a view to implementing the levy on that date, and the measure will be included in next year's Finance Bill.
The levy is a surgical approach, intended to encourage banks to move to less risky funding profiles, and a contribution reflective of economic risk. A tax based simply on profits, such as corporation tax, is not related to risk and will not create the behavioural effect that we believe the banking levy will achieve.
The overall impact on banks of the proposed reduction in corporation tax depends on a number of factors, and I will provide some details in a moment. None the less, I should like to put it on record that it is entirely right that hon. Members ask such questions. My hon. Friend the Member for St Ives (Andrew George) made a thoughtful and probing speech, and I was also interested to hear the comments of the right hon. Member for East Ham (Stephen Timms). However, I wondered, given his concern about the impact on the banking sector, precisely which angle he was coming from. Those who remember the debate prior to the general election will recall, for example, the remarks of the then Chancellor, the right hon. Member for Edinburgh South West (Mr Darling) who, in an interview on "The Andrew Marr Show" on 21 March, argued against proposals for a unilateral bank levy, saying that he thought it could work only if there were international agreement, as my hon. Friend the Member for West Suffolk (Matthew Hancock) said.
Of the Conservatives' policy of introducing a unilateral bank levy, which was also a policy of the Liberal Democrats, the then Chancellor said that we were taking a hell of a risk, given that the banking industry employs more than 1 million people in this country. He seemed to be somewhat concerned that we were going to far and too hard. I do not know whether the shadow Minister is worried because the proposals are too tough on the banks, or because they are not tough enough.
Chris Leslie: I thank the Minister at least for that recognition, but I wonder whether he could take some time to justify the fact that the proposed banking levy is so low in relation to, for example, the American arrangement. Does he understand the incredulity and frustration that banks should be given this cashback bonus in the form of the corporation tax cut at this particular time? I want to hear him justify that.
Mr Gauke: Let me turn to the heart of this matter, because we have had quite a lengthy debate on it. We have heard concerns that the corporation tax would cancel out the effect of the bank levy or offset it, and that there would be a cashback bonus, to use the hon. Gentleman's phrase. The shadow Minister asked whether the banking levy will "far outweigh" the benefit to banks of the cut in corporation tax. Perhaps the easiest thing I can do in response-there is much more one could say about corporation tax, and I will in future debates-is to refer to my answer to the right hon. Member for Holborn and St Pancras (Frank Dobson), who asked the
"Chancellor of the Exchequer what estimate he has made of the revenue from the financial services sector to be foregone by the Exchequer as a result of the proposed reduction in corporation tax in each financial year to 2015-16."-[ Official Report, 1 July 2010; Vol. 512, c. 610W.]
We have the numbers only until 2014-15, and I should point out that the financial services sector is somewhat broader than just banks. It includes insurance, pension funds and auxiliary financial services, so the numbers refer to the corporation tax cost not only for banks, but for other financial services. However, I will compare those with the bank levy yield. For 2011-12, the corporation tax costs will be £0.1 billion, whereas the bank levy yield will be £1.15 billion; for 2012-13, corporation tax costs will be £0.2 billion, compared with a bank levy yield of £2.32 billion; for 2013-14, corporation tax costs will be £0.3 billion, compared with a £2.5 billion additional yield from the bank levy; and for 2014-15, the corporation tax costs will be £0.4 billion, compared with a bank levy yield of £2.4 billion. Even in this last year, where the differential is at its narrowest, we can see that it has not been cancelled out or offset. There is no cashback, and the banks are not quids in as a consequence.
The test that the shadow Minister gave was whether the bank levy yield far outweighs the benefit of the corporation tax change, and the answer is clearly yes. Given that the proposal for a differential corporation tax rate in amendment No. 21 is not supported by the Front Benchers of the party to which the hon. for Nottingham East (Chris Leslie) belongs, I urge him to withdraw it.
Chris Leslie: The Minister is saying that £400 million is a small amount to be given in cashback to the banks in this corporation tax giveaway, but that sum could offset the necessity to scrap the health in pregnancy grant. It could offset the need to reduce the maternity allowance to just the first child. Those are important for users of public services, and he surely understands that.
Mr Gauke: Our aim was to rebalance the tax system. We are requiring the banking sector to pay at least £2 billion more in tax as a consequence of these proposals. That is not a minor matter. Other sectors, including manufacturing, will benefit from the reduction in corporation tax, but the banks will not benefit because we are introducing the bank levy. I urge the hon. Gentleman to withdraw amendment No. 21, given that his Front Benchers recognise the difficulties of a separate corporation tax rate for banks. I believe that I have satisfied the tests set out by the right hon. Member for East Ham, because the bank levy yield far outweighs the benefits of the corporation tax for banks.
Andrew George: The corollary to the corporation tax cut is the banking levy, but although I respect the information that my hon. Friend has given in his reply so far, he has not yet addressed himself to the criteria for the setting of the banking levy and why it has been set at the proposed level- [ Interruption. ]
Mr Gauke: Beginning tomorrow, we will consult on the bank levy. The intention is to find a means of discouraging risk, and that is why the targeted approach of the bank levy is appropriate. It will raise additional revenue, and it is right to do so. We think that we have the balance right in raising additional revenue while enabling banks to lend more, and we are also taking steps to encourage that further.
Chris Leslie: Having heard what the Minister had to say, I am not convinced that he makes a case for giving away £400 million to the banks, especially as Members on the other side of the House constantly ask us where the money would come from and how we would reduce the deficit. That sum would offset the need to abolish the health in pregnancy grant. It would offset the need to reduce to the CPI the indexation of housing benefit. It would offset the need to scrap the maternity allowance for second children, and so on. I hope that my hon. Friends will remember the £400 million giveaway to the banks in this corporation tax reduction.
I recognise that the consensus in the debate is that it is important to test the right amendment this evening. I therefore wish to withdraw my amendment, but I hope that one of the amendments that would require the Treasury to justify and assess the impact of the corporation tax change on the banks will be tested. That is the least we should be doing.
It is a puzzling feature of the Budget that, on the one hand, the Chancellor is gambling on a big increase in investment, and basing his Budget arithmetic on the belief that investment will grow in each of the next three years at a rate that has been achieved in only one year in
the last 40. That is an heroic assumption about investment growth, and if it proves to be untrue, the Budget gamble will fail. At the same time as banking on that huge increase in investment, he has announced that he will drastically cut the incentives for investment. The rates of capital allowances will be reduced from 20% to 18%, and the annual investment allowance will be cut by three quarters, from £100,000 to just £25,000. It is hard to see how the forecast growth in investment can be reconciled with such a big cut in investment allowances. The Budget was billed as Britain being open for business, yet it will clearly reduce the prospects for growth, as the Office for Business Responsibility confirmed in its two projections, before and after the Budget. Indeed, the International Monetary Fund, in its projections last week, also downgraded its growth forecast for the UK economy as a result of the Budget.
