Draft Income Tax (Construction Industry Scheme) (Amendment of Schedule 11 to the Finance Act 2004) Order 2015
The Committee consisted of the following Members:
Austin, Ian (Dudley North) (Lab)
† Barwell, Gavin (Lord Commissioner of Her Majesty's Treasury)
† Bray, Angie (Ealing Central and Acton) (Con)
† Dakin, Nic (Scunthorpe) (Lab)
Evans, Mr Nigel (Ribble Valley) (Con)
Flynn, Paul (Newport West) (Lab)
† Gauke, Mr David (Financial Secretary to the Treasury)
Godsiff, Mr Roger (Birmingham, Hall Green) (Lab)
† Harris, Rebecca (Castle Point) (Con)
† Hemming, John (Birmingham, Yardley) (LD)
Hepburn, Mr Stephen (Jarrow) (Lab)
† Johnson, Gareth (Dartford) (Con)
Lammy, Mr David (Tottenham) (Lab)
† Lee, Dr Phillip (Bracknell) (Con)
† Mahmood, Shabana (Birmingham, Ladywood) (Lab)
† Randall, Sir John (Uxbridge and South Ruislip) (Con)
† Russell, Sir Bob (Colchester) (LD)
Shannon, Jim (Strangford) (DUP)
John-Paul Flaherty, Committee Clerk
† attended the Committee
Second Delegated Legislation Committee
Monday 16 March 2015
[Sir David Amess in the Chair]
Draft Income Tax (Construction Industry Scheme) (Amendment of Schedule 11 to the Finance Act 2004) Order 2015
4.30 pm
The Financial Secretary to the Treasury (Mr David Gauke): I beg to move,
That the Committee has considered the draft Income Tax (Construction Industry Scheme) (Amendment of Schedule 11 to the Finance Act 2004) Order 2015.
The Chair: With this it will be convenient to consider the draft International Tax Enforcement (Macao) Order 2015 and the draft International Tax Enforcement (Monaco) Order 2015.
Mr Gauke: It is a very great pleasure to serve under your chairmanship once again, Sir David. We have three draft orders for the Committee to consider today. One concerns the domestic construction industry scheme; the other two concern tax information exchange agreements with Macao and Monaco.
The draft Income Tax (Construction Industry Scheme) (Amendment of Schedule 11 to the Finance Act 2004) Order 2015 deals with subcontractors in the construction industry scheme, which, as hon. Members might know, is a withholding regime that applies to the construction sector. The order requires the approval of the Committee and would apply from 6 April 2015. Paragraph 13 of schedule 11 to the Finance Act 2004 provides a power to make regulations to modify the conditions that a subcontractor in the construction industry must satisfy for payments to be made to them without deduction of tax.
Under existing rules, subcontractors that meet certain qualifying conditions can apply to be paid gross, meaning that they do not suffer a withholding deduction from their payments and can pay their tax to Her Majesty’s Revenue and Customs after the end of the tax year. To qualify, subcontractors must pass three tests: business, turnover and compliance. If eligible, subcontractors and the contractors they work for are notified of their gross payment status by HMRC, which is kept under annual review. Gross payment status helps businesses to improve their cash flow and reduces administrative burdens. It means that subcontractors do not need to reclaim a tax refund from HMRC after the end of the tax year.
Following discussions with industry and a consultation, the Government propose to relax the compliance test element for gross payment status where two firms or companies come together to form a joint venture. Where one firm or company has gross payment status, its compliance with its tax obligations will have been confirmed. Currently, if that firm forms a joint venture, the joint venture also has to pass the compliance test to have gross payment status.
The order proposes that in future it would not be necessary to separately apply for gross payment status if the firm holding that status formed a joint venture with another firm that did not have it. That would be on the condition that the partnership or company had a right to at least a 50% share of the assets or income of the joint venture or held at least 50% of the shares or voting power of the joint venture where it was a company joint venture. The order would particularly aid cross-border joint ventures, where determining the compliance records of directors and companies in other states can be an onerous burden. The change would speed up infrastructure projects and investments, as many contractors insist on gross payment status for large contracts.
