Finance (No. 2) Bill

Public Bill Committee, 16 May 2023.

(Except clauses 5 and 6, 7 to 9, 10 to 15, schedule 1, clauses 18 to 25, 27, 47, 48, 50 to 60, schedules 7 to 9, clauses 121 to 264, schedules 14 to 17, clauses 265 to 277, schedule 18, clauses 278 to 312 and any new clauses or new schedules relating to the subject matter of those clauses and schedules.)

Esther McVey (Conservative, Tatton)

We are now sitting in public and the proceedings are being broadcast. I have a couple of preliminary announcements. Hansard colleagues would be grateful if Members could email their speaking notes to hansardnotes@parliament.uk. Please switch electronic devices to silent. Jackets may be removed.

We will first consider the programme motion on the amendment paper. We will then consider a motion to enable the reporting of written evidence for publication. I call the Minister to move the programme motion standing in her name, which was discussed yesterday by the Programming Sub-Committee.

Kirsty Blackman (Scottish National Party, Aberdeen North)

I will make a brief comment in relation to the programme motion. It is the convention of the House that a Finance Bill does not take oral evidence. That continues to be a significant issue for the knowledge of the Committee. Written evidence is very important, and everybody does their best to read it, but nothing quite compares to asking questions in an oral evidence session. The programme motion does not allow for oral evidence. The Government have made it clear on previous Finance Bills in previous years that that is because part of a Finance Bill is considered by the whole House and the rest is considered in Committee.

Given the extent of this Finance Bill and how incredibly complex it is, particularly when it comes to corporation tax, it would have been beneficial for the Committee to ask questions of experts. It would not have taken us past any potential dates. We could have scheduled an oral evidence session with, for example, the Association of Taxation Technicians and the Chartered Institute of Taxation, and taken evidence on the parts of the Bill that we are yet to consider in order to better understand what is in the Bill and the issues that it presents for professionals.

Although I will not oppose the Programming Sub-Committee’s recommendations in the programme motion, I raise my concerns, as I do for every Finance Bill Committee on which I sit, that oral evidence sessions would have made a positive difference. They would not have held up the machinery of government and the progress of the Bill, but they would have allowed us to make more informed decisions.

Angela Eagle (Labour, Wallasey)

It is a great pleasure to serve under your chairmanship, Ms McVey, I think for the first time. I have a great deal of sympathy with what hon. Member for Aberdeen North has just said, and I look forward to what the Minister has to say about it. It may well be that an innovation that has worked well in other Committees should spread to the Finance Bill. In the absence of any progress on that, I refer the hon. Member for Aberdeen North to the work of the Treasury Committee, of which I am a member, alongside one of her colleagues. We do extensive work pre and post Budgets and take a great deal of evidence. While it is not the same as having oral evidence to this Public Bill Committee, it is a pretty good alternative, and at the moment it is all we have.

Victoria Atkins (Conservative, Louth and Horncastle)

May I say what a pleasure it is to serve under your chairmanship, Ms McVey? I am delighted if this is the first Finance Bill over which you are presiding. I should declare that I used to prosecute tax fraudsters for His Majesty’s Revenue and Customs, but I have not done so since being elected to this place. I ought also, while we are in housekeeping mode, welcome all Committee members to this scrutiny. It is an important part of our legislation-making process. Particular thanks go to my hon. Friend the Member for Totnes who—I hope he will not mind my sharing—got married at the weekend and so is perhaps the first parliamentarian to spend his honeymoon in a Finance Bill Committee. My sincere apologies to Mrs Mangnall.

I am grateful to the hon. Member for Aberdeen North and to the hon. Member for Wallasey from the Treasury Committee. I thank that Committee for its scrutiny, not just of the Finance Bill but of everything that the Treasury does. Ministers and Departments take it very seriously, and I imagine we will be enjoying the company of the Committee in due course on this and other matters.

The hon. Member for Aberdeen North raised a point about oral evidence. There is a fuller picture than the one she portrayed. We have the extensive scrutiny of the Committee of the whole House, which, as she will know, is not usual for most Bills going through this place, where scrutiny tends to happen in Committee Rooms, and we also have an extensive programme of pre-legislative consultation with tax experts and members of the public—the taxpayers—where required. That pre-legislative scrutiny includes publishing clauses in draft before the Bill is introduced to Parliament. The Government published more than 250 pages of legislation before the Bill was introduced.

One of the reasons why the procedure on the Finance Bill is so long standing is precisely because we have scrutiny into two parts—the Committee of the whole House, and line-by-line scrutiny in Public Bill Committee. We all recognise that often the most contentious issues are raised on the Floor of the House. Any oral evidence sessions in Public Bill Committee would be able to consider only those parts of the Bill not selected for consideration by the Committee of the whole House.

We encourage those who have an interest in these matters to write to the Public Bill Committee with their views, which are of course taken into account. I emphasise the huge programme of work that goes into creating the draft clauses before the Bill is even introduced, particularly the public consultation points. That is a real opportunity for the organisation the hon. Member for Aberdeen North mentioned, but also for taxpayers who are perhaps not a member of an institution or an organisation, to put their views forward. I hope that that answers the concerns that colleagues have rightly raised.

Esther McVey (Conservative, Tatton)

Copies of written evidence that the Committee receives will be made available in the Committee Room and will be circulated to Members by email.

We now begin line-by-line consideration of the Bill. The selection list shows how the clauses and the selected amendments have been grouped together for debate. Clauses and amendments grouped together are generally on the same or similar issues.

Clause 1 - Income tax charge for tax year 2023-24

Esther McVey (Conservative, Tatton)

With this, it will be convenient to debate clauses 2 to 4 stand part.

Victoria Atkins (Conservative, Louth and Horncastle)

Clause 1 legislates the charge for income tax for 2023-24. Clauses 2 and 3 set the main, default and savings rates of income tax for 2023-24 and clause 4 maintains the starting rate for savings nil rate band for tax year 2023-24.

Before I get into the meat of these clauses, it might help to remind hon. Members that, as I have already said, because some measures in the Bill have already been debated on the Floor of the House, many measures will not be debated here in this Public Bill Committee. There is no mystery as to why some clauses are not appearing.

Income tax is one of the most important revenue streams for the Government, expected to raise approximately £268 billion in 2023-24. These clauses are legislated annually in the Finance Bill. Clause 1 is essential; it allows for income tax to be collected in order to fund the vital public services on which we all rely. Clause 2 ensures that the main rates of income tax for England and Northern Ireland continue at 20% for the basic rate, 40% for the higher rate and 45% for the additional rate.

Clause 3 sets the default and savings rates of income tax for the whole of the UK. The starting rate in clause 4 applies to the taxable savings income of individuals with low earned incomes of less than £17,570, allowing them to benefit from up to £5,000 of savings income free of tax. Clause 4 will maintain the starting rate limit at its current level of £5,000 for 2023-24, in order to ensure simplicity and fairness within the tax system while maintaining a generous tax relief. Clauses 3 and 4 are important pillars of the Government’s savings strategy, because we wish to help those with low earned income to save.

In addition to the starting rate whereby eligible individuals can earn up to £5,000 in savings income free of tax, savers are supported by the personal savings allowance, which provides up to £1,000 of tax-free savings income for basic rate taxpayers. Savers can also continue to benefit from the annual ISA allowance of £20,000. Taken together, those generous measures result in around 95% of savers paying no tax on their savings income.

Finally, the Government’s efforts to encourage those on the lowest incomes to save include the Help to Save scheme, which provides savers with a 50% bonus on their savings. The Government have recently extended the scheme while we consult on longer-term options to continue to support low-income savers, which is a good example of our commitment to levelling up opportunity across the whole country. I hope that Committee members feel able to promote the scheme to their constituents, and I encourage them to do so. We are committed to helping people of all incomes, at all stages of life, to save. Recent reforms, coupled with the significant increase to the starting rate limit in 2015, mean that the taxation arrangements for savings income are very generous.

James Murray (Labour/Co-operative, Ealing North)

It is a pleasure to serve on this Committee with you as Chair, Ms McVey. As we heard from the Minister, clause 1 imposes a charge to income tax for 2023-24. It is a formality in every Finance Bill, which provides the legal basis for Parliament to impose an annual income tax. Of course, we will not oppose that clause. Clause 2 provides the main rates of income tax for 2023-24, which will apply to the non-savings, non-dividend income of taxpayers in England and Northern Ireland. As the Minister said, the rates include the 20% basic rate, the 40% higher rate and the 45% additional rate.

With respect to the other nations of the UK, the explanatory notes make it clear that income tax rates on non-savings, non-dividend income for Welsh taxpayers are set by the Welsh Parliament. The UK main rates of income tax are reduced for Welsh taxpayers by 10p in the pound on that income. The Welsh Parliament sets the Welsh rates of income tax, which are then added to the reduced UK rates. Income tax rates and thresholds on non-savings, non-dividend income for Scottish taxpayers are set by the Scottish Parliament. We do not oppose clause 2. However, the income tax rates within it will interact with the level of personal allowance and relevant thresholds to determine how much income tax people pay. I will briefly ask the Minister about them.

Committee members will remember that in the March 2021 Budget, and in the Finance Act that followed, the then Chancellor—now Prime Minister—froze the basic rate limit and personal allowance for income tax for four years. In the recent autumn statement 2022, and in the following Finance Act, the current Chancellor extended those freezes by a further two years. That means that the current 2023-24 tax year is the second of a six-year freeze. The Office for Budget Responsibility has made clear, in its March 2023 economic and fiscal outlook, that the Government’s six-year freeze in the personal allowance will take its real value in 2027-28 back down to the level in 2013-14. When the Minister responds, I would be grateful if she could confirm whether she accepts that conclusion from the Office for Budget Responsibility.

As we have heard, clause 3 sets the default rates and saving rates of income tax for the year 2023-24. Clause 3 specifically sets the default rates that will apply to the non-savings, non-dividend income of taxpayers who are not subject to the main rates of income tax, Welsh rates of income tax or Scottish income tax. It also sets the savings rates that will apply to savings income of all UK taxpayers. We will not be opposing the measure.

Finally, clause 4 sets the starting rate limit for savings for 2023-24, which remains at £5,000, as we heard. As we know, the starting rate for savings can apply to an individual’s taxable savings income, which includes—but is not limited to—interest on deposits with banks or building societies. The extent to which an individual’s savings income is liable to tax at the starting rate for savings, rather than the basic rate of income tax, depends on their total non-savings income, which can include income from employment, profits from self-employment, pensions income, and so on.

If an individual’s non-savings income is more than their personal allowance plus the starting rate limit for savings, the starting rate is not available for that tax year. Where an individual’s non-savings income in a tax year is less than the personal allowance plus the starting rate limit, their savings income is taxable at the starting rate up to the starting rate limit. We will also not be opposing clause 4.

As I have set out, we will not be opposing any of the four clauses in this first grouping of the debate, but I look forward to the Minister’s response on my specific point about the Office for Budget Responsibility.

Esther McVey (Conservative, Tatton)

I call Dame Angela Eagle.

Angela Eagle (Labour, Wallasey)

Thank you very much, Ms McVey. I think that the comment that I made earlier about this being your first Committee was about it being your first Committee that included me, not it being your first Committee completely. I am sure that we have an extremely experienced Chair, or you would not have been put in the position of having to Chair a Bill Committee where the Bill is this thick. I think that everyone can have great confidence in your ability to take us through the proceedings today.

I want to raise some questions for the Minister about levels of income tax, so that she could perhaps talk to us about the Government’s thinking. We have here—it is not explicitly referred to in the legislation, but it is there nevertheless—the fact that the thresholds have been frozen until 2028. That effectively drags many more people into paying these rates of income tax, at whatever level. It is called “fiscal drag” in the business.

When we analyse precisely what the Government are doing, we see that, without the headline rates of income tax being affected, 8 million people will be forced to pay higher levels of income tax the threshold has been frozen. That is particularly exacerbated in an era of high inflation, when more people will get dragged into paying higher levels of income tax because prices are going up yet thresholds are frozen.