We have here a collision of conflicting objectives, which we highlight in the amendment. We propose a lower rate of corporation tax for companies that lose out from the reduction of allowances above a certain threshold. The Institute for Fiscal Studies pointed out before the election that the losers as a result of the Conservatives' approach would be those making big investments and earning modest profits, notably
"in the manufacturing and transport sectors",
We do not yet know what the legislation on allowances will say. The Chancellor said in his Budget speech that the change in the rate of capital allowances and the lower annual investment allowance would not take effect until 2012. Will the Minister confirm that the coalition Government are planning no reduction at all in investment allowances in the current financial year? Will the changes announced by the Chancellor in the Budget be in the Finance Bill later this year or will they be delayed until next year's Finance Bill? I hope that the Minister will also comment on the principles underlying our amendment. How can it make sense to reduce so drastically the incentives for investment in a period in which the Budget depends so heavily on an unprecedentedly large and sustained increase in investment?
Mr Gauke: As I have already explained, the Chancellor or the Exchequer set out a business tax package in the Budget that included rate cuts and reductions in allowances that are good for business and growth overall. Amendment 49 proposes that clause 1 be amended to reduce the main rate of corporation tax to 26% for those companies whose tax bill will increase by more than 1% as a result of the reduction in investment allowances. That is a somewhat complex mechanism, but it provides an opportunity to raise the matter of capital allowances.
As part of a package to improve the UK's competitiveness, it was announced that from April 2012 there would be reductions in the rates of writing-down allowances for plant and machinery and a reduction in the annual investment allowance. The Government will reduce the main rate of corporation tax to 26% that year-2012-and by that reduction, alongside changes to allowances, we will achieve the results that the amendment seeks. Furthermore, by not implementing the changes to allowances for two years, but reducing corporation tax rates next year, we are giving companies a full year
to benefit from the reductions in rates, alongside current levels of allowances. Further reductions in the main rate of corporation tax follow in later years and capital allowances remain broadly in line with average rates of economic depreciation. To answer the shadow Minister's questions, no changes are made to the so-called investment allowances in this Finance Bill and none is planned for the next financial year.
Barry Gardiner (Brent North) (Lab): Why does the Minister believe that, if the Budget begins to work and we see businesses begin to pull the country out of recession, that is the right time for the Government to take away the incentive for further investment in business growth? That seems paradoxical to us all and to damage the very prospects of the recovery that he claims he wants to aid.
Mr Gauke: As I said a moment ago, the changes to capital allowances will take effect from 2012, and we believe that there is a substantial benefit for the UK economy in reducing the corporation tax rate. Indeed, it is a direction of travel that our predecessors followed when they reduced the rate from 30% to 28%, but we do not think that that went far enough. The point was raised in earlier debates that the UK has lost its competitive advantage in having a relatively low rate of corporation tax, as a number of other countries have cut their corporation tax rates much further than we have over the last 13 years. We believe that the lower rate sends a very clear signal that Britain is open for business and it is a demonstration of the direction of travel in which we are going. Assessment of the impact of Budget measures on investment over the next few years suggests an increase in investment of £13 billion.
The Budget thus provides a set of proposals and a set of reforms to corporation tax that will encourage further investment. As I say, it is a sign that Britain is open for business and a sign to investors and businesses throughout the world that the UK is a good place in which to do business. We believe that the package as a whole is well balanced and that it will aid a private sector recovery, partly funded through reforms to capital allowances and partly through the bank levy, as we debated earlier. Legislation is not required for the changes in capital allowances in this Finance Bill or indeed in next year's, but we have set out a clear sense of direction that has been welcomed by business groups as a whole. We therefore urge the shadow Minister not to press the rather complicated amendment 49. It will not make any difference, because we will legislate to this effect in any event-without the complicated mechanism in the amendment. I urge him to withdraw it.
Stephen Timms: I am disappointed by that response. I am disappointed that my hon. Friend the Member for Brent North (Barry Gardiner) did not get an answer to the telling point that he put to the Minister. There is a real issue about how this large increase in investment is supposed to be achieved at exactly the time that incentives for investment are being reduced. Nevertheless, I shall not press the amendment to the vote. I beg to ask leave to withdraw the amendment.
Stephen Timms: We have had useful and important debates about the amendments to clause 1, but some important points remain to be discussed. I have no wish to oppose the clause, and I will not encourage my hon Friends to vote against it. However, we need to ask some significant questions, in particular about why the clause does not contain items that we might have expected.
Small companies will face a worrying and uncertain time over the next few months, and we would all sign up to the proposition that they are the lifeblood of the UK economy, yet the Bill does nothing to help them. The Budget did not do much either, but at least it included the 1 percentage point reduction in corporation tax. Inexplicably, that measure has been omitted from the Bill. Will the Minister tell us why? What was the basis for selecting the measures in the Bill? Is the Bill's purpose simply to ensure that the increase in VAT is legislated for before Liberal Democrat Members have the opportunity over the summer to learn what their constituents think about it, or perhaps before their party conference has a chance to express a view in September? Were the other measures included just to make up the numbers and pad out the Bill? Alternatively, is there another criterion-urgency, presumably-for what is included in or omitted from the Bill? If so, why was it urgent to legislate for the large companies rate but not the small companies rate? The more we look at the Bill, the more it appears to be a rag-bag of measures to give an impression of substance, when in reality it is all about railroading the VAT increase through Parliament before the Liberal Democrats wake up.
"Fiscal consolidation, both in the UK and the euro area, will restrict growth".
The IMF's startling post-Budget growth downgrade for the UK last week made the same point. The Daily Telegraph expressed it bluntly on Friday, "UK austerity drive threatens to snuff out recovery, IMF warns", and went on to summarise the IMF message thus:
"Britain's fledgling recovery may be nipped in the bud by the savage cuts".
A lot of other evidence points in the same direction. Last Monday, the monthly report on business confidence showed that, far from the Budget placing an "Open for business" sign above Great Britain plc as the Chancellor had hoped, business confidence suffered the biggest one-month fall ever recorded in June, the month in which the Budget announcements were made. With confidence on a sharp downward trajectory, the truth is that the Chancellor is taking an enormous and unwarranted risk with the UK economic recovery.
Our case is clear: in taking such an enormous and unjustified risk with the recovery, the Budget judgment was wrong. Businesses and their employees, as well as those who work in the public sector, will pay the price. As was mentioned earlier, small manufacturing firms will be hit particularly hard by the Budget, as the Engineering Employers Federation pointed out in its Budget response, to which my hon. Friend the Member for North Durham (Mr Jones) referred. The EEF said:
"Reducing the corporation tax rate over time was in principle the right course of action. But financing it, in part, by cuts to investment allowances will be a heavy price to pay, especially for smaller companies."
The Budget significantly reduces the incentives for investment by small and medium-sized enterprises. I shall say more about that in a moment. Large companies will benefit from the proposed reduction in the corporation tax rate from 28% to 24% over the next four years, but small companies will not. They have been promised a reduction of only 1 percentage point in 2011, from 21% to 20%, and, inexplicably, even that has been omitted from the Bill.
