I thank the Minister for his earlier kind words, and commend him for his sterling effort over the last two days. He has fought his way through the Finance Bill with a bad back, and we wish him a speedy recovery. There will be a place in heaven for him, I am sure of that.
I want to speak about clauses 72 to 81, schedules 11 to 14, Government amendments 30 to 68, new clause 2, and the amendments that stand in my name and those of my hon. Friends. Clause 72 and schedules 11 and 12 cut the basic rate of capital gains tax from 18% to 10%, and the 28% rate to 20% on most gains made by individuals, trustees and personal representatives. Gains accruing on the disposal of interest in residential properties that do not qualify for private residence relief, and gains arising in respect of carried interest, remain subject to the 18% and 28% rates.
The Government have said that the retention of the higher rates for residential property is intended to provide an incentive for investment in business over property. Entrepreneurs’ relief will remain at 10 %, and will be extended to investors. I shall return to those reliefs, about which the Opposition have some concerns, later in my speech. The changes will take effect on 6 April 2016.
As the Committee will know, Labour Members have a serious problem with this policy decision, which they opposed during the Budget debate and on Second Reading. It constitutes a major tax giveaway to the tune of £2.7 billion over the next five years for the wealthiest in our society, at a time when the poorest communities are crying out for help and investment. The Chancellor had a choice to make in his Budget. He had to decide whether to use any spare cash, of which he keeps saying there is none, to help the most vulnerable, who have suffered six years of the Government’s austerity programme,
or to give a tax break to those who need it the least. He chose the latter, and, in the Opposition’s view, that says it all about the Government’s priorities.
The explanatory notes state that
“the Government wants to ensure that companies have the opportunity to access the capital they need to grow and create jobs, and wants the next generation to be backed by a strong investment culture.”
Opposition Members want capital investment in our economy. Indeed, we champion it and we have been saying so for more than nine months. However, we question whether cutting the headline rate of capital gains tax will indeed trigger large-scale investment. We believe that it could simply line the pockets of some of the wealthiest.
The Chartered Institute of Taxation echoes those concerns, stating that
“the intention of the reduction is stated as being to drive productivity growth across the UK, but we question whether a simple reduction in rates will stimulate growth”.
The Office for Budget Responsibility’s economic and fiscal outlook document suggests that such a cut is unlikely to put rocket boosters under business investment, having not predicted massive increases over the next five years. What is more, business itself has not been calling for this measure, which was totally unexpected. The top priority for business is investment in skills and infrastructure, not cuts in the top-line rate of taxation—especially when the headline rates are frequently chopped and changed by the Chancellor in what Paul Johnson, the director of the Institute for Fiscal Studies, describes as an
“up and down rollercoaster ride”.
He also stated that
“we need a serious plan and strategy here. This is not the way to make good tax policy”.
In the current economic climate, given the result last Thursday, it is even more vital to provide as much certainty as possible to business on the rates of tax that they will pay. Given the serious risk of recession in the latter end of this year, I again make the point that £2.7 billion is a lot of money that could be put to better use. The Opposition will not support such an unfair measure, and we will oppose this clause standing part of the Bill.
Clauses 73 to 75 relate to entrepreneurs’ relief, which provides a rate of capital gains tax of 10% on any gains accrued when directors who own 5% or more of a company sell shares in the companies they own, up to a lifetime limit of £10 million. The clauses address some issues with the legislation that was introduced in the Finance Act 2015. According to the Government’s explanatory notes to the Bill, changes in that Act
“prevented certain abuses involving ER, but they also limited the availability of relief on some transactions where there was no abuse. The effect of the changes made by this clause are backdated to the introduction of FA 2015 in order to mitigate the disadvantage suffered by some as a result of earlier changes.”
Opposition Members have no issue with the content of the clauses, and we are pleased that the Government have tabled amendments to correct the poor drafting of the original ones. The Chartered Institute of Taxation had raised some concerns about that, so we are pleased that the Government have clarified the legislation.
However, the Opposition are concerned about entrepreneurs’ relief as a whole and we have therefore proposed, in new clause 11, that the Government produce a report within six months of the passing of this Bill
giving the Treasury’s assessment of the value for money provided by entrepreneurs’ relief. The relief was estimated to cost £2 billion in 2012-13, rising to £3 billion in 2015-16. That represents a vast amount of Government revenue that is being forgone, and there appears to be no assessment of the relief’s efficacy in encouraging entrepreneurialism. We understand the rationale behind it, but as with all tax reliefs, the Government must ask themselves whether it provides value for money and whether it works in practice.