This has been estimated to be the biggest stealth tax put into place since the doubling of VAT in the early 1990s. Looking at the situation that is expected to prevail in 2027-28—on the plans that the Government are putting forward—8 million people will be affected by fiscal drag. In other words, they will have their income tax increased even though the headline rates have stayed the same. That will mean that one in five taxpayers—20%—will actually be paying the higher rate, at 40% or above, as a result of this Government’s stealth tax.

That is at a time when people’s incomes are being squeezed from all directions. Many of us know that we have a cost of living squeeze that is driving millions to food banks, having to make the choice between heating and eating, and sometimes not being able to do either satisfactorily because of the amount of cash available at the end of a working week to buy essentials.

I will demonstrate just how many people have been dragged into the higher rates of tax by the stealth tax manoeuvre that the Government have turbo-charged for the next few years. In the 1990s, no nurses at all paid the higher rate of tax, and only 5% to 6% of machinists or electricians did. The Minister might have noticed information from the Institute for Fiscal Studies on the front page of quite a lot of newspapers this morning that demonstrates that the situation has totally changed. One in four teachers and one in eight nurses will be higher-rate taxpayers by 2027—presumably, that is before their disputes have been settled one way or the other. That is bad in itself, because it is a stealth tax.

The Government are not levelling with people about the rates of tax. Trying to make it look as though tax rates are staying the same while dragging millions of people into higher-rate tax is not transparent policymaking; it is a stealthy way of raising money. The Government have therefore managed to deliver a dubious double whammy of a massively increased tax burden—the highest in 70 years—and a range of failing public services. The gathering view, which we all heard on the doorsteps across the local elections, is that nothing works in this country any more, there is a problem with everything and the Government are failing to deliver.

I suspect that that dubious double whammy caused some of the results that we saw in the local elections. I wonder what the Minister might have to say about being more transparent and up-front about the massive stealth tax rises indicated by this level of fiscal drag.

Craig Whittaker (Conservative, Calder Valley)

The points that the hon. Lady makes are valid. Another valid point is this: while it is true that more people are paying tax, is it not also true that more people are earning a lot more money than they used to?

Angela Eagle (Labour, Wallasey)

I am all in favour of people earning more money, but it is important that they are doing so in in real terms. Someone can earn more money in terms that do not take account of inflation, but they can actually be earning less. If the right hon. Gentleman talked to people and asked them whether they were any better off than they had been when this series of Governments came into office in 2010, he would find that people’s nominal salaries and wages might be higher in some cases, but a lot of them are worse off in reality because those earnings have not kept up with inflation. The point about the tax burden and fiscal drag makes that much worse.

Kirsty Blackman (Scottish National Party, Aberdeen North)

On the point about how well-off people feel, does the hon. Member know that in 2008, 12% of people in the UK believed that their children would be worse off than them? Now, IPSOS has found that that number is up to 41%—some 41% of people now believe that their children will be worse off than them. Does she feel that that needs to be tackled, and that the Government are not taking it seriously?

Angela Eagle (Labour, Wallasey)

I agree, and the hon. Lady makes a valuable point. For societies to advance in a sensible, healthy way, succeeding generations must have optimism about things changing for the better. That also tends to lead to happier societies with people who are more likely to innovate and go the extra mile. We all want that so that we can rebuild prosperity for our nation in the years ahead in the new, more isolated circumstances in which we find ourselves, as a result of which we must remake the economic foundations of our country. I wonder how much fiscal drag helps us to do that, and I am interested to hear the Minister’s observations on how that approach will help.

There are other undesirable effects of threshold freezes of the kind encompassed by clause 1, including very high marginal tax rates for people in particular circumstances. We know from the Prime Minister’s tax return that he effectively pays 22% on his millions of earnings every year, if one combines the income tax that he pays with the way that he takes out his money through capital gains and in other areas. However, given the present tax thresholds and fiscal drag, there are people who will face marginal tax rates of 45% and 60%, which are very high—much higher than those that the Prime Minister faces.

The Treasury Committee is so concerned about that that we have begun an inquiry into spiky marginal tax rates and cliff edges. As you will know, Ms McVey, from having been Secretary of State for Work and Pensions, cliff edges and high marginal tax rates can often combine to create even greater losses of income. That is a disincentive to work harder, get more hours and move jobs when the increased wage may not compensate for the higher marginal tax rate, or a combination of the higher marginal tax rate and the cliff edge for a particular allowance. When we took evidence a few weeks ago, we discovered a marginal tax rate combined with a cliff edge that was over 100%.

There are issues surrounding the £50,000 threshold, at which point high earners start having child benefit clawed back. That has remained unchanged. It has not gone up; it is another frozen threshold. That is dragging far more people into the means test for child benefit than even the Conservative Chancellor George Osborne—we can say his name now, as he is no longer a Member of this House—intended when he introduced the policy. The Government should be aware of the combined effect of fiscal drag and unindexed rates on real people’s choices.

Freezes are a stealthy and arbitrary way to raise tax revenues. They often have a bigger impact on household incomes than more eye-catching discretionary measures do. They are particularly expected to have an impact on lower earners. By 2028, someone earning £20,000 will be £1,165 poorer under the current fiscal drag system than they would if income tax had been raised by 1%. There have been various calculations of how many pennies this stealth tax raises on the up-front rate of income tax, and they range from 3p to 4p per £1. I hope that the Minister will confirm that and try to justify why on earth the Government are raising money in that way, rather than being more transparent and up-front about rates of income tax. What will they do about the high marginal rates that the fiscal drag and frozen threshold system is landing our entire structure with? It is distorting the structure and making it very difficult to justify much of how it works for the future.

Rob Butler (Conservative, Aylesbury)

I am interested in what the hon. Lady is saying. Will she clarify the latter point about the increase in the rate that would have been necessary had it not been frozen? Is she saying that she would rather the basic rate of income tax had been put up by 3% or 4%, such that lower-paid workers—nurses, for example, to whom she has referred—who are in the lower tax bracket would pay more tax? That seems to be the logical end point of what she has suggested.

Angela Eagle (Labour, Wallasey)

I am not suggesting any policy—far be it from me to do so from this side of the House. I am a mere Back Bencher, and it is not for me to make tax policy from the Opposition Back Benches. I am merely pointing out some problems that the choices that the Government appear to have made with this stealth tax are causing real people out there.

The problems are exacerbated by high marginal rates, and by very difficult and bad incentives that are quite hidden. That is why I am raising some of them here—I am attempting to draw attention to them to see whether the Minister has a response. If the Government are working on those areas, I am trying to find out what they aim to achieve by doing things this way. That is precisely what these Standing Committees are about—one gets to talk in more detail about choices that are made.

The hon. Gentleman must not imagine that I am putting forward a completely costed, different alternative, because this is not the place or time to do that. I am pointing out some of the problems, about which there is cross-party concern. I am not even making highly party political points. Far be it from me to do so—it is too early in the morning for me to do too much of that—but there are issues that we need to surface so that we can hear the Government’s official response.

I fear that we are driving into a cul de sac that will cause more problems than it solves, particularly in the interaction of the income tax system with a range of benefits, not only for the very low paid, but for medium earners. That is not being properly talked about, so by raising the matter at this point in the Bill, I am trying to get a handle on the Government’s thinking. I look forward to listening to what the Minister has to say about it, and perhaps even intervening further if she says something that piques my interest.

Victoria Atkins (Conservative, Louth and Horncastle)

In that case, I will try to be extremely dull. I am genuinely grateful to the hon. Lady for her questions. If I may take issue with her challenge that this is somehow hidden or a stealth tax, we debated these thresholds in the previous Finance Bill in the autumn. My right hon. Friend the Chancellor was very clear in his statement and in the following debate, as well as during the consideration of the Bill, about the difficult decisions, and we very much include the threshold decisions in that category. We were up-front and transparent about what we had to do to address some of the underlying issues we face in the economy.

I do not for a moment underestimate the hon. Lady’s intentions in raising the matter, but I must push back on the idea that this is somehow being hidden. Indeed, I remember being asked about it on many occasions both in this place and, dare I say it, on media rounds—understandably so, because this matters to people.

There is one point of agreement across the House, however, and that is the impact of inflation on people’s take-home pay. That is why the Prime Minister has set it as his first of five priorities to halve inflation by the end of this year, because it hurts all of us, but it hurts the poorest in society the most. We have heard the ongoing debate about food inflation, and none of us wants to see the difficult situations that people on the lowest incomes are finding themselves in. That is why the Treasury is doing everything that we can to support the Bank of England, which is of course operationally independent, in lowering the rate of interest.

The hon. Member for Ealing North asked me about the OBR. I am happy to quote the Chancellor, who has said in relation to the OBR’s figures overall that we respect them. It is an independent forecaster, whose job it is to make a forecast. As we all know, however, and as we have seen very recently with the Bank of England, forecasts are exactly that—forecasts. They can change, so we are working to support the Bank of England in its work. We respect the OBR, but fundamentally we are trying to ensure that the lowest paid receive as much of their income without having to pay any tax as we can afford as a country.

That is why we are so proud of the fact that we have been able to increase the personal allowance in taxation and national insurance to £12,570 per year. That means that we can earn around £1,000 a month without paying a penny in tax or NI on it. Not only will that help the very poorest in our constituencies to manage the cost of living, but it will build the economy as a whole. We want to help people to keep more of their money as they move up the income scale.

My right hon. Friend the Member for Calder Valley made an interesting point about putting some of the figures that we have heard in context. Some of the groups of people that we have heard about are earning more, and that context is important. Of course, we acknowledge the impact that inflation is having. None the less, we have seen wage increases over the last decade. We are very proud of the significant work that we have done to introduce and supplement the national minimum wage and national living wage. Indeed, in the Budget my right hon. Friend the Chancellor set out our plans to increase them. That will have a real impact on those who are on the lowest wages.

In terms of what this means nationally, it is estimated that more than 3 million people will be taken out of tax by 2023-24, compared with what would have happened if the personal allowance had risen with inflation from 2010-11. That means that as a result of our policies, we have been able to take more people out of tax completely. Indeed, 30% of individuals do not pay tax as a result of the personal allowance. It remains one of the most generous internationally, and the UK higher rate threshold is still high enough to protect the vast majority of people from paying the higher rate of income tax. Around 80% of taxpayers pay the basic rate. Indeed, average median earnings for an employee are £28,000 a year—well below the higher rate threshold of £50,270.

Angela Eagle (Labour, Wallasey)

I assume that those figures are for now. Is there a calculation of where fiscal drag will have left them after 2027-28? The figures will undoubtedly go down, especially if inflation persists for any length of time. It is 10% now, which means that anyone who is within 10% of the next threshold will go over it this year.

Victoria Atkins (Conservative, Louth and Horncastle)

The hon. Lady has hit on exactly the point. We have to be so careful with forecasts, because there are so many variables. As she has identified, inflation is one of them. Please do not think that I am speculating about what may or may not be in future fiscal events, but if there are changes to the rate of national living wage, for example, that will have an impact. There are many variables, and that means that our figures are both costed from a Treasury perspective and examined by the OBR. We very much stand by the figures set out in the autumn statement and as part of Budget considerations in the spring.

Angela Eagle (Labour, Wallasey)

The Office for Budget Responsibility has said that the frozen thresholds will drag 2.1 million people into the higher rate of tax, raising £26 billion a year, which is the equivalent of 4p on the basic rate. One presumes that that is net of all the other things that the Minister is talking about.

Victoria Atkins (Conservative, Louth and Horncastle)

The shadow Minister asked that question. We respect the work of the OBR, and of course we understand that it is an independent forecaster. However, as I said, we have never shied away from the fact that this a difficult set of circumstances. I know it is not for the hon. Lady to set tax policy on behalf of her Front-Bench team, but my hon. Friend the Member for Aylesbury posed an interesting question: what is Labour’s alternative? Outside observers may wish to take that into account.