The two international tax enforcement orders deal with tax information exchange agreements. They are both standard agreements that stick closely to the model developed by the OECD and adopted by the United Kingdom. The agreements will facilitate exchanges of information on request between the relevant tax authorities and will assist HMRC in its tax compliance activities to counter tax avoidance and evasion.
Let me begin with the Macao Special Administrative Region of the People’s Republic of China. We were pleased to respond to an approach by Macao for a treaty. The agreement, which I signed on 3 September 2014, is a first-time tax exchange agreement. The agreement with the Principality of Monaco, which I signed on 22 October 2014, is also a first-time tax exchange agreement. Monaco has also recently signed the OECD multilateral convention on mutual administrative assistance in tax matters. The signature of the agreement with the UK and the multilateral convention will improve the exchange of tax information between our countries. I hope that those explanations are helpful.
In conclusion, I commend the orders to the Committee. I am happy to answer any questions hon. and right hon. Members may have—
Sir Bob Russell (Colchester) (LD) rose—
Mr Gauke: Indeed, I will do so now.
Sir Bob Russell: Are we talking about construction workers—that doughty band of hard-hatted workers—or about construction companies? Regardless of whether it is one or the other, or both, how many people are involved in the two places listed on the Order Paper?
Mr Gauke: To be clear, we are talking about separate orders. The first order relates to the construction industry scheme. Particular rules relating to withholding tax regimes apply to the construction industry, and those rules are relaxed in certain circumstances. There are then two separate orders, which are completely unrelated to the construction industry scheme. They are about tax information exchange agreements—one with Monaco and one with Macao. To be clear, we are talking about separate arrangements. We are not talking about construction in Monaco or Macao, however much there may be in those jurisdictions. I have done some esoteric orders in my time as a Treasury Minister, but that would be taking things to a level of specific application that even I have never attempted.
Sir Bob Russell: May I suggest that in future we have a full stop, rather than a comma between such orders? Reading the English language the way I do, the three
orders look like all the same thing, rather than three separate things. I could not quite work out how Monaco was getting mixed up with the communists in the People’s Republic.Mr Gauke: I am grateful for that constructive suggestion. We will certainly take my hon. Friend’s comments on board. Sadly, the number of orders we still have to deal with in this Parliament is somewhat limited, and I am not sure whether we will have another such opportunity. However, officials will have taken on board what he said, and we will certainly endeavour to ensure that no such confusion happens again. With those points of clarification, I would welcome any further questions about the orders.
4.37 pm
Shabana Mahmood (Birmingham, Ladywood) (Lab): It is a pleasure to serve under your chairmanship, Sir David. I am grateful to the Minister for his introductory remarks on the three orders. I will deal with them in the same order he did.
On the first order, the construction industry scheme enables contractors, who have to register for the scheme, to deduct money from a subcontractor’s payments and pass it to HMRC. Those deductions count as advance payments towards the subcontractor’s tax and national insurance. Subcontractors do not have to register, but if they do not, deductions are taken from their payments at a higher rate. At Budget 2014, the Government announced that they were going to consult on how the scheme could be improved by reducing the costs to businesses and HMRC and by making it easier to administer. The consultation resulted in the changes that the order introduces.
The tax information and impact note published alongside the order estimates that some of the approximately 90,000 subcontractors currently active have net payment status but meet turnover level requirements for gross status. Can the Minister be a bit more specific about the number of subcontractors who will benefit from the changes? The tax information and impact note also states that HMRC will incur costs in making changes to, or in introducing new, IT systems to enable improvements to the construction industry scheme to be fully effective. Will the Minister explain whether changes to IT systems will be required or whether wholly new systems will have to be introduced? What estimates have been made of the cost?
The construction industry scheme is a long-established part of our legislative framework. It would be helpful if the Minister outlined whether any other improvements to the scheme have been looked at. If so, they will perhaps not make it on to the statute book before the end of this Parliament, but they would be ready and waiting as improvements that are acknowledged as being required, but have not yet been enacted.