Tax Research UK’s analysis of the relief suggests that in the 2013-14 financial year, 3,000 people received tax relief to the tune of £600,000 each, at a total cost to the Treasury of £1.8 billion. Will the Minister confirm whether that is the case and tell us whether the Treasury has the relevant figures for 2014-15? That analysis also highlighted a couple of issues with the logic behind the relief itself, arguing that it is given at a time when people cease to be entrepreneurs by selling out of their businesses, and that it therefore does not encourage entrepreneurialism. It also argues that the relief has unfortunate behavioural consequences because by increasing the reward from sale it encourages sale far too early. The Opposition therefore feel that an assessment of the relief is in order given the vast amount of forgone Government revenue, which appears to be concentrated in the hands of a small number of individuals. I noted the Minister’s earlier comments and look forward to the results of the Government’s research, due to be published in 2017.
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That leads me nicely on to clause 76, Government amendments 44 to 68 and Opposition amendment 181 relating to investors’ relief. Clause 76 extends entrepreneurs’ relief to external investors in unlisted companies, applying a 10% rate of capital gains tax to gains accruing on the disposal of shares in an unlisted trading company. Shares must be held by individuals, be newly issued on or after 17 March 2016 and have been held by the investor for at least three years, starting from 6 April 2016. A person’s qualifying gains are subject to a lifetime cap of £10 million. The theory behind the relief was that it would encourage investment in small businesses that need capital to expand and create jobs, and it is expected to cost £120 million over the next five years.
We are happy to support the initial implementation as an experimental relief, but as with entrepreneurs’ relief we believe that the Government should periodically assess its efficacy. Amendment 181 would introduce a sunset clause whereby the relief will expire in five years’ time. To extend it, the Chancellor would have to enact secondary legislation, but before such an order could be made he must review matters and lay a report of the investors’ relief before Parliament. That would be a sensible approach to ensure that the relief is doing in practice what the Government intend it to do in theory. I hope that the Government can see the merits of that approach and accept our amendment, but I will not seek to divide the House on it today.
Clauses 77 and 78 relate to employee shareholder schemes, as does Opposition amendment 182. Employee shareholder schemes allow employees to become a shareholder in the company by which they are employed by giving up some statutory employment rights in exchange for free shares issued by the employer. As the Chancellor helpfully explained in 2012:
“You the company: give your employees shares in the business. You the employee: replace your old rights of unfair dismissal and redundancy with new rights of ownership. And what will the government do? We’ll charge no capital gains tax at all on the profit you make on your shares. Zero percent capital gains tax for these new employee-owners. Get shares and become owners of the company you work for.”
Under the current law, the tax treatment is that the first £2,000 of free shares received by the employee shareholder are free of income tax and national insurance. Gains on the first £50,000 of shares received are free of capital gains tax when sold. Clause 77 places a lifetime limit of £100,000 on the capital gains tax exempt gains that a person can make on the disposal of shares acquired under employee shareholder agreements entered into after 16 March 2016.
Now, I must be clear that the Opposition do not like employee shareholder schemes one bit. Giving up one’s statutory employment rights is certainly a red line for me and the Opposition. However, we welcome this specific clause and the imposition of a lifetime limit. Frankly, we are amazed that it has taken so long seeing as how the scheme has been labelled
“the best tax wheeze in town”.
Given the mounting evidence to suggest that the scheme is being misused for tax avoidance purposes, we question whether a £100,000 limit is too high. Amendment 182 proposes reducing it to £50,000. I hope the Minister will heed my concerns about the schemes, and I look forward to his response. Again, I do not want to divide the House on this matter tonight, but I hope that the Government will address my points.
Clause 78 is an anti-avoidance measure designed to prevent investment managers from converting their management fees and carried interest into an exempt gain for capital gains tax purposes. The clause prevents the employee shareholder scheme capital gains tax exemption from applying if the relevant disposal is not compliant with a new test introduced in clauses 36 and 37. We support this measure.
Clauses 79 to 81 make some minor changes to the capital gains tax regime for non-residents disposing of UK residential property. The first corrects a technical error, removing a potential double charge, and the second provides two circumstances when a non-resident’s capital gains tax return is not required. The last simply amends the Provisional Collection of Taxes Act 1968 to include capital gains tax. I have no issues with those clauses, and we will support them.
New clause 2, tabled by the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin would specifically require the Chancellor to conduct a review of the ways in which the law could be amended to ensure that no element of the remuneration paid to an investment fund manager may be treated as a capital gain, and that such remuneration shall be treated, for tax purposes, wholly as income. We welcome that suggestion and we will support it if Scottish National party Members push it to a vote.
We are supportive of most of the measures up for discussion in this group of clauses, but I hope that the Minister will take account of the Opposition’s concerns that I have outlined about the entrepreneurs’ relief, investor relief and employee shareholder schemes. However, what we cannot support is such a huge, huge tax giveaway
for the wealthiest in society with this cut to capital gains tax while our communities are completely starved of investment. We will therefore oppose clause 72.