We believe in sound money, and the rate of debt interest that we are paying each year—some £120 billion—is money that we would much rather spend on our NHS, police and defence. However, precisely because of our extraordinary efforts to protect our constituents throughout the pandemic, to help Ukraine and to provide support through the cost of living crisis that has emerged from that, we are having to take these difficult decisions in a fiscally responsible way.

Ashley Dalton (Labour, West Lancashire)

It is a pleasure to serve under your chairmanship, Ms McVey. This is my first Public Bill Committee, so I am definitely the baby in the room. There is just one thing I would like the Minister to clarify. When she was responding to the point raised by my hon. Friend the Member for Wallasey about the OBR projections, she said very clearly that she respected and understood them. However, does she agree with them?

Victoria Atkins (Conservative, Louth and Horncastle)

The hon. Lady will know that I have just answered her shadow Minister’s question on that. I will quote the Chancellor:

“I respect the OBR’s figures. The OBR is an independent forecaster”—

the hon. Lady must use the correct terminology—

“it is their job to make a forecast.”

However, I do observe that forecasts can change, which is why these variables are so important.

Clause 16 - CSOP schemes: share value limit and share class

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss clause 17 stand part.

Victoria Atkins (Conservative, Louth and Horncastle)

Clauses 16 and 17 make changes to improve two of the tax-advantaged employee share schemes. Clause 16 increases the generosity and availability of the company share option plan, or CSOP. The changes will help larger companies that have grown beyond the scope of the enterprise management incentive—EMI—scheme, to offer more attractive share-based remuneration, helping them to recruit and retain the key talent that they need to succeed and grow. Clause 17 makes changes to the provisions of the enterprise management incentives. Those changes will simplify the process to grant options under an EMI scheme, and remove some of the administrative burdens on participating companies.

CSOP is available to all UK companies wishing to offer their employees share options, but the EMI scheme is specifically targeted at small and medium enterprises. It helps them to compete with larger firms to attract and retain key talent by bolstering the attractiveness of the share-based remuneration they can offer to their employees. At Budget 2021, the Government published a call for evidence to seek views on whether the EMI scheme should be expanded. At spring statement 2022, they announced that it remains effectively and appropriately targeted. However, they also expanded the review to consider whether CSOP could support companies as they grow beyond the scope of EMI. Following the review, we decided that CSOP should be expanded to make it more generous and accessible to a broader base of companies, including scale-ups that are no longer eligible for EMI.

The Government also listened to those who said that the administrative requirements of the EMI scheme could be improved, particularly in relation to the process of granting options. That is an example for the hon. Member for Aberdeen North of the public-facing nature of our efforts in drafting this Bill. We are making these changes to address those concerns.

The changes made by clause 16 will increase the CSOP employee share options limit from £30,000 to £60,000 and allow future changes to the share option limit to be made by regulations. The “worth having” condition will be removed, allowing more share types, and therefore companies, to be included in the scheme. Clause 17 will remove two administrative requirements within EMI. The first is the requirement to include within the option agreement details of any restrictions on the shares to be acquired under the option, as those restrictions are typically set out in other documents. The second is the requirement for an employee who receives an EMI option to sign a declaration that they meet the EMI working time requirement. The clause will not remove the working time requirement itself, which is a key part of the scheme. These sensible changes will reduce the burdens on companies granting EMI options, saving them time and money and reducing the risk that tax relief is lost due to administrative oversights.

The changes to EMI will support an estimated 4,700 small and medium-sized companies, and an estimated 45,000 employees who are granted EMI options annually. The changes will apply to both schemes granted on or after 6 April 2023, and options granted before 6 April 2023 that have not yet been exercised.

Clause 16 will improve the company share option plan, making it more accessible and generous, which will support businesses to recruit and retain key staff. Clause 17 will improve the enterprise management incentives scheme by simplifying the process to grant options, and will support small and medium-sized businesses to recruit and retain the talent they need to succeed. I commend the clauses to the Committee.

James Murray (Labour/Co-operative, Ealing North)

As the Minister said, clause 16 makes changes to the company share option plan, a tax-advantaged employee share scheme available to all UK companies and their employees. It will double the employee share options limit from £30,000 to £60,000; remove the “worth having” condition, which limits which types of shares are eligible for inclusion within a CSOP scheme; and make changes to the share options limit, which will now be achievable through secondary rather than primary legislation.

We understand from the Government’s policy paper that this measure seeks to support companies to attract talent and to grow by expanding the availability and generosity of CSOP. They hope to allow companies to offer their employees a greater stake in the company so employees can share in their employer’s success. The changes will help companies that have grown beyond the scope of the enterprise management incentives scheme to offer more attractive share-based remuneration, supporting them to recruit and retain talent. These changes to CSOP were announced not by the Chancellor at the spring Budget 2023, but by the previous Chancellor in September 2022, so it seems we have found one of the very few remaining measures from last autumn’s so-called growth plan.

Although the Minister has set out the details of what this measure involves, I would like to ask her to explain some of the detail behind its operational impact, set out in HMRC’s policy paper. In the section on operational impact, it says that a small IT change will be required to support delivery of the measure, which will be expected to cost less than £5,000. It also says that, due to the relaxation and increased generosity of the CSOP rules, HMRC will undertake increased compliance activity to ensure CSOP is being used appropriately. It says that additional resource will be dedicated to compliance work to support the effective delivery and implementation of this measure, and that this resource is expected to cost a total of £570,000.

Will the Minister confirm whether the additional resource dedicated to that compliance work will be additional net resource at HMRC, or will it involve any redeployment of resources? If the latter is true, will she explain the expected impact on other work carried out by HMRC? We know from a recent Public Accounts Committee report that £9 billion in tax revenue was lost during the pandemic because 4,000 HMRC staff fighting tax avoidance were redeployed. We therefore believe it is important to ask questions about any such potential redeployment. I look forward to a clear answer from the Minister on that point.

Clause 17 specifically removes two requirements for employer companies when granting enterprise management incentives options. First, the clause removes the requirement to set out in a share agreement the details of any restrictions on the shares that can be acquired. Secondly, it removes the requirement for a company to declare that an employee who receives share options has signed a working time declaration, though it does not, however, remove the working time requirement itself.

As the Minister has explained, the changes will apply to EMI options granted on or after 6 April this year, as well as EMI options granted before 6 April that have not yet been exercised. We know that EMI is a tax-advantage share scheme introduced in 2000, targeted at small and medium-sized companies to help them to recruit and retain key employees. We understand, as the Minister said, that following representations made in response to the call for evidence on EMI launched in 2021, the measure will remove administrative requirements for companies using EMI schemes and simplify the process to grant options, so we will not be opposing the clause. However, I look forward to the Minister’s specific comments in response to my questions on clause 16.

Kirsty Blackman (Scottish National Party, Aberdeen North)

Like the Labour party, the SNP will not oppose this measure. These are positive changes. Particularly on EMI, the Government have listened to what companies are asking for, and making some of requested changes is important, particularly when it may not have been the Government’s initial intention to dos so. They have listened to the additional information that has come in and made that change as a result of the response from companies.

There are two sides to what happens in relation to employee share schemes. There is the experience that employers and companies have in relation to whether they are an EMI or a CSOP—it looks like that will be smoother for companies. There is also the experience that the employee has, and whether or not accessing those schemes works for their lives and what they intend to do. The right hon. Member for Knowsley (Sir George Howarth) has put forward a ten-minute rule Bill on the share incentive plan scheme, trying to ensure that lower-income workers can get access to the scheme and that the length of time that an employee is required to stay at the company before they can access their share ownership and benefits is reduced from five years to three years.

We know that the younger workforce these days are moving companies more quickly, and that is not necessarily a bad thing. Younger people are seeing the benefits of working for a number of different companies and building up a significant breadth of experience across companies, and they are more likely to job hop than my parents’ generation. As I said, it is not a bad thing; it is just a change in the way society works. As a result, share ownership schemes, in the way that they are written and organised by the Government, are less attractive to the younger workforce than they were to previous generations.

My key question is: what are the Government’s intentions for employee share ownership? Are they hoping to encourage and increase the amount of employees taking part in such schemes? It seems to me that 4,700 small and medium companies feeling good about EMI access is not all that many, and other companies that could benefit from it that may find there is not much in the way of interest among their employees because of the restrictions. Do the Government hope to make it more attractive for employees, or simply to make it slightly easier and more attractive for employers? If they hope to make it more attractive for employees, are they looking at the current restrictions and restraints on employee share ownership schemes and whether they work for the workforce of today, as opposed to just the workforce of yesterday?

I am incredibly positive about employee share ownership schemes. I do not necessarily think that every single company should use them, and I would certainly not push every single company in that direction. However, all companies that want to use them should have the flexibility to access them without red tape and bureaucracy, so removing some of that is helpful. Companies will be able to use them only if they get buy-in from their employees, which they can do only if the employee sees the benefit of taking part. It would be helpful to have an idea of the Government’s intentions—whether they plan to do any wider consultation or check in on the numbers, whether they have targets for employee share ownership and whether they plan to extend and increase it. It seems to me from clauses 16 and 17 that the Government are positive towards the schemes, but they have not gone quite far enough in increasing accessibility.

Victoria Atkins (Conservative, Louth and Horncastle)

If I may, I will answer the hon. Lady’s questions first. For the two schemes to work, we must help employers and employees to administer them and take advantage of them respectively. This is why we have made the changes that I set out.

We are mindful of the changes in the employment market that the hon. Lady described, and we looked very carefully at the gig economy. The issue is that many workers in the gig economy are not employed for tax purposes, so they fall outside the scope of EMI. Extending eligibility to the self-employed would go beyond the aims and objectives of EMI, because it is about employees having not just an earned income interest, but a full share investment in the business for which they work. There are complexities here, but we are mindful of how the modern economy is taking shape. That is why we will be launching a call for evidence shortly on non-discretionary share schemes, which are open to all employees of companies that opt in. I encourage her and others to participate in that call for evidence when it is launched.

The hon. Member for Ealing North asked about compliance, and he will know that HMRC takes compliance very seriously. Indeed, we have increased funding for compliance activities across the board. We want to ensure not only that officers can deal with particular forms of tax evasion or criminal activity, but that they can offer results across the board. I know that the answer will come to me shortly, but I commit to writing to the hon. Gentleman if it does not fall upon my shoulders before I sit down. I am very willing to take questions or interventions from any colleague on this matter, particularly from colleagues on this side of the House, because we fundamentally believe in entrepreneurship and capitalisation. We believe in spreading prosperity and wealth across the workforce, so it is not just the business owners but the employees that must profit.

Craig Whittaker (Conservative, Calder Valley)

Before my time in this place, I worked for the Dixons stores group in retail. I remember how valuable the share options were to us—they were available to all employees. In fact, Dixons stores group was such a great company to work for that it often gave us free shares. On one occasion, it helped to pay for a very luxurious family holiday. Does the Minister agree that all the Government can do is to facilitate legislation to enable good employers to keep such things going? Skin in the game, as we used to say, is of as much value as money. Feeling part of the company is just as important.

Victoria Atkins (Conservative, Louth and Horncastle)

I am extremely grateful to my hon. Friend, who had a very successful business career before he was rightly elected to this place. He makes a really interesting point about spreading the benefits and how they do not just need to be financial, as he says. They can also be about career development. I recently visited John Lewis on Oxford Street. Although it has a different model of—

Esther McVey (Conservative, Tatton)

Minister, if we could come to a conclusion as soon as possible.

Victoria Atkins (Conservative, Louth and Horncastle)

Yes, Ms McVey; the trip to John Lewis will have to come later. I am helpfully informed that, as set out in the TIIN, the additional resource will be dedicated to compliance work to support effective delivery and implementation of the measure. That is expected, as the hon. Member for Ealing North said, to cost a total of £570,000, but we will write to him with further details in due course.