As the Minister explained, the remaining two orders relate to international tax enforcement agreements, one between the United Kingdom and the Special Administrative Region of Macao and the other between the United Kingdom and the Principality of Monaco. Both provide for the exchange of information that is foreseeably relevant to the administration or enforcement of the taxes covered by the agreement and by each country’s revenue authorities. Information would be exchanged in accordance with the provisions of the
agreements. These agreements are an important tool through which territories agree to co-operate in tax matters through the exchange of information. They enable Governments to enforce their domestic tax laws by exchanging information on request that is relevant to a tax matter covered by the arrangements. We support both orders because we recognise that information exchange is an important tool to increase tax transparency and prevent tax avoidance. Such agreements continue to have the Opposition’s support, as they have had throughout this Parliament.While both orders have the same purpose, there is a little difference in their scope. The agreement between the Government and Macao covers
“taxes of every kind and description imposed in the Contracting Parties.”
In contrast, the agreement with Monaco covers taxes of “every kind and description” in the UK, but in the Principality of Monaco the agreement would cover only the profit tax on commercial income levied from individual persons, the profit tax levied from companies, inheritance tax, gift tax and transfer tax. It would be helpful for the Committee to understand why there is a difference between the two agreements. Is there any danger that tax may still be liable to being sheltered in Monaco without the full scope of information exchange that is envisaged in the Macao agreement and, indeed, in agreements that the Minister and I have debated in previous Committees? Is there any expectation that the UK Government will seek to broaden the scope of the agreement with Monaco, so that it covers taxes of “every kind and description”, as the agreement with Macao does?
The Minister will know—as we have debated this at length in recent weeks—that international tax agreements and co-operation between countries have been in the spotlight recently. It is a matter of real public interest. Is he confident that orders such as these will ensure that potential tax avoidance or evasion is highlighted to the relevant authorities as soon as possible? Will he also explain how much exchange of information, either automatically or on request, has occurred in this Parliament? That would give us a broad-brush idea of the kind of work that HMRC is doing as a result of these agreements.
Can the Minister give us an estimate of the amount of additional tax that has been collected as a result of this type of information exchange? That would be helpful for the Committee to assess the efficacy of the agreements once the orders are made. We all agree that these agreements are a good thing, but we also want to ensure that they are doing the job they are intended to do.
4.44 pm
Sir John Randall (Uxbridge and South Ruislip) (Con): May I say what a pleasure it is to serve on this Committee with you in the Chair, Sir David? Sadly, unless I am very lucky and selected for another delegated legislation Committee—which is always a possibility—this may well be the very last SI that I take pleasure in.
As I am of a mischievous bent, I was thinking that I might be able to look through these orders and find some question about them. There is nothing more exciting than either having the Minister say that he will have to reply to me by letter or seeing the flurry of notes coming from his advisers.
The Minister is so expert at delivering the information—quite frankly, I could not really understand what he was talking about—that I should probably leave it there; however, generally speaking, there is a great danger when we do not take statutory instruments seriously. Serious legislation goes with them, and a lot of things can slip under the radar—obviously not under this Government, because they would not possibly do anything like that, but it could be true. For new people coming in, it is worth coming to listen to these Committees—sometimes to have a bit of fun, but also to hear what goes on.
Sir David, when Parliament reconvenes—I hope you and other colleagues will be back in the Chairman’s seat—and I am at home working out which new jigsaw I can get to work on for the next week, I will be thinking wistfully of the happy, happy hours I have spent on these Committees.
4.46 pm
Mr Gauke: Before turning to the questions that the hon. Member for Birmingham, Ladywood asked, may I say what a great pleasure it is to respond to what might be the last intervention in a Delegated Legislation Committee by my right hon. Friend the Member for Uxbridge and South Ruislip? I wish him well in his retirement, over the many years ahead. I am sure many jigsaws will be completed. He will be greatly missed from the House of Commons. [Hon. Members: “Hear, hear.”] I fear that he will not be replaced by as big a character. He has been an enormously popular Member of the House of Commons, and I played a very small part in campaigning for him in the by-election in 1997, when he triumphed, which was a rare event for a member of our party in that year.