It is perfectly true-as the Minister may well remind me-that before the election we proposed an increase in the small companies rate of corporation tax, rather than the decrease that I am now suggesting. However, we did not propose, as the Budget has, that the annual investment allowance should be cut by three quarters, from £100,000 to £25,000. We did not propose a cut in the rate of capital allowances either.
Now that we appear to have a firm commitment from the Government to reducing the main rate of corporation tax by four percentage points-although for some reason only one of the four is in the Bill, which I also wish to query-I hope that the Minister will be able to hold out the prospect of further reductions for small companies as well, beyond the 1 percentage point reduction announced in the Budget and, for some reason, not included in the Bill. I hope that the Minister can give some comfort to small companies that face great anxieties about what will happen over the next couple of years.
Let me return to the other puzzling omission. Given that the Chancellor made a great show of providing certainty by announcing annual reductions in the rate of corporation tax up to 2014, why does the Bill provide for only one year's reduction, rather than all four? When I queried that on Second Reading, the Chief Secretary told me:
"the practice in Finance Bills is to legislate one at a time for the changes that are needed in the following years."
I should be interested to know from the Exchequer Secretary the basis for that claim. When I queried it on Second Reading, the Chief Secretary-prompted, I believe, by the Economic Secretary to the Treasury, the hon. Member for Putney (Justine Greening), who was sitting next to him and who will respond to the debate tonight-told me that there were
"various technical reasons... which the Exchequer Secretary will explain in his closing speech. The basic point is that our method is more business-friendly."-[ Official Report, 6 July 2010; Vol. 513, c. 207-8.]
The Exchequer Secretary did not explain that in his closing speech. As I was not present for his closing speech, I will not complain about that, but I do ask him to explain it to us today. How can the Government's method be "more business-friendly"? Certainty is key here, but in the absence of legislation there can be no certainty.
As I said on Second Reading, the precedent is very clear. Nigel Lawson, as Chancellor, announced a series of four reductions in the rate of corporation tax, from
50% down to 35%, and they were all legislated for in clause 18 of the Finance Act 1984. As far as I know, there is no other precedent for four successive annual reductions in the rate of corporation tax, so what the Chief Secretary said about practice in Finance Bills was clearly incorrect.
The debate in the House on 1 May 1984 makes interesting reading. Roy Hattersley pointed out that because the reduction in the rate was being funded by allowance cuts, there would be an increase in the tax paid by manufacturers. My hon. Friend the Member for Great Grimsby (Austin Mitchell) made a notable contribution. Speaking for the then Government, the Exchequer Secretary's predecessor John Moore explained that
"The clause proposes a four-year programme of reductions in the main rate of corporation tax."-[ Official Report, 1 May 1984; Vol. 59, c. 274.]
So it is certainly not the case that the practice is to legislate a year at a time. I have been unable to find any complaints in 1984 that it was contrary to the interests of business to legislate in one go, and I find it hard to imagine that anyone would have complained. It seems much more likely that the Government simply could not be bothered to produce for the Bill the slightly longer legislation required alongside the very small clause to implement the reduction in the small companies rate of corporation tax because they were making such a headlong rush to get the all-important VAT rise on to the statute book before the summer.
One suggestion has been made for legislating only for the first year, namely the impact on deferred tax. I shall listen with great interest to the Minister's answer as to whether it is the right explanation. Accounting standards require the declaration of deferred tax assets or liabilities at the rate that has been "substantively enacted" by the date at which a balance sheet is compiled. For companies with large losses to offset for tax purposes against their future profits, a reduction in the rate of corporation tax would require them to reduce the value of their deferred tax assets on the balance sheet. For some banks that could be a very large number, which is why, to refer back to what the Minister was saying, their corporation tax for the next few years will be a lot lower than would otherwise have been the case.
The Minister may therefore be balancing the advantages of providing certainty for inward investors-of showing that Britain is open for business-and the benefits of legislating now for the next four years and of supporting manufacturers against the headache that could be caused for some banks. When the Chief Secretary says it is more business-friendly to do this one year at a time, perhaps he just means that it is helping out some banks.
Stewart Hosie: I am listening carefully to the right hon. Gentleman's comments, and I rise to seek the following clarification. Am I right that it was in fact the previous Government who-sensibly-allowed unused tax assets to pay, at least in part, for the asset protection scheme to protect all of us against non-performing and toxic assets?
Indeed, and I am certainly not arguing against the long-established mechanism allowing tax losses to be used in that way. I am simply querying, just as a matter of fact, whether that is the reason why this
Bill only makes one of the four promised year's reductions in corporation tax. I have certainly not come across any other suggestions as to why the Bill is doing that in that way. People who have deferred tax liabilities-as opposed to the banks having deferred tax credits-would benefit from early enactment of the lower rate. Typically, that is people such as manufacturers. If that is the reason, this is, sadly, another case of helping out the banks at the expense of manufacturers.
"to provide better certainty for businesses"
"as soon as possible for the proposed reductions in the main rate of corporation tax".
When will the Government legislate for the remaining reductions? Will they do so in the Finance Bill that we have been promised in the autumn? Are we really going to have to wait for four years of Finance Bills to complete these reductions, as the Chief Secretary suggested, or can we look forward to legislation in the Finance Bill No. 3 of 2010? If certainty for business is the aim, it surely must be done this year at least.
When do the Government intend to introduce their changes to the rate of capital allowances and the annual investment allowance? I listened carefully to what the Minister said about that and perhaps I missed the point but I did not quite grasp which piece of legislation he envisaged those changes being made in. Will they be in the further Finance Bill in the autumn or will they await next year's Bill? By that time, I suppose we might have some further data on the actual change in business investment in the next 12 months and how that compares with the change on which the Chancellor is pinning his Budget arithmetic.
There is something else about which the Bill is silent but on which we might have expected some change: the differential compared with the main rate of corporation tax inside the North sea ring fence. The ring fence for North sea operations rightly prevents taxable profits from oil and gas extraction in the UK and the UK continental shelf from being reduced by losses from other activities or by excessive interest payments. The ring-fenced corporation tax rate was the same as the main corporation tax rate, until the previous Government reduced the main rate from 30% to 28% from 1 April 2008; we left the ring-fenced rate at 30%. Now that the main rate has been announced as falling to 24%, do the Government intend to leave the ring-fenced rate at 30% throughout the next four years, thus trebling the differential from two to six percentage points or is a reduction to the ring-fenced rate being considered, perhaps along with some other changes to the fiscal regime for oil and gas extraction?
Let me finish by asking one further question. As I reminded the House, it was the previous Government's explicit aim that corporation tax in the UK should be the lowest among the G7 economies, and we succeeded in achieving that aim. That is one of the reasons why the UK has been so successful over the past decade in attracting so much overseas investment into our economy. Do the present Government intend to ensure that we continue to have the lowest rate of corporation tax in the G7? Will that commitment be maintained?