James Murray (Labour/Co-operative, Ealing North)

I appreciate the Minister reading out the information from the policy note, which I also read and quoted during my speech. The question I was specifically asking, just to make sure there is no confusion at all, was whether the additional resource that she referred to—the £570,000 resource that is dedicated to compliance work—will be additional net resource at His Majesty’s Revenue and Customs, or will it involve any existing resource at HMRC being redeployed? If the latter, will the Minister set out—in writing, I presume—what impact the redeployment will have on other work carried out by HMRC?

Victoria Atkins (Conservative, Louth and Horncastle)

I am mindful that when the hon. Member asked me quite a technical question in a Statutory Instrument Committee recently, he misunderstood my response and raised a point of order that turned out to be wrong. I had to correct him on the record and with a letter to the Library, so I am pleased to be able to write to him on this matter to ensure that I have answered his question and that he understands the answer.

James Murray (Labour/Co-operative, Ealing North)

Maybe you’ll get it right this time.

Victoria Atkins (Conservative, Louth and Horncastle)

I got it right. That was the point. He raised a point of order that was wrong.

Clause 26 - Payments under Jobs Growth Wales Plus

Victoria Atkins (Conservative, Louth and Horncastle)

The clause clarifies that payments made under the Welsh Government’s Jobs Growth Wales Plus scheme are exempt from income tax, with retrospective effect from 1 April 2022. The scheme was introduced by the Welsh Government on 1 April last year to replace traineeships and Jobs Growth Wales. The changes made by the clause will exempt from income tax payments made by way of training allowances under the scheme. Without the clause, the payments would be taxable, which would not be in line with the treatment of payments made for other training allowances.

James Murray (Labour/Co-operative, Ealing North)

As we have heard, the clause introduces an income tax exemption for payments made by way of training allowances under the Jobs Growth Wales Plus scheme, which the Welsh Government introduced on 1 April 2022 to replace the traineeships and Jobs Growth Wales programmes in Wales. This is a training and employment programme aimed at 16 to 18-year-olds who are not in education, employment or training, and is designed to help them overcome any barriers that they may face in further training or employment.

As I understand it, the scheme has three strands: engagement, advancement and employment. Under the engagement strand, participants receive a training allowance of up to £30 a week; under the advancement strand, they receive £55 a week, and under the employment strand, individuals will be paid at national minimum wage for the age group. We understand that the training allowances paid under the scheme will be exempt from income tax. That was announced by the Financial Secretary to the Treasury in a written ministerial statement on 11 October last year. The objective of the measure is to clarify the tax treatment payments made by way of training allowances under the Jobs Growth Wales Plus scheme, and it will have retrospective effect from 1 April last year. We will not oppose the measure.

Kirsty Blackman (Scottish National Party, Aberdeen North)

Will the Minister clarify how the payment has been treated in the interim period? I understand that back in October the Government announced their intention to treat it as exempt from income tax, but what has happened to the payments made since 1 April last year? Have the individuals been liable for income tax during that period? Will repayments or tax adjustments be required for those individuals because of the retrospective nature of the measure? Will the Government provide some clarity on how they intend to tackle those things to ensure that everybody has certainty about their tax treatment—that the individual who pays income tax has certainty about their tax treatment and that devolved Governments, when they are putting in place any of the allowances, are certain about the relevant income tax treatment in advance? We do not want uncertainty around something that is supposed to be positive for individuals.

Finally, will the Minister confirm whether there will be any additional cost to HMRC from fixing any issues that have arisen as a result of the possible previous tax treatment of the allowances and payments? That treatment is now changing because of the retrospective nature of the tax allowance. If the Minister does not have answers today, I am happy to receive answers later—she does not need to have her team scribble incredibly quickly now.

Victoria Atkins (Conservative, Louth and Horncastle)

I am happy to be able to tell the hon. Lady that they were exempted. In terms of costs, I see the word “negligible” in the Exchequer impact assessment, so that is the administrative side effect of what we are trying to achieve to support efforts to train young people in Wales, which are commendable and for which I welcome the support. Clause 27, which I do not think we will debate, allows us to clarify the treatment of devolution payments via statutory instrument, which we are keen to do. Indeed, the hon. Lady will know that significant work with the Scottish Government, led by the Chief Secretary to the Treasury, is going on across the Treasury to underpin the arrangements for the fiscal framework.

Kirsty Blackman (Scottish National Party, Aberdeen North)

Let me make sure that I understand what the Minister is saying. The Welsh payments were considered exempted, and this measure is just the legislation catching up with the treatment that they were being given anyway. Is that correct?

Victoria Atkins (Conservative, Louth and Horncastle)

I can confirm that.

Clause 28 - Qualifying care relief: increase in individual’s limit

Victoria Atkins (Conservative, Louth and Horncastle)

The clause makes changes to support foster carers by increasing the amount of income tax relief available to them and ensuring that that relief stays at an appropriate level over time in line with inflation. We are nearly doubling the qualifying care relief threshold, which will give a tax cut to a qualifying carer worth an average of £450 a year. I know that hon. Members are particularly interested in supporting foster carers, who are real public servants, in looking after looked-after children.

Qualifying care relief has been unchanged since 2003. Many carers are now paying income tax on payments intended to represent the additional costs of fostering that qualifying care relief was intended to exempt. Minimum fostering allowances are set to rise by 12.4% in this financial year, and with current tax threshold freezes, current qualifying care relief levels are expected to push approximately 1,500 carers into tax, which could disincentivise care. We are seeking to reflect the higher allowances that are paid to carers and the higher costs of caring compared with when the relief was set originally. By linking the value of the relief to inflation, the measure will also help to ensure that the level of qualifying care relief remains appropriate over time, supporting carers now and in the future. This will help to provide a greater financial incentive for carers to join or stay in the care industry, improving the recruitment and retention of carers in the future.

The measure increases the amount of income tax relief available for foster carers across the UK and shared lives carers using qualifying care relief from £10,000 to £18,140 per year, plus £375 to £450 per week for each person cared for. Those thresholds will be index linked to the consumer prices index. That will benefit more than 33,000 individuals who receive care income in respect of foster caring and other types of care and who currently submit self-assessment returns; such people look after an estimated 58,000 foster children.

We expect to take most care income out of tax by providing a higher level of relief. It will have simplification benefits, because it will allow more carers to use the simpler method of completing their self-employment pages on their self-assessment return. I hope that that will be a welcome improvement to the tax position of foster carers and shared lives carers. I therefore commend the clause to the Committee.

James Murray (Labour/Co-operative, Ealing North)

As the Minister says, the clause increases the annual amount of care income that a recipient of qualifying care relief will receive that is not subject to income tax. Furthermore, the clause provides for the annual amount to increase in subsequent tax years in line with CPI. We know that qualifying care relief allows carers who look after children or adults, including foster carers, shared lives carers and kinship carers, to receive certain payments tax free, up to an annual limit. We know that the annual limit comprises a fixed amount for each household, plus a weekly amount for each child or adult being cared for.

Qualifying care relief is a tax simplification providing specific tax relief for care income as a replacement for apportioning and calculating full deductions for expenses. The relief allows carers to keep simpler records for their care activities and to use a simpler method of filling in the self-employed pages of their tax returns, as the Minister mentioned. We recognise that the clause increases the fixed and weekly amounts making up the annual limit to bring more carers out of income tax and simplify their tax reporting responsibilities. It also introduces CPI indexation.

We welcome the fact that the clause could provide a greater financial incentive for carers to join or stay in the care industry, potentially improving the recruitment and retention of carers in the future, so we will not oppose it.

Kirsty Blackman (Scottish National Party, Aberdeen North)

First, given the inflation that we are facing, it is incredibly important that people who are caring, and taking on caring responsibilities, can afford to do so and are not forced to stop because of an impact on their income. This is a positive step. A not insignificant number of those who are cared for face a specific issue, such access to special diets, for which inflation has increased much more than even for food inflation. Individuals caring for anybody who is on a special diet will have seen a differentially large impact on their household spend specifically as a result of having to cater for those special diets. The changes being made therefore could not have come at a better time.

It is also positive to hear recognition for kinship carers, who are so often missed out in conversations about caring, even if people are taking on a formal role as kinship carers. We could not do without the significant amount of work that kinship carers do, so I am pleased, having previously had to argue in my council role for similar benefits for kinship carers as those that foster carers were receiving, that the Government have as a matter of course included kinship carers in the qualifying care relief, and ensured that the changes being made extend to them.

Angela Eagle (Labour, Wallasey)

I think that this measure will be welcomed across the Committee. As the Minister said, no one will vote against it. All of us know locally, from our constituency advice surgeries and our general work, the pressure that the entire care system is under. We know many of the things that are wrong with it and difficult in it, and how crucial it is to try to get it right, not least for the life opportunities of those people who are caught up in the system.

In the context of a welcome change, could the Minister explain the decision to index to CPI rather than RPI? The retail price index takes into account the costs of rent or housing in a way that I would have thought was directly relevant in this context. Why was it decided to use CPI rather than RPI for future indexation?

Victoria Atkins (Conservative, Louth and Horncastle)

We use CPI across the board. What we have tried to do is bring the value of the QCR back to its intended level. As I said, it had not changed since 2003. Index linking protects its value to foster carers in the future, so that a future Finance Bill Committee does not have to consider a similar uprating in the future.

Angela Eagle (Labour, Wallasey)

I thank the Minister. It is obviously a good thing that there will be indexation. In fact, I was talking about the lack of indexing when we were talking about the freezing of tax thresholds earlier, so I understand that point.

However, I am asking a very technical, specific question about why the Government are using CPI rather than RPI. RPI includes the cost of housing, and the cost of rent, or whatever, for the place where the caring is being done seems to me to be a relevant cost in this context. Indexing to RPI would actually be a better way of representing and indexing those costs going forward. I am asking: why CPI, rather than RPI?

Victoria Atkins (Conservative, Louth and Horncastle)

It is because that tends to be our measure across the board. I take the hon. Lady’s point about housing, but if someone needs help with the cost of housing, depending on their income levels, there are other ways in which they can get help from the state for that. This relief was specifically to reflect the extraordinary public service that families across our constituencies provide in helping those most vulnerable of children.

Clause 29 - Estates in administration and trusts

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss the following:

Amendment 4, in schedule 2, page 291, line 38, at end insert—

“(za) the property comprised in the settlement is not held for a pensions purpose within the meaning of paragraph 7(3) of Schedule 1C to TCGA 1992 (property comprised in settlements held for a pensions purpose);”

This amendment would mean that a pensions settlement could not be a “qualifying settlement” for the purposes of section 24B of the Income Tax Act 2007 (being inserted by the Bill) or a “relevant settlement” in respect of which the conditions in subsection (9) of that section could be met.

That schedule 2 be the Second schedule to the Bill.

Victoria Atkins (Conservative, Louth and Horncastle)

Clause 29 and schedule 2 make changes to provide greater certainty and simpler tax administration for trusts and estates by legislating and extending an existing concession. The changes prevent trusts and estates having to report small amounts of income tax to HMRC, make tax calculations more straightforward for some trustees, and provide technical clarifications for estate beneficiaries.

Trustees of trusts and personal representatives of deceased persons’ estates do not have tax allowances in the same way that individuals do. As a result, they must send HMRC a self-assessment return for all income, even small amounts. HMRC operates a narrow concession so that trustees and personal representatives do not have to report small amounts of untaxed savings income.

Last year, HMRC consulted on proposals to formalise and extend the concession, and on related reforms that would apply to smaller trusts and estates. Respondents broadly welcomed the proposals. We published a summary of the responses to the consultation at the spring Budget and are proposing legislation in line with that publication.

The changes made by clause 29 and schedule 2 will provide greater certainty and simpler tax administration for trusts and estates. Part 1 of the schedule makes technical amendments relating to income distributed from a deceased person’s estate to a beneficiary. Those ensure that the beneficiary’s tax credits operate correctly, and that a person can use their savings allowance against distributed savings income.