The Lord Commissioner of Her Majesty's Treasury (Gavin Barwell): He had a good press officer.
Mr Gauke: I understand that my right hon. Friend the Member for Uxbridge and South Ruislip had a very good team behind him, and that may have made a small contribution to his success. I thank him for his intervention and his wise words in these Committees, although I should make it clear that on this occasion the Government have not slipped anything through in any of these orders.
In respect of the construction industry scheme order, a question was asked about the IT systems that will be needed. HMRC will be introducing an upgrade to its existing system. It is also looking to introduce a digital enhancement to allow subcontractors and contractors to view the relevant data. The costs of that are not yet fully known, but we are always conscious of the need to reduce costs wherever we can. Indeed, there is the potential to address these matters through the use of digital systems.
It is difficult to give a precise number for the businesses that will benefit from this measure. A relatively small number of businesses benefit from the gross payment arrangements. The order will expand it, but it is difficult to go beyond what is set out in the TIIN. The hon.
Member for Birmingham, Ladywood asked what was being done to reduce the administrative burden for the majority of businesses in the construction industry scheme. HMRC is taking a number of measures, such as improving the online verification service and the CIS online filing service, making it easier for subcontractors to obtain gross payment status by reducing the threshold for the turnover test to £100,000 in multiple directorships and reducing the number of obligations in the initial annual compliance tests. HMRC is also introducing a digital service to allow subcontractors to view their payments and deduction statements online, removing the obligation to file a nil return when a contractor has not paid subcontractors and allowing an earlier repayment when a company subcontractor is subject to a winding-up proceeding during the tax year.Turning to the international tax enforcement orders, the hon. Member for Birmingham, Ladywood asked why the scope of the Monaco order was narrower than that of the Macao order. In truth, that is an issue for Monaco—their tax is at issue, not ours—so there are no plans to broaden the scope. If Monaco wanted us to broaden it, we would be willing to consider that, but that is not a matter where UK tax is at risk as such.
It is difficult to set out how much exchange of information has occurred in this Parliament and how much has been raised, although I will write to the hon. Lady and set out what information we have. The main point is that, as a consequence of the reforms made and the introduction of the common reporting standard, which we will see in 2017 and 2018 for a number of jurisdictions—I think 90 jurisdictions in all have signed up to it—the level of information exchange between tax authorities is now much greater than we have ever seen. The ability to hide assets offshore, out of the reach of the tax authority, is substantially diminished, simply because that information will now become available to tax authorities. That is a huge breakthrough.
When I began in post five years ago, I do not think I would have expected us to reach the stage that we have, but we have done so, which is good news for the vast majority of honest taxpayers, who do not attempt to hide their assets offshore. Although we have made considerable progress over these five years in delivery and the signing of these tax agreements, the real progress will be seen through the common reporting standard. The Chancellor of the Exchequer and the Prime Minister have led the way in making progress in that area at various international forums—the G7, the G20 and elsewhere. It is good news for our constituents who pay the taxes that are due that the opportunities to evade taxes offshore are so diminished as a consequence.
With those remarks and that clarification, I hope that the orders can be accepted by both sides of the Committee—by the massed ranks on the Government and by those on the Opposition Benches, which seem somewhat Front Bench-focused today.
The Chair: I believe I speak for everyone when I say that Sir John will be missed. He will not be forgotten, whether it be for jigsaws or for his favourite pastime of bird spotting.
draft International Tax Enforcement (Macao) Order 2015
That the Committee has considered the draft International Tax Enforcement (Macao) Order 2015.—(Mr Gauke.)
draft International Tax Enforcement (Monaco) Order 2015
That the Committee has considered the draft International Tax Enforcement (Monaco) Order 2015.—(Mr Gauke.)