As I explained at the outset of my remarks, it is not my aim to oppose this clause, but I hope that the Minister will provide some explanation for the omissions I have highlighted, and in particular give an account of why the remaining reductions in the rate of corporation tax have been delayed, and say when the legislation for them will be introduced.
Chris Leslie: I am grateful, Mr Benton, that you have seen fit to allow a stand part debate on this important clause, especially at a time when every measure in the Finance Bill and the Budget as enacted needs sufficient scrutiny to ensure that the general public can have confidence in the fact that any revenue forgone is forgone for a good purpose. At a time when our public services are threatened and look set to be cut so significantly, it is very important that, if this country is to give away potential yield through changes such as the corporation tax, this is done for the right reasons.
It is important to note that we want a healthy economy and for our companies, by and large, to be profitable and doing well. I do not, of course, want to revisit in too much detail our debate on the banking sector, but I point out that it is necessary to have an environment in which our companies can be competitive on a global scale, and to ensure that they can succeed. While we want companies to be profitable, we also want them to reinvest a lot of those profits, so that they can improve the capital stock, improve the ingenuity and enterprising innovation that goes on within such companies, and have a longer-term profitability trajectory. It is for those reasons that I am perplexed by the drastic reduction in capital allowances, to just £25,000. Manufacturing companies-the institutions that produce the actual goods we can sell and export abroad-may well be disadvantaged relative to other sectors of the economy.
Barry Gardiner: Is my hon. Friend aware of the predicated growth, contained in the Government's figures, of the private sector generation of income into the Treasury over the next five years, and does he believe that that is compatible with the reduction in capital allowances that has been announced? In particular, would he care to comment on the timing of that reduction at precisely the moment when-if the Chancellor's figures were to work out-the economy would be about to see the largest part of its expansion?
Chris Leslie: I am very disturbed that the Chancellor's measures are coming at a time when our manufacturing industries are potentially just finding their feet and beginning to think about turning the corner out of the recession. Taking away some of those crucial allowances will not only affect those niche companies, which will, in turn, be the producers of the tool manufacturing equipment and the entrepreneurs whose work is so necessary and has perhaps been funded and supported by those allowances, but will, in a general context, potentially reduce the competitiveness of that particular sector of the economy.
It is a more general matter of debate whether some sectors of the economy benefit more than others from the corporation tax change. As I have said in previous debates, I am not sure whether my constituents would feel that the oil companies, the utilities and the banking sector should also have the gains from this corporation
tax reduction. As I said in our debate some time ago, I am not convinced that now is the time to be giving away a £400 million windfall to the banking sector in this corporation tax cut.
Jon Trickett (Hemsworth) (Lab): I am listening carefully to my hon. Friend's argument. Has not the largest single factor in this recession been, in effect, a private sector investment strike? I am talking about the fact that £6 out of every £10 of the fall in gross domestic product is attributable to a single factor, which is that the private sector some time ago decided not to invest. There are all sorts of reasons why that should be, one of which is the failure of the banks to provide the capitalisation to allow those companies to invest-that touches precisely on the point that he was just making. Given that level of inactivity in investment, are we not facing both an increasingly inefficient private sector and, as has been said, the cuts in the allowances, which will make things worse?
Chris Leslie: Indeed that is the case. I know that my hon. Friend has done a great deal of work on some of the analysis of these points. There are arguments to be made for reducing corporation tax to boost competitiveness, but clearly that is a way of encouraging profit-taking and, in turn, the removal of money from companies in the form of dividends. That, of course, benefits us all in some ways, because we are all members of pension funds and so on. However, if it is indeed the Government's particular choice at this point in time, as we are coming out of a recession, to try to encourage companies to focus on their long-term profitability, might it not be a better strategy, in some respects, to retain some of those capital allowances to ensure that we can fix our banks such that they are able to supply much-needed credit to small companies, in particular, and to the wider industries across the board?
Barry Gardiner: My hon. Friend rightly talks about the need for companies to pay dividends and the benefits of that for all of us in society, in particular pension fund holders. Does he appreciate that the portfolio of shares that our pension funds all hold can also increase in value by incentivising companies to reinvest in themselves? That happens by the increase in value of the company through the increased investment that it has made in itself. Is that not a more efficient way of doing things than paying out dividends, which may simply go into private pockets for consumption?
Chris Leslie: That is a moot point and I would not go to the wall to argue against reducing corporation tax in this way. All I am suggesting is that there are other strategies that I do not feel that the Government have properly explored. We ought to be focused on growth and on how business can contribute to it. Let us not forget that we have such a deficit situation in this country not because of so-called excessive public service consumption but because tax receipts have been so depressed. That has partly been caused by the credit crunch and the lack of credit available, which provoked the private sector investment strike that has been mentioned by my hon. Friend the Member for Hemsworth (Jon Trickett).
When the hon. Gentleman and his hon. Friend talk about a private sector investment strike, I wonder whether it might not be because there
has been negative growth in unused sterling credit facilities for the past 27 months. Businesses, large and small, have simply been unable to get the cash.
Chris Leslie: Indeed. There are liquidity problems across the economy and they remain. There are rumours in the air about the return of quantitative easing and that we might be entering into double-dip recession territory. All these things prove that the so-called independent Office for Budget Responsibility's downgrading of growth predictions as a result of the measures in the Budget suggests that the Government had a choice in their hands to steer the economy in a particular direction and that they have chosen not the pro-growth path that the Liberal Democrats and the Labour party advocated before the election but, because of the damascene conversion of the Secretary of State for Business, Innovation and Skills the day after the general election, the anti-growth path. They will take a whole chunk of money out of the economy by cutting public services so steeply and so massively in such a short space of time.
Andrew Bridgen (North West Leicestershire) (Con): Does the hon. Gentleman not appreciate that there is no money for the private sector from the banks because of the legacy of the last Labour Government? The Government are borrowing £3 billion a week-there is no money left for the private sector.
Chris Leslie: I do not agree that the private sector is crowded out in that way. I do not think that there is quite the evidence to suggest that. However, I am not sure that the hon. Gentleman, had he been in government during the crisis that the credit crunch provoked, would have done anything massively different to underpin and insure some of the banks against their losses at that time, purchasing shares in various banking institutions in order to keep the banking system going. I understand the partisan nature of his point, but all parties would have had to create that safety net for the banks at that time. I do not want to dwell on these matters, because time is limited and it is important to make my speech as brief as I can.
I want to ask the Minister specific questions about the absence of the small profits rate cut from the Bill, a matter on which I tabled an amendment. It is important to know why on earth it is not included. Typically, large corporations with their multi-million pound profits are at the front of the queue as far as this Government are concerned, but the real engine of growth in this economy is small firms. When I asked the Federation of Small Businesses about this, Stephen Alambritis, the head of public affairs, said that he was surprised at the signal sent to small businesses by the way in which the Bill is framed. He told me:
"It is important that small business is recognised in discussions about the Finance Bill. There should be a reduction in the tax rate for small business as there is for larger companies. There seems to be some discrimination from the coalition government, in that they are favouring large companies at the expense of small business".