Part 2 of the schedule introduces a tax-free amount for trusts and estates with an income of £500 or less in a tax year. That frees smaller trusts, and around one in every seven estates with income, from paying and reporting income tax. The tax-free treatment for estate income is also passed on to the estate’s beneficiaries. For groups of trusts, the £500 limit will be reduced to a minimum of £100 per trust. That will prevent individuals from splitting up their investments into multiple small trusts to build up an inappropriate amount of tax-free income. We have tabled amendment 4 to simplify that rule. It excludes certain pension schemes from consideration when determining the amount of any reduction to a trust’s £500 tax-free amount.

Part 3 of the schedule removes the default basic rate and dividend ordinary rate of tax that applies to the first £1,000 slice of income for accumulation trusts and discretionary trusts. Reducing the number of tax rates in this way will make tax calculations more straightforward. It also avoids complications with the new tax-free limit, which is better targeted at low-income trusts. The change will take about 8,000 trusts and estates out of income tax and reporting, and simplify how tax applies to bereaved beneficiaries.

James Murray (Labour/Co-operative, Ealing North)

As we have heard from the Minister, clause 29 introduces schedule 2, which makes provisions relating to the taxation of estates in administration and trusts. We understand that the clause implements the Government’s response to the “Income tax: Low income trusts and estates” consultation conducted by HMRC between April and July 2022. The response was published at the time of the spring Budget. The clause seeks to legislate for an existing concession on the administration of tax for trusts and estates.

We will not oppose this measure, but I ask the Minister to address concerns raised by the Chartered Institute of Taxation about the impact of this clause on trusts. It believes that the legislation takes a practical approach on estates, which will benefit both the personal representatives of the deceased and their beneficiaries. However, it believes there is less simplification in respect of trusts with low incomes, and that for some people, the administrative burden will actually increase. The institute has concerns about the way that trust income is taxed in two stages. First, the trustees report the trust’s income and pay tax on it. Secondly, when income is distributed to beneficiaries, they must report the income and pay any tax that remains due after credit has been given for the tax that was taken at the first stage.

The Chartered Institute of Taxation draws attention to the fact that although a £500 threshold, like that for estates income, is applied to the income accruing to the trustees of a settlement, that does not exempt the income in the hands of the beneficiaries. Where trustees have no liability to report or pay, basic rate taxpayers will have to pay the basic rate tax due on their income from the trust. Currently, they may not be filing a tax return at all, as their basic rate liability will have been met by the tax deducted by the trustees; this measure may mean that they now have to file a tax return. I would welcome the Minister’s thoughts on that point, and would be grateful for a response to CIOT’s concern that this measure, while described as a simplification, could impact on often vulnerable beneficiaries receiving modest amounts of income, who will now have greater compliance burdens.

Kirsty Blackman (Scottish National Party, Aberdeen North)

I have a quick question on Government amendment 4. Will it change the application of schedule 2 and proposed new schedule 1C to the Taxation of Chargeable Gains Act 1992, or does it simply clarify what is intended anyway under those schedules? The amendment specifically mentions the property not being held for pensions purposes. I am trying to understand whether that was the original intention, or whether the amendment changes the intent of schedule 2 and of schedule 1 to the TCGA.

Victoria Atkins (Conservative, Louth and Horncastle)

On the simplification point, the replacement of the lower-rate band with the new tax-free amount supports our long-standing goal of a modern and simpler tax system. This is a simplification for low-income discretionary trusts, as income within the tax-free amount will no longer be taxed as it arises. The change also simplifies calculations when income distributions are made. The consultation last year outlined that where discretionary trusts make income distributions, the existing 45% credit given to beneficiaries with that income would remain, as would the continued need for trustees to top up their payments to HMRC to match that credit when the distribution is made. I am told that the Chartered Institute of Taxation agreed with that proposition, and the Association of Taxation Technicians saw that as largely a question of timing and did not see a particular issue with the principle.

The hon. Member for Ealing North asked about vulnerable beneficiary trusts. The measures are a simplification for those trusts, as for any other low-income trust, as there will no longer be the need to elect to have income taxed as if for vulnerable beneficiaries. Instead, the income will simply not be taxed as it arises. Most vulnerable beneficiary trusts are, indeed, discretionary trusts, and as I said earlier, both the Chartered Institute of Taxation and the Association of Taxation Technicians have opined on this. The measure does not affect the need for trust beneficiaries to consider their tax reliability on their trust income. On the hon. Member for Aberdeen North’s question, the amendment clarifies our intentions.

James Murray (Labour/Co-operative, Ealing North)

I thank the Minister for her response to my point. For clarity, my understanding of the Chartered Institute of Taxation’s point was that where trustees have no liability to report or pay, the beneficiaries, if they are basic-rate taxpayers, may still have basic rate income tax due on their income from the trust. I may have misunderstood, but did she say that beneficiaries will not be liable to income tax? Can she clarify that point?

Victoria Atkins (Conservative, Louth and Horncastle)

I will repeat exactly what I said for the hon. Gentleman, slowly: the measure does not affect the need for trust beneficiaries to consider their tax reliability on trust income that they receive.

Schedule 2 - Estates in administration and trusts

Clause 30 - Transfer of basic life assurance and general annuity business

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss clauses 31 to 33 stand part.

Victoria Atkins (Conservative, Louth and Horncastle)

Clauses 30 and 31 address two issues concerning the tax rules that deal with reinsurance of a specific type of long-term insurance business known as basic life assurance and general annuity business, or more commonly, BLAGAB. Clauses 32 and 33 address the corporation tax and pension tax consequences that will arise from proposed new schedule 12 of the Financial Services and Markets Act 2000, which amends the procedure for a court-ordered write-down of an insurer’s liabilities when an insurer is in financial distress.

Clauses 30 and 31 were originally announced by the Economic Secretary to the Treasury in a written ministerial statement on 15 December 2022 and applied with effect from that date. They address the risk of both tax loss and unfair outcomes for insurers that could otherwise arise from commercial transfers of BLAGAB from one insurer to another.

Insurers writing BLAGAB are charged corporation tax under the “income minus expenses” basis of taxation, which seeks to tax the shareholder profits and the policyholder investment return together as a single taxable amount. When a BLAGAB book is reinsured prior to the transfer of a business, the shareholder profit and policyholder investment return become separated and are taxed differently, which could result in a tax mismatch. Clauses 32 and 33 prevent unintended tax consequences arising for both the insurer and individuals in the event of a court-directed write-down, which will help to ensure that such write-downs are a viable option to insurers in financial difficulty.

Clause 30 addresses a possible tax mismatch arising from the rules applying to the reinsurance of BLAGAB, which can result in a loss of corporation tax when a court-approved transfer of BLAGAB is preceded by reinsurance. In that situation, the clause classifies and taxes the reinsured business as BLAGAB in the hands of the reinsurer, ensuring that profits are taxed on a consistent basis. By protecting the Exchequer in such a way, this measure will increase receipts by £50 million to £60 million per annum.

Clause 31 addresses an industry concern that the current scope of the legislation, which treats certain sums received under a reinsurance contract as taxable income, may be unnecessarily wide and is blocking commercial transactions. It amends section 92 of the Finance Act 2012 so that it does not apply where substantially all the insurance risks of a book of BLAGAB are reassumed by a reinsurer.

Clause 32 addresses the corporation tax consequences that could otherwise arise when an insurer’s liabilities are written down under proposed new section 377A of the Finance Services and Markets Act 2000, and when there is any subsequent write-up under proposed new section 377I of FSMA. Without the clause, any release of liabilities could lead to an undesirable additional tax charge, which would reduce the balance sheet benefits of the write-down. The changes therefore help to ensure that the ailing insurer avoids insolvency. The clause also prevents the insurer from claiming a tax deduction where a write-down order is subsequently varied or terminated, which ensures that when an insurer recovers, the overall impact of the clause is tax neutral.

Clause 33 will extend the circumstances in which a pre-6 April 2015 lifetime annuity or a dependants annuity under a registered pension scheme can be reduced under a section 377A write-down without incurring unauthorised payments charges. This will ensure that those who receive financial services compensation scheme top-up payments, following a write-down under proposed new section 217ZA of the Financial Services and Markets Act 2000, will not face a tax disadvantage.

These clauses address a possible mismatch within the life insurance tax rules and clarify the scope of existing legislation, facilitating commercial transactions and protecting vital Exchequer revenue. They also ensure that write-down orders are a viable option for insurers in financial distress, and do not cause any additional tax liability for either the insurer or the individuals who hold policies with those insurers. I therefore recommend that the clauses stand part of the Bill.

James Murray (Labour/Co-operative, Ealing North)

As we have heard, clause 30 applies to reinsurers of specific types of long-term insurance businesses known as basic life assurance and general annuity businesses, or BLAGAB. This is a technical change that addresses a tax mismatch in the life insurance rules where reinsurance precedes a transfer of BLAGAB. In that situation, the clause classifies the reinsured business as BLAGAB in the hands of the reinsurer.

We recognise that when books of life insurance policies are transferred between insurers, the economic transfer is typically effected by a reinsurance contract, pending court approval of the transfer. That gives the purchaser the economic benefits of the acquisition immediately. As we know, a tax mismatch can arise, as the profits from the business are initially taxed in the hands of the cedant as BLAGAB, then in the hands of the reinsurer as non-BLAGAB and, finally, after the business transfer scheme occurs, in the hands of the reinsurer as BLAGAB once again. A loss of tax can occur if a non-BLAGAB trade loss arises for the reinsurer and is offset against total profits or surrendered as group relief. The clause resolves that anomaly by ensuring that any profits or losses from the reinsured business that arise to the reinsurer are within BLAGAB. The ensuing result is that any trade profit or loss in the reinsurer will be subject to the BLAGAB rules, which accordingly brings the tax treatment of the reinsurer in line with the seller of the business.

We will not oppose this measure. For completeness, however, I would be grateful if the Minister could confirm the Exchequer impact of the measure, as it was not included in the original policy paper published on 15 December last year. We recognise that, as the policy paper points out, a consultation was not conducted due to the risk of forestalling. We also recognise that the amendments to eliminate the possibility of a mismatch will apply from 15 December last year, regardless of when the reinsurance contract was entered into.

The policy paper states that the final costings for the measures will be subject to scrutiny by the Office for Budget Responsibility and set out at the next fiscal event. For absolute completeness and to ensure that the information is on the record and easily available as we consider the clause, I would be grateful if the Minister confirmed what the Exchequer impact up to 2027-28 is now estimated to be.

Moving on, clause 31 makes a technical amendment to existing legislation to address industry concern that the scope of section 92 of the Finance Act 2012 may be unnecessarily wide. Where life insurance companies reinsure blocks of BLAGAB, it is possible that amounts received under the reinsurance might be treated as deemed income within I-E. That uncertainty has inhibited commercial transactions. As the Minister set out, this technical amendment excludes amounts from the operation of section 92 of the Finance Act 2012 where sums are paid under a reinsurance contract and substantially all the insurance risks relating to a group of policies are reinsured. We will not oppose this measure.

Clause 32 operates alongside clause 33, which I will come to in a moment, to help to deliver the policy intent of the amendments to be made through the 2022 Financial Services and Markets Bill, which seeks to support insurers in financial distress by averting the tax implications for insurers and for policyholders. This clause addresses the corporation tax consequences that would otherwise arise when an insurer’s liabilities are written down under the proposed new section 377A of the Financial Services and Markets Act 2000 and any subsequent write-up. This primary legislation will apply from the date of Royal Assent. We will not oppose clause 32.

Finally, clause 33, which operates alongside clause 32, as I mentioned, extends the circumstances in which a pre-6 April 2015 lifetime annuity or dependents annuity under a registered pension scheme can be reduced without incurring unauthorised payment charges. That will ensure that those who receive financial services compensation scheme top-up payments as a result of the write-down under the Financial Services and Markets Bill’s proposed new section 217ZA of the Financial Services and Markets Act 2000 will not face a tax disadvantage. The primary legislation for those pensions tax changes will also apply from the date of Royal Assent of this Finance (No. 2) Bill, while additional consequential pensions tax changes concerning unauthorised payments will be made via a statutory instrument. We will not oppose clause 33.

