In the Budget, the Chancellor set out his vision for an economy that will allow the UK to succeed. This was a vision of a fair, simple and modern tax system that enables our businesses to be world leaders. The clauses we are considering today, along with other measures in this Bill, will help us to achieve these goals. For example, on fairness, these measures will make sure that everyone plays their part in helping to fund new investment in health and social care. That is because the Bill provides that, in addition to the new health and social care levy, we will ask for an equivalent contribution from those who earn income through dividends. This will spread the burden more equally across society.
On tax simplicity, these measures will support the smaller businesses that are at the heart of our economy through reforming basis periods. That change will make the tax system easier and fairer for these firms.
On competition, we have set the rate of the bank surcharge to ensure that the UK remains internationally competitive while making sure that banks continue to pay their fair share of tax.
Finally, these measures will help businesses create jobs and growth by extending an increase in the annual investment allowance on plant and machinery assets. This will encourage firms across the country to invest more and earlier. I will now turn to each of these clauses in depth.
I shall start with clause 4. This increases the rate of income tax that is applied to dividend income by 1.25%. The increase will be used to help fund the health and social care settlement announced in the spending review. By way of background, dividend tax is paid by people who receive dividend income from shares. That income is not subject to national insurance contributions or to the new health and social care levy. The increase in dividend tax rates will mean that those with dividend income will also contribute to the health and social care settlement, just like employees, the self-employed and businesses.
As well as supporting the Government to fund this critical area of public services, the measure will deter individuals from cutting their tax bills by incorporating as a company and remunerating themselves via dividends rather than as wages. That is something that the Office for Budget Responsibility has pointed out as a potential risk. However, it is important to point out that many everyday investors will be unaffected by this change. That is because shares held in ISAs are not subject to dividend tax. In addition, because of both the £2,000 tax-free dividend allowance and the personal allowance, around 60% of those with dividend income outside of ISAs are not expected to pay any dividend tax or be affected by this change next year.
The measures contained in clause 4 are also progressive. We have calculated that additional and higher-rate taxpayers are expected to contribute more than three quarters of the revenue raised by the measures next year. In short, this clause supports the Government to fund public services and tackle the challenges in social care, but in a fair and progressive way.
I shall now turn to the proposed new clauses, 1, 8 and 16. These all call on the Government to publish information on the changes to dividend tax rates set out in clause 4 as well as on alternative potential changes to the dividend
tax system. The Government have already published an assessment of the fiscal and economic impacts of the 1.25% increase in tax rates on dividend income. The fiscal impacts were set out in the Budget document and the fiscal and economic impacts were both set out in the taxation information and impact notes for that measure. Both of these are available for the public to consider on gov.uk. It is not standard, however, for the Government to publish assessments of the fiscal and economic impacts of measures that they are not introducing and it is not clear in this case that doing so would be a beneficial use of public resources. I therefore recommend that the House rejects the new clauses.
I now turn to clause 6. Before turning to the bank surcharge itself, it is important to remember the overall context for this clause. From April 2023, corporation tax will rise from 19% to 25%. That increase, combined with a current banking surcharge rate of 8%, would have led to banks paying an effective rate of 33% on their profits. That is not competitive. Such a rate would have put us at a competitive disadvantage in relation to other major financial centres, such as the US, Germany and France. Clause 6 makes sure that banks pay their fair share of tax while remaining internationally competitive, protecting British job and tax receipts.
I know that the Opposition may like to bash banks, but it is important to remember that the banking sector accounts for almost half a million jobs across the country, and 65% of those jobs are outside London. Let us not forget that the sector contributes around £37 billion a year in tax revenue, ultimately paying for vital public services. The changes made in clause 6 will therefore support those jobs and protect that tax revenue while making sure, as I said, that banks pay their fair share. A surcharge rate of 3% will mean that banks pay an overall rate of 28% on their profits. That is, of course, more than the 27% that the banks now pay and above the 25% paid by most other businesses. In combination, the changes to corporation tax and the bank surcharge will result in banks paying an additional £750 million in tax over the period to 2026-27 based on current forecasts.
I should also point out that none of our global competitors charges an additional rate on banking profit. Clause 6 also increases the allowance above which banks pay the surcharge—from £25 million to £100 million. This new, increased allowance will support growth and competition for smaller, retail and challenger banks, benefiting consumers and businesses.
New clause 2 would require the Chancellor to publish an assessment of revenues from the bank surcharge since its introduction, of public expenditure on supporting the banking sector since 2008, and of future risks to the banking sector. The Government already publish figures on revenues raised from the bank levy introduced in 2011 and the banking surcharge introduced in 2016 in the Red Book at each Budget. On state support, as of 27 October this year the independent Office for Budget Responsibility estimated an implied balance, excluding financial costs, of £13.5 billion for the net direct effect from the public finances of financial sector interventions made as a result of the 2007-08 crisis. We must also remember that the costs of the financial crisis would almost certainly have been more significant in the absence of direct interventions.