The Minister might say, "Of course they will get their cut," but can we really trust the Government to deliver that if they are not putting such a measure in the Bill, particularly if they are not putting in the future years of the main rate cut, too?
Mr Gauke: In the Budget, my right hon. Friend the Chancellor announced a programme of measures aimed at improving the competitiveness of the UK economy, including four annual 1% reductions in the main rate of corporation tax, down to 24% in 2014, and a reduction in the small profits rate to 20% from April 2011, in contrast to the previous Government's plan to increase it to 22%. That will reduce the tax rate for some 850,000 companies. The Budget also included, from April 2012, a reduction in the capital allowances main rate from 20% to 18%, a reduction in the special rate from 10% to 8% and a reduction in the annual investment allowance to £25,000. Despite that, investment allowances will permit more than 95% of businesses to offset completely their annual plant and machinery expenditure. As I said in our debate on amendment 49, by delaying these changes to allowances for two years but reducing the corporation tax rate next year, we are giving companies a year's advantage.
We have been asked why we are legislating for the 1p cut in the main rate this year. This is the usual convention as the corporation tax main rate is usually set a year at a time. The right hon. Member for East Ham (Stephen Timms) is right to say that there was an exception in 1984, when four years were done together, but the usual convention is to do these things a year at a time. A distinction has been made between the mainstream rate and the small profits rate. The right hon. Gentleman, who was a distinguished Treasury Minister for several years, may have forgotten that payers of the corporation tax main rate are within the quarterly instalments payment regime and so require advance notice of the rate, as they might be making payments of corporation tax liability before 1 April of the relevant year in which profits fall in the next financial year. Payers of corporation tax at the small profits rate do not require advance notice, as they have until nine months after the end of the accountancy period to pay their tax.
Both main and small profits corporation tax rates have traditionally been set in this manner, and what we are doing is consistent with the usual approach. The right hon. Gentleman asked about deferred tax assets, but they are not the reason why we are doing this; we are simply following the usual convention.
Opposition Members have asked whether business can have faith in what this Government do, but they should give us some time and they will see exactly what we will do: we will follow through on these promises. No great concerns about this issue have been raised with us. On deferred tax assets, when I was in opposition, I received representations not from a bank but from a major manufacturer who made the point that the right hon. Gentleman has made, but that is not what has driven our thinking regarding the timing in this area.
The Minister says that it is normal practice to do what the Bill does, but as far as I know, there has been only one occasion since this tax was introduced when a series of reductions was announced, and those reductions were all legislated for in the 1984 legislation. I am not sure what precedent he is
referring to that suggests that the way things are being this time is the normal way, as that is not the case.
Mr Gauke: The usual approach has been that the Finance Bill sets the small companies rate in-year, just as it sets the rate for income tax; the preceding year sets out the large companies rate. The right hon. Gentleman is right that there is a precedent for doing it another way, but we do not believe that business has any concerns that we will fail to follow through on our promises. There is an argument for doing it the other way, but we are pursuing the approach that has been adopted for a number of years.
Why cut corporation tax? As I have explained in debates on amendments to the clause, this package of measures takes real strides towards restoring the UK's tax competitiveness, and will support economic growth in this country. It does so in a sustainable way that provides business with a clear direction on our long-term aims-a 1% cut every year for four years clearly demonstrates our position in making the UK open for business. No other legislative changes are proposed in the Finance Bill, although the small profits rate of corporation tax will reduce from 1 April 2011 from 21% to 20%, instead of rising to 22%, as the previous Government intended. I find it somewhat strange that those who were proposing to raise that tax are now outraged that we are not legislating to reduce it, or are calling for us to reduce it even further.
In 1997, the UK had the 10th lowest main rate of corporation tax in the current 27 EU countries, but we have now slipped to 20th. According to the World Economic Forum, the UK has fallen from the seventh most competitive economy in the world in 1997 to 13th. Richard Lambert, the chief executive of the CBI, has described our tax system as a
"ball and chain round the ankle of the UK economy",
and we are throwing off the shackles, so that the private sector can be at the heart of our plan for growth. As we reduce spending-as we must if Britain is to live within its means-only the private sector can lead the recovery. We therefore need to show that Britain is open for business. The Government are taking such action immediately, showing the international business community that the UK is the right place to do business and that our tax system is one reason why. Our changes mean that by 2014, we will have the fifth lowest rate of the G20; the lowest rate of any major western economy; and the lowest rate this country has ever known.
I make four arguments for prioritising this move to reduce corporation tax. First, corporation tax rates are important in themselves in selling the UK. They are an advert for the economy and for the UK as a good place to do business. By reducing our rate we are sending the strongest possible message that Britain is open for business. Secondly, this cut is a necessary step to help to rebalance the economy. As we take tough measures to scale back the public sector, we must provide the necessary boost to the private sector. Thirdly, the OECD's estimates suggest that corporation tax is an inefficient and growth-damaging tax. Lower corporation tax rates encourage investment, which this country needs to support the recovery. Finally, far from merely being a tax cut for profitable companies, they will provide the boost to investment that is vital for Britain, and they will support jobs in the private sector.
The corporation tax package means a reduction in allowances, but it would be inappropriate to view those changes in isolation. Across the economy, the package of reductions in corporation tax rates will offset the reductions in capital allowances, making the cost of capital investment cheaper when the measures are fully implemented. That is expected to lead to an additional £13 billion of business investment between now and 2016, based on Treasury analysis.
We have taken immediate action to restore the UK's competitiveness not only by reducing corporation tax rates but by setting out how we can improve the way in which we make tax law. Competitiveness is about the wider tax environment, which can have as much influence over where a company chooses to locate as the headline rate. We will consult business on the taxation of intellectual property; on the support research and development tax credits provide for innovation; and on the proposals in James Dyson's review for making the UK the leading high-tech exporter in Europe. We will introduce a programme of reforms to the rules for taxation of foreign profits to deliver a more territorial system, including the taxation of foreign branches and the controlled foreign company rules.
The Government are committed to improving the tax system more generally, providing greater certainty, stability and simplicity. The Budget 2010 policy costings document sets out our new, more transparent approach. As I have said, we have set out a framework for developing tax policy making and tax law, set out in a discussion document published alongside the Budget.
The previous Government have left a legacy of complexity and red tape that we are determined to tackle. There is significant work to be done to correct the mistakes of the past, and we will therefore establish an independent office of tax simplification to help us to do just that.
One or two questions were raised in the course of the debate. The shadow Minister referred to the ring-fenced regime for oil and gas. We have not made any announcements on that particular matter; indeed, a period of stability is welcome after the out-of-the-blue supplementary charges introduced by our predecessors.
In setting the corporation tax rate for 2011-12 at 27%, this year's Finance Bill takes a first step towards putting Britain back on the map as an attractive place to do business. That is consistent with sound public finances.