Angela Eagle (Labour, Wallasey)

We often plead for financial services legislation to be made simpler, but from listening to the debate, it seems that we have not quite succeeded yet. I have a few questions, but the changes seem to be sensible; they ensure that there is no game-playing when it comes to reinsuring those bits of business that might need to be transferred from an ailing or failing insurance company to something stronger, so that those who rely on payments for their pensions or other costs can be assured that they will not lose out.

Have these technical changes been proposed as a result of an issue in the insurance world? Do insurers who wish to join larger companies or pass on some of their insurance policies want to do so because they thought that they had a tax advantage, and have buyers not been wanting to buy because they think that they might be left holding the baby, and face a big tax issue? Is this a structural problem, or does the Treasury see this as a potential problem that it wants to iron out before it manifests in the market? I suppose that is the question I am asking. If we are talking about a problem that has been holding up the efficient working of the market, what will the effect of the change be? Will it be beneficial? Has the Treasury modelled it, so that it knows the implications of the change? I am trying to get a handle on whether this is a theoretical issue, or whether there is an actual problem that has led to these changes, which seem sensible, if complex.

Victoria Atkins (Conservative, Louth and Horncastle)

First, in answer to the hon. Member for Ealing North, the Exchequer impact is plus-£15 million for 2022-23—all the figures are positive—plus-£50 million in 2023-24, plus-£55 million in 2024-25, and the same for 2025-26 and 2026-27. That is how long the measure has been scorecarded for. The hon. Member for Wallasey asked whether the risk was possible or actual. We legislated before significant further risk could arise on the adoption of the new accounting standard, IFRS 17.

Clause 30 addresses a possible tax mismatch in the BLAGAB reinsurance rules. Clause 31 addresses a matter brought to HMRC’s attention by the insurance sector, which has a long-standing concern that the current scope of the legislation, which treats certain sums received under a reinsurance contract as taxable income, may be unnecessarily wide and is blocking commercial transactions. In relation to the hon. Lady’s laments about the simplification of financial services legislation, I speak with the scars of having tried to prosecute insider dealing cases in my time, so I can understand why she asks about that.

Clause 34 - Corporate interest restriction

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss the following:

Government amendment 5.

That schedule 3 be the Third schedule to the Bill.

Clause 35 stand part.

That schedule 4 be the Fourth schedule to the Bill.

Victoria Atkins (Conservative, Louth and Horncastle)

Clause 34 and schedule 3 make changes to the corporate interest restriction and connected rules in order to protect Exchequer revenue, remove unfair outcomes and reduce administrative burdens for businesses. Clause 35 and schedule 4 amend tax rules for real estate investment trusts, qualifying asset-holding companies, and overseas collective investment vehicles that invest in UK property.

On clause 34, the UK’s corporate interest restriction rules prevent groups from using financing expenses to erode their UK tax base, where those expenses are not aligned with a group’s UK taxable activities. The Government estimate that the rules have increased corporation tax receipts by over £1 billion per annum since they were introduced in April 2017. The rules can be complex because they operate at both worldwide group and individual entity level. Therefore, on their introduction, the Government committed to keeping the rules under review, and in July last year HMRC set up an external working group to consult on proposed amendments to address issues raised by businesses and their advisers.

Following that consultation, we are introducing clause 34 and schedule 3 to make a total of 21 amendments to the corporate interest restriction and related rules limiting deductions for finance costs. There are five changes that protect the Exchequer’s position. I will not go through all five, but they include ensuring that groups cannot reallocate amounts of disallowed financing costs to reduce or eliminate a corporation tax inaccuracy penalty for careless or deliberate errors, and confirming that groups containing charities cannot benefit from tax relief for financing costs incurred in respect of tax-exempt activities. In most cases, the changes implemented by the Bill will take effect for periods of account starting on or after 1 April 2023.

The Government have also tabled amendment 5, which concerns the definition of an insurance company for the purpose of the corporate interest restriction rules. The amendment ensures that the legislation has the desired effect, and I am told that it is supported by the Association of British Insurers.

At Budget 2020, we launched a review of UK investment funds’ taxation and regulatory rules. That led to the introduction of a new tax regime for qualifying asset-holding companies in April last year. Clause 35 and schedule 4 make targeted changes to that regime, to address issues raised by industry. They also make reforms to other tax regimes for investment vehicles that invest in UK property.

There are many changes, including, first, to amend the “genuine diversity of ownership” condition in the tax regimes for qualifying asset-holding companies and real estate investment trusts, as well as the non-resident capital gains tax rules that apply to overseas collective investment vehicles. The second group of changes make targeted amendments to the REIT rules, to address issues raised by industry following a call for input in April 2021. They remove unnecessary constraints and administrative burdens. The third group of changes make amendments to the qualifying asset-holding companies regime, making it more widely available to investment fund structures that fall within its intended scope.

It is right that, after six years, the Government review the corporate interest restriction rules and address issues brought to our attention. That is what these clauses and schedules serve to deliver.

James Murray (Labour/Co-operative, Ealing North)

As we have heard, clause 34 and schedule 3 make amendments in connection with the corporate interest restriction and predecessor legislation, to ensure that the rules work as intended. As we know, the corporate interest restriction rules superseded part 7 of the Taxation (International and Other Provisions) Act 2010, commonly referred to as the debt cap. The aim of the rules has been to restrict the ability of large businesses to reduce their taxable profits through excessive UK finance costs. Amendments were made to the corporate interest restriction rules in the Finance Acts of 2018, 2019 and 2021, to address various technical issues in order to ensure that the rules operated as intended. In July 2022, a working group was formed to consider proposed amendments to the rules, following further representations from customers, tax advisers and representative bodies regarding unfair outcomes. It was announced at the Budget that the Government would make a number of modifications to the rules, and clause 34 implements those modifications.

We will not oppose clause 34, but I would be grateful if the Minister could give some sense of the scale of the benefit that the changes are likely to bring to businesses or the Exchequer. The policy paper for the measure begins:

“This measure addresses a number of issues to protect the Exchequer and reduce unfair outcomes or high administrative burdens.”

However, in the detail, it states:

“This measure is expected to have a negligible impact on the Exchequer…This measure will have a negligible impact on an estimated 6,800 groups,”

and

“This measure is expected overall to have no impact on business’ experience of dealing with HMRC as the proposals do not significantly change any processes or administrative obligations.”

The policy paper therefore sets out at several points the view that the measure has no impact or, at most, a negligible impact. I would be grateful if the Minister could help us to square those statements with the aim of the measure. For instance, can she explain how the policy paper can claim at one point that the measure will “reduce...high administrative burdens,” yet also conclude that

“the proposals do not significantly change any processes or administrative obligations”?

Clause 35 and schedule 4 update the rules governing the tax treatment of certain investment vehicles. The qualifying asset-holding companies regime was included in the Finance Act 2022 and came into effect from April last year. Amendments to the regime were initially announced in July 2022, with further amendments announced in March 2023. The amendments seek to make the regime more widely available to investment fund structures that fall within its intended scope.

As we have heard, clause 35 and schedule 4 also affect the rules for real estate investment trusts—companies through which investors can invest in real estate indirectly. In a written statement on 9 December 2022, the Chancellor announced changes to the property rental business condition and three-year development rule within the real estate investment trust rules. Schedule 4 gives effect to those changes, and we will not oppose clause 35.

Victoria Atkins (Conservative, Louth and Horncastle)

We are making these changes because, as I have said, we are mindful that this is an incredibly complex area of law and of corporate accountability and we are genuinely happy to listen to businesses when they tell us that there are problems and they think that they have solutions for those problems. That is why we have gone through this process and set up an external working group. HMRC, businesses and their advisers have identified issues with the current rules. We are making these changes to protect the Exchequer and reduce unfair outcomes and administrative burdens on affected businesses.

The hon. Member for Ealing North referred to the worldwide debt cap. The corporate interest restriction rules superseded the tax treatment of financing cost and income rules, commonly referred to as the worldwide debt cap, but there are still open inquiries and cases in litigation where the debt cap legislation is in point. The changes clarify that a revised statement of disallowances is ineffective unless a revised statement of allocated exemptions is also submitted, so exemptions must always be reduced in line with disallowances.

Schedule 3 - Corporate interest restriction etc.

Clause 36 - Share exchanges involving non-UK incorporated close companies

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss the following:

Clause 37 stand part.

That schedule 5 be the Fifth schedule to the Bill.

Clause 38 stand part.

Victoria Atkins (Conservative, Louth and Horncastle)

Clause 36 makes changes to ensure that tax is paid on value built up in UK shares or securities even if the shares or securities are exchanged for an equivalent holding in a non-UK company. The measure is already legally in application since the point of its announcement in the autumn statement on 17 November last year. It will ensure that tax cannot be avoided where a UK resident non-domiciled individual with a degree of control in a UK company exchanges shares or securities in a UK close company for shares or securities in a non-UK holding company.

Before the measure was introduced, individuals could claim the remittance basis on disposal of the non-UK company shares and any income received in respect of the non-UK company shares. That means that tax will be paid only on the chargeable gain or the income if it is brought into the UK. The measure prevents the remittance basis from applying to the chargeable gain on disposal where the individual holds more than 5% of shares or securities in a UK close company and exchanges the shares for an equivalent holding in a non-UK company. Instead, the individual will pay tax as if the share exchange had not taken place. The clause will prevent tax avoidance by a small number of individuals, and protects £830 million of revenue across the scorecard period, ensuring that tax is paid on value built up in the UK on UK company securities even when securities are exchanged for securities in a non-UK company.

Clause 37 and schedule 5 make changes to require large multinational businesses operating in the UK to prepare transfer pricing documentation in accordance with the OECD’s transfer pricing guidelines. Transfer pricing is a means of ensuring that the pricing of transactions between connected parties is at arm’s length for tax purposes. From the financial year 2016-17 to 2021-22, HMRC brought in £10 billion in additional tax from transfer pricing compliance activities. HMRC does not currently prescribe specific transfer pricing records that UK businesses must prepare to demonstrate that their tax returns are complete and accurate, or the format of those records.

The proposed changes would require UK businesses to prepare OECD standardised documentation, which is described as a master file providing high-level information of the global business operations and a local file providing more detailed information about material cross-border transactions of UK group members with other members of the multinational group. The changes made by clause 37 and schedule 5 provide greater certainty for UK businesses, provide HMRC with better quality data to enable more efficient and targeted compliance interventions, and align the UK’s practice more closely with the transfer pricing documentation requirements of comparable tax administrations.

Clause 38 makes changes to ensure that access to double taxation relief is limited in respect of dividends received by UK companies in periods prior to the introduction of a broad distribution exemption regime in 2009. Specifically, it will prevent new claims for double tax relief credit calculated at the foreign nominal rate of tax on such dividends being made on or after 20 July 2022, the date on which the Government announced in a written ministerial statement that legislation would be introduced for that purpose. Unlike normal double tax relief, which is given on tax actually paid, foreign nominal rate credit is a notional amount calculated by reference to the rate of tax applicable to the profits out of which the overseas dividends were paid.

A first-tier tribunal decision in 2021 concerning the nature of this credit raised the prospect that certain claims could still be made by companies in receipt of foreign dividends prior to the introduction of distribution exemption in 2009, possibly as far back as 1973, so we needed to act. The measure will protect Exchequer revenue by preventing new claims from being made for long-settled years where no actual additional tax has been paid by the claimant. It does not seek to prevent such claims in relation to periods that are open or remain subject to ongoing litigation. The measure is intended to preserve the balance between taxpayers’ rights to make double-taxation relief claims and the need to impose reasonable time limits in respect of such claims. I recommend that all of these clauses stand part of the Bill.