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Since the financial crisis, we have introduced regulations that reduce the potential risk and shift costs away from the taxpayer. Indeed, today’s banking system is much stronger than at the time of the financial crisis, and banks hold three times more capital. The Bank of England’s Financial Policy Committee is required to publish two financial stability reports a year. The committee judged in September that the banking sector remains resilient to outcomes for the economy that are much more severe than the Monetary Policy Committee’s central forecast—a judgment that is supported by the interim results of the Bank of England’s 2021 solvency stress test. New clause 2 would therefore provide no new information, so I encourage Members to reject it.
Let me turn to clauses 7 and 8 on the technical but important issue of basis period reform. Clause 7 and schedule 1 abolish the basis period rules, simplifying how the self-employed and partners allocate their profits to tax years. The rules remove complexity, and ensure that taxes are declared and paid closer to the actual trading period. Clause 8 legislates to allow property businesses to treat accounts drawn up to 31 March as equivalent to the tax year, reducing the administrative burden on such businesses and simplifying their reporting responsibilities. Together, these reforms will create a simpler, fairer and more transparent set of rules for the allocation of trading income to tax years. This will make tax affairs much easier for small businesses, particularly in the first years of trading. Under the current complex rules, firms at this stage would otherwise have to deal with double taxation and later overlap relief.
New clause 17 would require the Government to produce a report on the impact of the abolition of basis periods, but the Government have already published a detailed impact assessment of basis period reform, and more information on impacts in the summary of responses to the consultation on reform. I therefore encourage Members to reject this proposed new clause.
Clause 12 is another measure that supports business. In this Bill, we are extending the £1 million temporary level of the annual investment allowance or AIA for 15 months until the end of March 2023. The AIA helps to tackle the long-standing problem of under-investment by UK businesses, by providing businesses with an up-front incentive to spend money on new equipment. It allows firms a 100% in-year tax relief on qualifying plant and machinery investments up to an annual limit, and simplifies tax for many businesses. In 2015, the Government set the permanent level of AIA at £200,000. At Budget 2018, the allowance was temporarily increased to £1 million for two years from 1 January 2019.
At this year’s spring Budget, the £1 million level was extended for another year until 1 January 2022—a measure that was warmly received by businesses. The decision to continue this extension until the end of March 2023 reflects the pressing need to help the economy to recover from the coronavirus. As the Chancellor has said, now is not the time to reduce support for businesses investing in the UK’s future growth and prosperity. This measure will encourage firms across the country to invest more and earlier by providing them with greater up-front support. It will also make tax simpler for any business investing between £200,000 and £1 million. Ultimately, the £1 million AIA level will mean that
more than 99% of businesses will have their plant and machinery expenditure covered. The extra investment will in turn help to spark growth, and create jobs and new opportunities around the country. I am not quite clear why the Opposition are opposed to the Government helping businesses to invest and grow.
New clause 3 would require the Government to review the investment decisions of businesses across the UK; classify businesses by size, sector and ownership; and assess the super deduction as a result. Moreover, it would require the Government to lay their findings before the House of Commons within three months of April 2023. Amendment 4, and new clauses 10 and 11, would also require assessments of the AIA for economic, geographical, environmental and Brexit impacts. The Government oppose these amendments on the basis that the Treasury carefully considers the impact of all measures on investment in all parts of the UK as a matter of course when preparing for the Budget.
At autumn Budget 2021, the Government set out detailed information on the Exchequer, macroeconomic, business and equality impacts of this provision. These assessments are not expected to change in the near future. Furthermore, the Government are already monitoring and evaluating the success of the reliefs, following the structured approach to evaluating tax relief, including capital allowances, that Her Majesty’s Revenue and Customs began to set out in October 2020. The Government will publish results from this approach in due course. As a result, a further review would not be useful.
Amendment 5 would add a new requirement for companies to demonstrate to the Government that they are transitioning to net zero. I am pleased to say that the Government have championed greenifying our economy as a matter of priority. Dame Eleanor, you will be aware of Her Majesty’s Treasury’s work on net zero and its review, which is considering the costs and opportunities of net zero, how the transition could be funded, and how policy can help to maximise the benefits and minimise the costs of transition.
Amendment 6 would add an eligibility requirement that businesses must have no history of tax avoidance. Tackling tax avoidance and evasion, both nationally and internationally, is a priority for this Government. For example, we have introduced an additional 19 measures in 2021 to tackle avoidance, evasion and non-compliance that are forecast to raise £2.3 billion over the next five years. Having assessed the potential for fraud, abuse and tax avoidance, there are a number of safeguards in the legislation to prevent such abuse—for instance, the exclusion of connected party transactions. These amendments would create a compliance burden for businesses after such a tough year, and hold up the economic recovery for the purposes of objectives that the Government are already dedicated to working towards separately. As a result, they should not be added to the Bill.
Amendment 7 would make changes to the AIA’s transitional rules for firms whose accounting periods straddle the AIA’s £1 million limit. The limit and the super deduction are specifically aimed at helping the investment-led recovery, and giving businesses the confidence to bring forward their investment by March 2023. We are alive to the points raised by the Chartered Institute of Taxation, but we believe that
businesses should have sufficient time to plan to take advantage of the maximum entitlement for the AIA for any investment.
I will not take up any more time. These measures support a fairer, simpler tax system that is globally competitive in an environment that allows businesses to continue to grow. I therefore move that clauses 4, 6, 7, 8 and 12 stand part of the Bill, and that schedule 1 be the first schedule to the Bill.