Mr Gauke: Of course, our proposals go beyond that. The explicit aim of this Government is to have the best corporate tax environment within the G20. That is considerably more ambitious, and we think that it will help to lead to the UK developing a stronger private sector that will lead us to recovery. The Bill and the clause represent a step in the right direction that will benefit the UK economy very strongly.
The Government have decided to raise the rate of capital gains tax for people paying higher rate income tax. We are not going to object to that; indeed, we are interested to know why a higher rate has not been adopted. The rate will be left at 18% for people paying basic rate tax, but the higher rate of 28% will apply to all trusts. Some people with low incomes have their interests represented by trusts, and there is a case that it would be unfair for them to pay the higher rate. However, it has been agreed that the rate of income tax on discretionary trusts will be 50%, so I accept that it is logical to apply the higher rate of capital gains tax to them as well, although I have no doubt that that this is a question to which the House will want to return in future debates.
Amendment 30 applies to one specific situation that has been drawn to our attention by the Low Incomes Tax Reform Group-that is, the position of so-called estates in course of administration, to which the Bill as drafted would apply, in every case, a capital gains tax rate of 28%. In the case of the majority of estates of people who have died and who paid basic rate income tax prior to their death, those people, had they still been alive, would have been entitled to realise at least some capital gains at the lower rate of 18%. The Bill, however, applies a rate of 28% to any taxable gain.
The most common problem that the Low Incomes Tax Reform Group had in mind was a case in which a house increases in value between the point of the owner's death and the point at which it is sold. Under the Bill as drafted, the whole of any such gain would be taxed at 28%, even if there was no other income or capital gain accruing to the estate at all.
I acknowledge that this is a relatively straightforward problem to identify but rather more difficult to solve. The amendment suggests that to remedy pragmatically what could, as I hope I have set out, otherwise be unfair, the first £10,000 of gains in a year should always be charged at 18%, rather than 28%, with gains above £10,000 being charged at 28%. I accept that that is not an ideal solution, because wealthy estates would benefit as well as the estates of people with low incomes. If the Exchequer Secretary has a better solution, I would be interested and eager to hear it, but I hope that he will recognise that there is a potential unfairness in relation to the estates of people with low incomes that realise capital gains after the individual's death, typically when the estate includes a property.
If the Exchequer Secretary feels unable to accept the amendment, will he agree to reflect on the matter and consider whether it might be possible to address what would certainly be an unfairness in some cases in the next Finance Bill later in the year?
Mr Gauke: The amendment would set the capital gains tax rate at 18% for personal representatives of the deceased for the first £10,000 of gains, while retaining the 28% rate for gains above that level and for trustees. I am grateful to the shadow Minister for the explanation of the thinking behind it. As he said, the matter was raised by the Low Incomes Tax Reform Group. The Institute of Chartered Accountants in England and Wales made a similar point, stating that it would be appropriate to tax the personal representatives of a deceased person in the same way as basic rate taxpayers because it is a completely different situation to that of a trust.
We believe that the treatment of personal representatives in the Bill is appropriate. The amendment would add complexity and could give rise to unfair results or avoidance opportunities. The function of personal representatives is very similar to that of trustees. They have a duty to realise the assets of the deceased person on behalf of the heirs or legatees, and it should be their primary objective to complete their duties as quickly as possible so that the assets of the estate are distributed to those people without undue delay.
The amendment could provide an incentive for personal representatives to hold on to an asset while it appreciated, so that they could sell the asset and pay tax at 18% on the gain, rather than passing the asset directly on to an heir or legatee with a potential liability of 28%. There is no reason to give that sort of incentive to increase the value of a legatee's inheritance by reducing the capital gains tax due.
I appreciate the manner in which the shadow Minister raised the matter and identified the problem. Quite fairly, he was somewhat tentative about the potential solution set out in the amendment, which I appreciate was of a probing nature. As I understand it, it is possible for personal representatives to pass assets to the heirs, so they could pay at 18% on the gains if appropriate. I will reflect further on the right hon. Gentleman's points, but as I believe he recognises, amendment 30 has its weaknesses. It could give rise to avoidance opportunities and some unfair results, and consequently I urge him to withdraw it. However, I am grateful for his comments on the amendment.
Stephen Timms: The amendments are probing amendments. We are keen to understand the thinking that led to the figure of 28% as the rate of capital gains tax. We will not vote against the Government's proposal or for the lower figure proposed in the three amendments.
I noted that some of my hon. Friends, including some who are in the Chamber, tabled an amendment calling for a higher rate at 40%. I understand why, in accordance with convention, it was not selected for debate. However, I am puzzled that no Liberal Democrat Members put their names to that amendment because it appears to reflect the proposal in their manifesto.
"taxing capital gains at the same rate as income, so that all the money you make is taxed in the same way."
"We propose to tax capital as income in order to remove this anomaly."
That presumably means applying a 50% rate to those on the highest income, as well as a 40% rate to those on the higher rate tax. The Liberal Democrat document claims that that would raise £3.2 billion a year. It also argues for reducing the annual tax exempt allowance from the current figure of just over £10,000 to £2,000, thereby raising a further £0.9 billion a year. That is more than £4 billion a year-a significant contribution to avoiding the unfair VAT rise, which is at the heart of the Budget and against which the Liberal Democrats campaigned. If more than £4 billion had been raised in that way, one percentage point of the 2.5% VAT rise could have been avoided.
"We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income."
The Liberal Democrats were therefore successful in at least getting the idea into the coalition agreement, but they signally failed to get it into the Bill. The Chancellor in his Budget speech flatly rejected the suggestion of reducing the annual exempt allowance. He said he would leave it at £10,000 and, far from reducing it to £2,000, would continue to uprate it in line with inflation in future.
I am encouraged to see the hon. Member for St Ives (Andrew George) in his place, together with some of his hon. Friends. He has tabled an amendment, about which he will speak shortly, and he may seek to pursue the ideas in the Liberal Democrat manifesto. It would be interesting to know whether Liberal Democrats really supported those proposals when they campaigned on them. Have they been persuaded by their coalition partners that they were naive or unrealistic, or that the proposals were damaging? Have most Liberal Democrats just given up, smothered in the embrace of their new partners and no longer capable of defending the policies on which they were elected?
I am very much looking forward to what the hon. Member for St Ives has to say on that. He has already described himself as a free-ranging Back Bencher, although he was not quite free enough to range into the Aye Lobby with the Opposition earlier this evening. I am
keen to hear from him and perhaps from other Liberal Democrats, who appeared to have such distinctive views on capital gains tax during the election campaign but who have since seemingly abandoned them, choosing instead to support what is traditionally the Conservatives' favourite tax-raising device, namely an increase in VAT.
"We will seek ways of taxing non-business capital gains at rates similar or close to those applied to income".