James Murray (Labour/Co-operative, Ealing North)

I begin by addressing clause 36, which inserts new sections into the Taxation of Chargeable Gains Act 1992. As we heard from the Minister, the new sections will help to make sure that UK tax cannot be avoided on chargeable gains made on the disposal of a UK business, or on income received in respect of shares or securities held in a UK business, by exchanging securities in a UK company for securities in a non-UK holding company. Under the current legislation, where such an exchange takes place and the individual is a UK-resident non-domicile, they will be able to claim the remittance basis on any chargeable gain made on the disposal of the non-UK company’s securities or on any income received in respect of the offshore company’s securities.

I would be grateful if the Minister could set out the Government’s response to some of the queries about the detail of the Bill that have been raised by the Chartered Institute of Taxation, which has expressed concern that by applying only to individuals in their other guises—for example, when they are acting as trustees—the measure leaves gaps that could be exploited. The Chartered Institute of Taxation believes that there is potentially a straightforward avoidance opportunity here, whereby having shares held by trustees just before the share-for-share exchange could be resolved by extending the measure to cover trustees, rather than just individuals on their own. To tackle this issue, the Chartered Institute of Taxation suggests that individuals acting as trustees, or as partners or members of partnerships or LLPs, be included within the definition of those affected by the change, to ensure that artificial intermediaries are not put in place prior to any exchange.

The second point raised by the Chartered Institute of Taxation, which I would like the Minister to address, relates to the wording of the Bill with respect to the ownership of shares, which it believes may also create an avoidance opportunity. New section 138ZA(1)(d) of the Taxation of Chargeable Gains Act 1992, which clause 36 introduces, refers to the person to whom the shares are issued—the legal owner, as opposed to the beneficial owner. It is well recognised in tax law that the beneficial owner is the real owner for tax purposes, so the Bill should logically refer to beneficial ownership. The Chartered Institute of Taxation is therefore concerned that failure to clarify the beneficial, rather than legal, ownership could leave a possible avoidance opportunity open, and I would be grateful if the Minister could address that point.

More widely, looking beyond the specific detail of the Bill, we believe it is important to consider the context in which the clause operates. It seems clear that the situation that the measure in the clause seeks to address arises only because of the existence of the non-dom tax status and the associated remittance basis. Indeed, the Government’s own policy paper on this matter makes it clear that the measure is expected to affect a very small number of wealthy, UK-resident non-domiciled individuals a year. In practice, the measures we are considering need to be addressed only because the Government refuse to get rid of the £3.2 billion-a-year tax loophole that the Prime Minister has referred to as “that non-dom thing”.

The Minister may recall how she told the House in January that the measures we are debating today would mean that the Chancellor would close the loophole in non-dom legislation, but when we inspect the detail that is before us today, it is clear that this is just a smaller loophole within the much larger and more profound loophole: the continued existence of the non-dom tax status. The policy paper underscores this point and confirms that the measure will raise, on average over the next five years, just one 20th of the £3.2 billion lost through the non-dom tax status every year. I urge the Minister to go beyond the small step today and commit to abolishing the non-dom tax loophole altogether.

Moving on to clause 37 and schedule 5, we understand that this measure is intended to make sure that businesses maintain and provide upon request transfer pricing documentation prepared in accordance with the OECD transfer pricing guidelines. We recognise that accessing high-quality data in a standardised format would enable HMRC to carry out more informed risk assessments, target resources more efficiently and reduce the time taken to establish the facts in compliance interventions. Moreover, having to clearly report transfer pricing information in specific documentation will result in businesses having clearer and more robust transfer pricing positions to inform the filing of their return. This may encourage and incentivise businesses that adopt higher risk transfer pricing positions to change their behaviour.

In recent years there have been significant developments in the field of international taxation. More than six years ago, the OECD presented a package of measures in response to the G20-OECD base erosion and profit shifting action plan, including a requirement to develop rules regarding transfer pricing documentation. The action 13 final report recognised the importance of having the right information at the right time to identify and resolve transfer pricing risks. This led to the introduction of guidance on a standardised approach to transfer pricing documentation.

The standardised approach consists of three things: a master file containing standardised information relevant for all multinational enterprise group members; a local file referring specifically to material transactions of the local taxpayer; and a country-by-country report for the largest multinational enterprise groups containing aggregate data on the global allocation of income, profit, taxes paid, economic activity and so on among the tax jurisdictions in which it operates.

We understand from the policy paper on this measure that the UK did not originally introduce specific requirements regarding the master file and local file because the Government felt that the UK already had broad record-keeping requirements. They seem to have changed their mind on this, which has led to this Bill. It seems that the status quo had created uncertainty for UK businesses regarding the appropriate transfer pricing documentation that they needed to keep. That led to an inconsistency of approach. Although this measure relates to the standardised approach for transfer pricing documentation, I would like to ask the Minister to update the Committee on the status of country-by-country reporting.

The policy paper refers to the fact that the UK implemented the country-by-country minimum standard. However, as we know, the Government have long been hesitant to go beyond that minimum and provide public country-by-country reporting. Indeed, nearly three years ago my hon. Friend the Member for Houghton and Sunderland South (Bridget Phillipson) made it clear to one of the Minister’s predecessors that for years the Opposition has been urging the Government to commit to country-by-country reporting on a public basis. Will the Minister give us her view on public country-by-country reporting and explain what is preventing the Government from implementing it?

Finally, clause 38 introduces a measure to limit access to double taxation relief in certain circumstances. Specifically, we understand that it will prevent new claims for double taxation relief credit, calculated by the foreign nominal rate of tax, which could arise in relation to overseas dividends received by UK companies in periods prior to the introduction of the distribution exemption in 2009. We recognise that this measure is intended to preserve the balance between double taxation relief claims and the need to impose reasonable time limits in respect of such claims, so we will not be opposing this clause.

Sam Tarry (Labour, Ilford South)

It is an honour to speak under your chairmanship, Ms McVey. On the points made by my hon. Friend in relation to clause 36, it is important for the record that we understand the Government’s thinking around non-doms. Although work has been done to close the particular loophole that was mentioned, as my hon. Friend has just said it is quite apparent that that work is tiny compared to the scale of the problem. It is worth exploring the breadth of the problem.

Let us be clear. Non-doms receive around £10.9 billion in offshore income. That is capital gains that they are not required to report on to HMRC or pay tax on in the UK each year. For a non-dom using that remittance basis scheme, that amounts to a tax break of on average £420,000. Those unreported capital gains represent a huge untapped pool of tax. There are so many issues facing the country, and that money could be used appropriately to lift many people out of poverty.

Members on Government Benches have expressed on many occasions concerns about abolishing non-dom status and a potential flight or mass exodus from the UK. However, recent interesting research by the University of Warwick found that only 0.3% of those affected would leave the country. That is fewer than 100 people in total, most of whom are paying hardly any tax under the current regime. My question to the Minister is: why is there so little breadth in what has been brought forward? This was an opportunity to completely abolish non-dom status, or, if the Government are not prepared to do that, certainly to apply minds in the Treasury to a far wider range of areas, which would have brought much-needed money into our coffers. It is a problem that the Government are really a bit lax when it comes to tax.

Turning to a slightly different issue, because it is important for people to know just how severe the problem is, a report by the London School of Economics showed that more than one in five top-earning bankers, and two in five top earners in the oil industry, have benefited from non-dom status. One in four top earners in the car industry have enjoyed non-dom status at some point in their careers. One in six of the sports and film stars living in the UK have claimed non-dom status, with an average income of £2 million.

Does the Minister find it fair that so many are avoiding tax on this huge scale while enjoying all the benefits of living in this country that everyone else has, effectively subsidised by nurses, rail workers, public sector workers and low-paid workers in the private sector? It is important to understand why the Government have decided not to bring forward more punitive, harsher measures that are wider in scope in the Bill, which would have dealt with the non-dom status issues in the round, or, as my hon. Friend the Member for Ealing North said, abolished it in the first place.

Victoria Atkins (Conservative, Louth and Horncastle)

I am delighted to answer the Opposition’s queries on non-domiciled taxpayers. Their stance is an interesting contrast to the Conservative party’s inclusive nature when it comes to wealth creation, and opening ourselves up to the rest of the world to encourage the best and brightest to come here and do business. I am interested to hear that the hon. Gentleman has something against film stars, singers and—dare I say it—movie stars who perhaps cross into the world of football. I will not name any taxpayers. But my goodness, I am sure he is proud of the fact that we have a leading film and creative industry in the United Kingdom, particularly on the outskirts of London. I have the great pleasure of meeting representatives of some of those industries from time to time; the excitement and the welcome they feel from the United Kingdom, partly because of the reliefs and support given by the Government, is really interesting to see.

Turning to the scheme itself, we want to have a fair but internationally competitive tax system, designed to bring in talented individuals and investment that will contribute to the growth of the economy. Non-domiciled individuals pay tax on their UK income and gains in the same way as everybody else, and they pay tax on foreign income and gains when those amounts are brought into the UK. They play an important role in funding our public services through their tax contributions. According to the latest information, non-UK domiciled taxpayers are estimated to have been liable to pay almost £7.9 billion in UK income tax, capital gains tax and national insurance contributions in 2021, and they have invested more than £6 billion in the UK using the business investment relief scheme introduced in 2012.

To put those numbers into context, £7.9 billion is just under half of what we spend on policing in England and Wales. They are extremely big numbers. When the Opposition put their plans forward, they do not address a significant risk, which we have looked into carefully. What happens if, by changing the rules and making ourselves less competitive, we start to turn away those very successful people?

The hon. Member for Ilford South talked about capital flight. I think he was referring to the research published by the London School of Economics and the University of Warwick, which suggested that abolishing the non-domiciled regime would lead to very little immigration—around 0.2%. That study looked at the particular response to the 2017 reforms. As colleagues will know, several policy mitigations that were put in place in 2017 reduced the migration impact of reform: protections for non-resident trusts, the option to revalue non-UK assets at their 5 April 2017 valuation for CGT purposes and the ability to rearrange offshore investments to make it easier to bring money to the UK. Abolishing the remittance basis outright would be expected to have a much more significant behavioural impact in the absence of any policy mitigations, so the headline result of the external research may underestimate the migration response.

Samantha Dixon (Labour, City of Chester)

This morning we discussed the Office for Budget Responsibility’s statement that the Bill will drag an extra 1.2 million people into the higher rate of tax, so will the Minister explain, in plain English, her reluctance to include non-domiciled taxpayers?

Victoria Atkins (Conservative, Louth and Horncastle)

They are taxed, as UK taxpayers are taxed, on their UK income—that is the point. The hon. Lady will know that the threshold for the additional rate was lowered from £150,000 to just over £125,000 at the autumn statement. That will apply to the UK income tax of those who are earning here in the UK. That is precisely the point; the difference relates to their foreign income. We want to help these very mobile and very successful people who work for banks or in the movie and sporting worlds, and we want to help those who work for the various businesses to which the hon. Member for Ilford South referred to help us to build the best tech industry that we can possibly have. We want them to help us to build incredible life sciences solutions.

If the hon. Member for City of Chester took a bit of time to talk to some of the individuals involved in the life sciences industry—that golden triangle between Cambridge, Oxford and London—she would know that what they do is genuinely inspiring. Why on earth would we not welcome people from overseas to help us in that? That little golden triangle has more tech companies in it than any place on the planet other than New York and Silicon Valley. If those places are our competitors in the tech industry, we are doing very well indeed. We want to encourage more of them to come to our country to help us to build that.

Aaron Bell (Conservative, Newcastle-under-Lyme)

It is a pleasure to serve under your chairmanship, Ms McVey. The Opposition already seem to have spent the money from this claimed non-dom bonus a dozen times over, by my count. The Minister referred to the University of Warwick research, which I have referred to during various debates in the main Chamber. If the Treasury analysis is that that research—that 0.3% figure—is misguided, is it not the case that the magic pot of money that the Opposition keep spending does not actually exist?