"similar or close to"
40%, let alone to 50%, and I hope the Minister can offer some explanation for the adoption of 28%, which seems to be at variance with the agreement. Perhaps he could shed some light on how vigorously-behind the scenes within the Government-Liberal Democrat members of the coalition fought for the position that they succeeded in negotiating into the agreement. Alternatively, is the truth that having got that into the agreement, they simply gave up, vacated the field and meekly accepted 28% as the best that the Conservatives were going to offer them? It would be of great interest to many of us if the Minister could shed light on those discussions.
Why was the figure of 28% chosen? It somewhat narrows the differential between tax on income and tax on capital gains, but it does not narrow it any further than the position before the introduction of the 50p rate, and nowhere near abolishes it. Indeed, increasing the rate by just 10 percentage points means that somebody on the 50p rate of income tax has exactly the same incentive to convert their income into capital gains as when they paid tax at 40p in the pound. For those people-the highest earners-there has been no reduction in the incentive, but as I understand it, reducing the incentive was the whole reason for the change.
"I asked the Treasury to examine what would have happened if we had increased the rate much further beyond 28%, and its dynamic analysis showed that that would have resulted in smaller total revenues."-[ Official Report, 22 June 2010; Vol. 512, c. 178.]
I would be grateful if the Minister could confirm whether the Government's view is that 28% is close to the revenue-maximising rate. Is 28% the rate at which proceeds from capital gains tax are maximised? Is he willing to place in the Library the "dynamic analysis" to which the Chancellor referred that shows how proceeds would decline if the rate were set at higher than 28%, more in keeping with the proposal in the Liberal Democrats' manifesto?
The Red Book tells us that that change will generate £725 million next year. That is certainly a handy and significant sum, but it is only about one sixth of the amount that the Liberal Democrats wanted to raise from increasing capital gains tax. Can the Minister tell us how much of that £725 million will be raised in capital gains tax, and how much of it will raised in income tax that would otherwise have been avoided by switching to capital gains?
Paul Uppal (Wolverhampton South West) (Con): I pay tribute to the right hon. Gentleman. It is good to see him in Committee. As a new Member, I was appalled by the dreadful event that afflicted him and it is good to see him in good health and good temper.
From my experience of the working of capital gains tax, and from speaking to constituents, it is a tax that is at the discretion of the individual investor. If prudent investors accrued a capital sum over a period of time, under the old system of indexation they would hold it for a long time and then realise the gains, often paying a minimal amount of capital gains tax. He will remember the 1970s, when CGT was very high and private investors would often ask "Why materialise this asset and pay the tax?" The 28% rate strikes a fair deal, and those of us on the Conservative Benches who come from a real business background understand and appreciate that a deal has to be struck with private investors and business.
Of course taxpayers have opportunities, for example, to defer payment of capital gains tax and I shall come to such instances in a moment. The hon. Gentleman suggests that 28% is a compromise, but the Chancellor suggested that it might be-or is at least close to-the rate at which revenue is maximised. The Treasury has carried out some dynamic analysis to illustrate that, and it would be welcome if it could be placed in the Library so that hon. Members can see it. We need to know more about the reasons for the choice of rate, and I hope that the Minister will be able to provide us and some of his Liberal Democrat partners with some much needed enlightenment.
I wish to press the Minister on two further aspects of the proposed change-the timing of the change and, on the change to entrepreneurs relief, the reason for the increase in its generosity and the change to the way the amount relieved will be calculated. First, on the timing point, the Minister will be very familiar with the arguments against changing tax rates mid-year. Indeed, when our positions were reversed, he used to rehearse regularly the arguments against the kinds of complexities caused by changing rates mid-year. Indeed, some of his hon. Friends said earlier that they were looking forward to the Government simplifying the tax system. This is their first Bill and they have introduced a new and unprecedented complexity. What is it that persuaded the Minister that this particular complication was worth introducing? I am told that there has never been a mid-year change of rate in CGT since it was introduced in the mid-1960s. Will he acknowledge that this should not be the norm-that sudden and unannounced lurches in tax rates, in the middle of a tax year, are damaging and undermine people's confidence in the tax system? Can he assure us that the Government will do their utmost to avoid a repetition in future?
The Institute of Chartered Accountants in England and Wales says that there are likely to be a number of practical problems, in particular with changes to the supplementary pages for capital gains for the self-assessment tax return and for filing online. Are the Government aware of those problems, and is the Minister able to tell us how they will be addressed? ICAEW also makes the point that the transitional provisions for the current financial year are insufficient from a technical standpoint. Is it intended to make further transitional arrangements in the third Finance Bill of this year-the one to be brought forward in the autumn? Is the Minister able to confirm that these matters will be discussed with the
experts of the CGT liaison group, ensuring through a collaborative approach that the final legislation later this year covers all the issues raised by a mid-year change?
At the moment, there is free HMRC software to deal with capital gains tax calculations in the tax return. The Institute of Chartered Accountants points out the importance of HMRC modifying that software, testing it fully and having it available to handle the complications created by a mid-year change in time for the beginning of the 2011-12 financial year, so can the Minister confirm that it will be? Can he also confirm that HMRC will work with commercial providers to ensure that third-party software products are also modified in time for the new financial year? If they are not, there will be some serious practical problems next year as a result of the change, as the Minister will appreciate.
That raises the question: why is the change being made now? Why was it not left until the new financial year? I can see that leaving it would create a problem of forestalling, with people rushing to realise their capital gains in this financial year rather than next. However, a puzzling question is: why does the Red Book say that there will be no revenue at all in the current financial year as a result of the change? The Red Book says that making the change will generate £725 million next year and £825 million the year after, but nothing at all this year, even though it has been made less than a quarter of the way through the financial year. With capital gains tax having been increased on 23 June, there must surely be some immediate increase in revenue.
Secondly-and lastly-I want to ask some questions about entrepreneurs relief. The previous Government introduced entrepreneurs relief when the rate of capital gains tax was raised to 18%. We believe it right that entrepreneurship should be well rewarded, and we support the role of entrepreneurs relief for that purpose. However, I wonder whether the Minister can explain to us the thinking behind the increase in the value of gains relievable from £2 million to £5 million. To what extent does that reduce the take of £725 million expected as a result of the overall change next year?
However, the Bill does not just increase the amount of the relief; it changes the way in which it is calculated. That has raised a number of quite difficult technical issues, which I hope the Minister will comment on. When the rate of capital gains tax was 18% and the rate payable for amounts relievable under entrepreneurs relief was 10%-a difference of eight percentage points-it was important that it should be clear precisely when the higher rate was payable and when the lower rate was. However, now that the high rate is 28%, the importance of that point is made that much greater, and there will certainly be strenuous and ingenious efforts to re-classify gains as relievable under entrepreneurs relief in cases where it might not have been worth bothering in the past.
It has been recognised in previous Finance Bill debates that at some point a review of the rules around entrepreneurs relief would be needed. With the increased differential between the rates, would the Minister accept that the case for a review is now more pressing? Prior to the change, someone making an entrepreneurial capital
gain could defer payment of capital gains tax by investing it as a qualifying investment in an enterprise investment scheme company. Then, when they sold the EIS shares, they could still pay capital gains tax on the original gain that they invested at the 10% rate. As I understand how things will work under the schedule, that will no longer be the case. Entrepreneurs relief will not be available when deferral relief has been claimed. That will mean a significant reduction in the incentives for investment in enterprise investment scheme companies. Is that what the Government intended? It might be an accident arising from the different way of applying the relief introduced by the schedule. If so, will the Government bring forward changes in the autumn to correct it?
We do not propose to divide the Committee on this schedule, but the Minister will recognise that we have identified some pressing concerns in this debate. I hope that he will be able to provide both some answers and some reassurance about the Government's intentions.
John McDonnell: Following on from my right hon. Friend's exposition, I want to speak briefly to amendment 10, which stands in my name. Amendment 10 simply calls for a report on the implications of aligning the rates of capital gains tax with those of income tax. I drafted amendments that were not in order, which calls into question the ability of Back Benchers to amend the Finance Bill and is perhaps something that can be discussed at a later date.
When capital gains tax was introduced in 1965, it was an attempt to get some equivalence between income tax and taxation on gains through capital investments. There has been reform since then. It is interesting that, under Conservative Chancellors, capital gains tax was aligned with income tax rates. Then, in the late 1990s, the Labour Government introduced the tapers and the link to the time that an asset was held. In 2007, there was further need for reform when it was discovered that executives of hedge funds were determining carried interest-their bonuses, that is-as part of their capital gains tax relief. As a result, they were effectively paying 10% tax on their income-less than their own cleaners. All parties in the House acknowledged that that was a scandal and recognised the need for reform.
It is accepted that there is an element of compromise between, on the one hand, an equitable tax relationship between income tax and capital gains tax, and, on the other, an arrangement that will support genuine entrepreneurs and business. There has always been an element of fudge, but there was a view that we would try to address the issue in this Finance Bill, whoever was in Government. The previous Government were considering capital gains tax reform, and that was widely supported by the Institute for Fiscal Studies and the Institute of Chartered Accountants. Indeed, Lord Lawson himself made statements about the need for a more equitable relationship between the two, in order to tackle tax avoidance. Such reform was also included in the Liberal Democrats' manifesto. I do not want to bait the Lib Dems tonight. This is too important an issue for that, although it can be quite entertaining.
"I think everyone recognises there is a problem. When you have a capital gains tax rate of 18% and a top rate of income tax at 50%, you'll find people finding all sorts of ways to treat income as capital gains."
He went on to say that the new Government would look at taking a different route to help what he described as the fairness agenda. The problem is exacerbated by the 50% increase. With income tax at 50%, even the 28% rate of capital gains tax proposed in the Bill will still leave a 22% differential to encourage further tax avoidance as people designate their income as capital gains.
My amendment simply asks for a report to be produced that will examine afresh the implications of the alignment between income tax and capital gains tax. I believe that we shall return to this issue in further Finance Bills, because I do not believe that this compromise will hold, or that it will be seen to be equitable or fair. I believe that tax avoidance will continue, certainly among the highest paid, who will re-determine their income as capital gains in order to pay the lower rate of 28%. I accept that an increase of 10% is significant, but it is not significant enough to implement the fairness agenda that the incoming Government have proposed.
Andrew George: It is a pleasure to follow the hon. Member for Hayes and Harlington (John McDonnell). I am pleased that, unlike the right hon. Member for East Ham (Stephen Timms), he chose not to bait the Liberal Democrats tonight. At this late hour, it would perhaps not be a good idea to respond to the rather combative approach taken by the right hon. Gentleman in his opening remarks. I shall merely point out that the Labour party, which claims to be the champion of the working poor, created a capital gains tax environment in which the cleaners of wealthy bankers were paying a higher marginal rate of tax than the bankers themselves. That is no doubt a cause of great embarrassment to the previous Government, so I do not think the Liberal Democrats need take any lectures from Labour Members on this issue.
Reducing the capital gains tax rate from 40% to 18% had many unintended consequences for communities across the country, including my own, which sucked in a lot more second home ownership. The more advantageous tax environment enabled more people to purchase second homes, and this made the housing environment, particularly for affordable homes, a great deal worse in many parts of the country. It is worth responding to the right hon. Gentleman: if he wishes to bait, we can certainly fight back. As for the questions he asked, most were directed at those on the Treasury Bench. The intention behind the starred amendments-I cannot refer to those standing in my name-was to probe the Government about the purpose of and background to the decision to set the capital gains tax rate at 28%.
The Exchequer Secretary has done an excellent job of responding to the issues raised this evening. I previously put questions to him-about his Department's economic modelling to determine the level of capital gains tax; what research or impact assessments he undertook before deciding to roll forward with the capital gains tax proposals; and the Department's estimates of the revenue accruing to the Exchequer from capital gains tax if the income tax rates for those with an income above the higher rate threshold were set at a range of different levels-which he answered on 7 July. Unfortunately, I was not given the requisite information to make an adequate assessment of the likely impact of this particular measure in contrast to the setting of capital gains tax at another threshold.
I put questions to my right hon. Friend the Business Secretary in the Budget debate-on 1 July, I believe, but I might have to check that. I asked him why the capital gains tax rate had been set at 28% and not a higher rate. The answer was that there is a law of diminishing returns. By the time that level is reached, the return to the Treasury would be significantly less, making it not worthwhile to take it beyond that particular level. Unfortunately, we do not have the statistical or factual basis on which to make that assessment.
Partly in response to the right hon. Member for East Ham, who commented on the Liberal Democrat manifesto commitments in the context of the level at which the threshold should be set, we have to address ourselves to the lack of evidence and information that the previous Government provided. The information on which many policy decisions were taken might well have been unreliable Treasury estimates at the time.
In conclusion, I urge the Exchequer Secretary to provide a little more information in response to my previous questions, which I think would help us all to understand rather better why the capital gains tax rate has been set at 28% and not at some other level. That would help to reassure us that it is not going to attract those who would have had to pay income tax at a much higher level if they had not simply transferred their assets into capital.
Mr Gauke: Clause 2 and schedule 1 introduce the changes to capital gains tax from 23 June 2010, as we have heard. The coalition agreement involved a commitment by the Government to align capital gains tax to levels similar or close to those applied to income, while providing generous exemptions for entrepreneurial business activity.
Within the Treasury team, we looked at various options as to how best to achieve that. The conclusion we reached, however, was that contained in the schedule. For individuals, the rate remains 18% when their income and gains for the tax year do not exceed their income tax basic rate band. Above that level, the rate is increased to 28%. Therefore, someone who is already paying income tax at the 40% or 50% rates will pay 28% on all their gains. As was mentioned in an earlier debate, the 28% rate applies to trustees and personal representatives, who will pay capital gains tax at that rate on all their gains. That ensures that trusts are not used to shelter personal gains from the higher rate of capital gains tax.
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