Victoria Atkins (Conservative, Louth and Horncastle)

My hon. Friend brings a particular fervour to his intervention, if I may say so. I absolutely want very high-earning people to pay their proper taxes here in the United Kingdom, but we need to stay competitive, which is why we look at other countries around the world. Our competitors have regimes that give tax advantages, or they are more careful with the tax that they apply, to people who are so highly mobile. I want to bring those people to the UK and get them to pay UK taxes on their UK earnings.

Rob Butler (Conservative, Aylesbury)

It is a pleasure to serve under your chairship, Ms McVey. Is it not also the case that attracting those very mobile people to this country means that they then spend money in this country? Some of that is on VAT—a further tax—and much of it is on employing other people, who then pay tax themselves, so the very presence of such very mobile people has a multiplier effect on tax.

Victoria Atkins (Conservative, Louth and Horncastle)

I completely agree: there is a ripple effect from those individuals. Conservative Members understand the concern that such people should pay their taxes fairly and contribute to our economy, which is precisely why it is a Conservative Government who act on loopholes when they emerge and are drawn to our attention, as we have done in the Bill but also in 2017. There is a delicate balancing act to ensure that we remain internationally competitive.

Sam Tarry (Labour, Ilford South)

It is important that we are clear that non-dom status is mostly used by British citizens who were born in this country but have decided to not pay their taxes in this country, even though they live here for the majority of the year—[Interruption.] It is true. It is a hangover from the colonial era, when people used to have sugar plantations. Look at the history of non-dom status; it is hundreds of years old. It has not just been cooked up by the Treasury in the last five minutes, has it? It was a way of allowing people to own different things around the world—sugar plantations in the Caribbean are one example—and have that money come back to the UK without paying the taxes. It was a perk, essentially, for those people.

If Conservative Members do not believe me, they should go and look at the history. They are in government. They should know these sorts of things. The fact is that non-dom status is used as a tax dodge. The point is about fairness. Of course we want to encourage the brightest, most talented people to come to this country, make a life here and contribute, be that in life sciences, tech companies, the NHS or whatever, but I strongly suggest to the Minister that she should have a firm conversation with the Home Secretary about putting in place a progressive migration policy, because that is the problem here.

This is about taxation and people paying their fair share. Some 77,000 people—British residents, living most of the time in this country—use the non-dom scheme to not pay taxes—

Esther McVey (Conservative, Tatton)

Order. I remind Members that interventions should be brief.

Victoria Atkins (Conservative, Louth and Horncastle)

The hon. Gentleman is trying to tempt me away from the scope of the Bill, and I will resist that temptation. I gently ask him to help me—perhaps afterwards—to understand the evidence he has to support his claim that the overwhelming number of non-dom claimants are British residents. We just need to be a little bit careful about definitions.

Let me move on to the questions from the hon. Member for Ealing North. The share exchange legislation prevents a relatively simple way for shareholders to avoid tax. It applies only to individuals. If individuals use artificial arrangements to prevent the legislation from applying, they will need to consider whether other anti-avoidance provisions apply.

The hon. Member asked about the difference between the legal owner and the beneficial owner. Again, the legislation applies to shares held on behalf of the individual in a nominee, or bare trust arrangement. Section 60 of the TCGA treats shares as being issued to the beneficial owner where there is a bare trust or nominee arrangement in place.

On public country-by-country reporting, we remain firmly committed to a multilateral approach, but it is important that such a requirement applies consistently across domestic and foreign headquartered multinationals to avoid distorting decisions on where companies decide to locate.

James Murray (Labour/Co-operative, Ealing North)

The Minister quoted some figures that we have heard before, and I think it is worth the Committee having the context for them. The Minister tried to defend non-dom tax status by claiming that non-doms paid £7.9 billion in UK taxes last year. As always, that argument entirely misses the point, because we are talking about the £3.2 billion of tax that non-doms avoid paying in this country every year.

The Minister also repeated her line about non-doms having invested £6 billion in investment schemes since 2012, but I am sure the Committee would want to know that that ignores the fact that only 1% of non-doms invest their overseas income in the UK in any given year. In fact, non-dom status discourages people from bringing money into the UK to invest. We have set out the Labour party’s position very clearly, explaining how we would have a modern, short-term scheme for temporary residents.

Finally, the Minister referred to the potential behavioural impact if non-dom status were abolished. She was quick to dismiss some of the independent findings of the LSE and Warwick, made on the basis of HMRC data. If she is so confident that the behavioural difference will be that different, will she publish the Treasury research, so we have it in the public domain?

Victoria Atkins (Conservative, Louth and Horncastle)

We have to make judgments on how we ensure that the UK economy is not only internationally competitive but attractive to other countries. We are happy to make the point that non-domiciled taxpayers can make a valuable contribution to the United Kingdom, but of course we want them to pay—we require them to pay—UK income tax, and so on, on their UK income and remittances. We want to ensure that that system is in place.

On the behavioural aspects, we looked very carefully at the University of Warwick report, but what worries us is that there does not seem to be a recognition of the mobility of such people. They are able to live and work anywhere in the world. We do not want to put their living here at risk. Let us not forget that the hon. Gentleman is prepared to put at risk £7.9 billion. That is a risk we are not prepared to take.

James Murray (Labour/Co-operative, Ealing North)

I will focus on the question in my previous intervention. The Minister was keen to rubbish the LSE and Warwick analysis based on HMRC data. Will she—

Victoria Atkins (Conservative, Louth and Horncastle)

On a point of order, Ms McVey.

Esther McVey (Conservative, Tatton)

James Murray will finish and then the Minister will come in.

James Murray (Labour/Co-operative, Ealing North)

Thank you, Ms McVey. The Minister was quick to rubbish the conclusions of the LSE and Warwick on the behavioural impact of abolishing non-dom status, even though the research was thorough and based on HMRC data. The question I asked the Minister was whether she will publish the Treasury analysis that she is relying on to rubbish that LSE-Warwick conclusion.

Shaun Bailey (Conservative, West Bromwich West)

On a point of order, Ms McVey. My hon. Friend the Minister did not say that. Is it in order for Members of this House to misrepresent the words of other Members? I am pretty sure that “Erskine May” is clear, but I would be grateful for your guidance. I apologise for jumping in.

Esther McVey (Conservative, Tatton)

We cannot say “misrepresentation”, but I would like the Minister to give a full response to what was said.

Victoria Atkins (Conservative, Louth and Horncastle)

We have been through this on many occasions. We are perfectly entitled to receive advice. We have come to the conclusion that non-domiciled status is right for ensuring that we remain internationally competitive. I am not rubbishing anyone, or anything of that nature, and it is improper to say that I am, but we do have reasonable concerns. We have to look at the evidence base. The one thing that we are not prepared to do is to put at risk that £7.9 billion going into the UK economy.

Clause 39 - Payments to farmers under the lump sum exit scheme etc

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss the following:

Clause 40 stand part.

Government amendments 6 and 7.

Clause 41 stand part.

Government amendment 8.

Clauses 42 and 43 stand part.

Victoria Atkins (Conservative, Louth and Horncastle)

Clause 39 makes changes to clarify that payments from the lump sum exit scheme are treated as capital receipts. It aims to set clear and fair rules regarding the taxation of the scheme. Clause 40 creates a fairer system for assessing capital gains when an asset is disposed of under an unconditional contract. Clause 41 makes the capital gains tax rules fairer for spouses and civil partners in the process of separating or divorcing. Clause 42 makes changes to ensure that individuals who pay tax on carried interest are able to better align the time a tax liability arises in the UK with that of other relevant jurisdictions, and therefore claim double taxation relief where it is due. Clause 43 makes changes to ensure that roll-over relief and private residence relief work as originally intended for members of limited liability partnerships and partners of Scottish partnerships.

I will go through the changes in detail. Clause 39 clarifies the tax treatment for around 2,700 sole trader farmers, farming partnerships and farming companies who have received, or will receive, payments from the lump sum exit scheme. That will give certainty to those receiving such payments and remove the need to consider individual cases.

Clause 40 modifies HMRC’s four-year assessment powers so that, in certain circumstances, they will operate by reference to the tax year or accounting period in which the asset is conveyed or transferred. For capital gains tax, those circumstances are where the conveyance or transfer takes place six months after the end of the tax year in which the contract is entered into. For corporation tax, the date is one year after the end of the accounting period for the contract.

Capital gains tax rules provide that the transfer of assets between spouses and civil partners is made on a “no gain/no loss” basis. When spouses or civil partners separate, no gain/no loss transfers can be made only in the remainder of the tax year in which the separation occurs. Clause 41 extends no gain/no loss treatment until the end of the third tax year after the year the parties ceased to live together, the date on which the parties’ marriage or civil partnership ended, or the date when the parties entered into a divorce or separation agreement. No time limit applies to transfers of assets that form part of a formal divorce or separation agreement. The clause also makes changes to the rules that apply to the sale of the former family home. The other change applies to individuals who have transferred their share in the former family home to their ex-spouse or civil partner and who are entitled to receive a percentage of the proceeds when it is eventually sold.

Amendment 6 corrects an issue with time limits. Where a divorce agreement has not been entered into, spouses and civil partners should have up to three full tax years in which to transfer assets between themselves on a no gain/no loss basis. As it is worded currently, clause 41 provides a day short of that, so we want to correct that. Amendment 7 clarifies that the new rules also apply to divorce agreements entered into after spouses and civil partners have ceased to be married or have ended their civil partnership.

The changes made by clause 42 will introduce a new elective basis of taxation for carried interest, a type of reward for asset managers. For those who opt to use the elective basis, it will tax carried interest in the UK at an earlier time than under the current rules. That will mean that individuals receiving carried interest may be able to claim double tax relief in other jurisdictions more easily, avoiding disproportionate tax outcomes. That will help to remove barriers to international trade and support the health of the asset management sector while accelerating, but not reducing, UK tax.

Amendment 8 seeks to refine the calculation of carried interest for the purposes of clause 42. It modifies the calculation methodology so that it works in circumstances where managers are entitled to more carried interest if investors receive fund profits earlier. That means that the measure will better deliver in practice the opportunity to claim relief from double taxation on carried interest, as intended.

Clause 43 will ensure that roll-over relief and private residence relief work as originally intended for members of limited liability partnerships and partners of Scottish partnerships, by clarifying that the reliefs are available to them when an exchange of interest in land or private residences takes place, in the same way as they are when the land is held by the individual members or partners.

This group of clauses will provide greater certainty, consistency and fairness in the taxation of chargeable gains. I therefore commend them to the Committee.

James Murray (Labour/Co-operative, Ealing North)

Clause 39 clarifies the tax treatment of payments received under the lump sum exit scheme, saying they will be treated as capital receipts rather than income, provided that the eligibility criteria are met. As we know, the lump sum exit scheme was designed to make it easier for farmers who wish to retire or to leave the industry. The basis for the scheme was considered in 2021 by a consultation that we understand received 654 responses.

We will not oppose the clause, which is specifically designed to provide clarity on the tax treatment of payments made under the scheme, but I wish to use this opportunity to ask the Minister for more context around the clause and, in particular, for details on the operation of the scheme and what comes next.

I understand that a total of 2,706 farmers made an initial application to the lump sum exit scheme by the deadline of 30 September 2022. Of those claims, 511 were withdrawn or rejected. Will the Minister tell us what analysis there has been of why those 511 claims were withdrawn or rejected?

I am conscious that when the draft Agriculture (Lump Sum Payment) (England) Regulations 2022, which relate to this matter, were debated in March last year, concerns were raised, on behalf of organisations including Sustain, that the scheme could be open to instances of fraud. Will the Minister confirm whether any of the 511 claims that were withdrawn or rejected were in fact rejected on the basis of fraud? If she does not have that information, perhaps she can at least provide us with the detail about what anti-fraud efforts have been made in relation to the scheme and how successful they have been.

I understand that the Department for Environment, Food and Rural Affairs is conducting five pilots aimed at supporting new entrants into farming, and I would be grateful if the Minister updated us on how those pilots are going and any early lessons that she may be able to share with us.

Clause 40 modifies the operation of the period in which a person must notify HMRC that they are chargeable to capital gains tax or corporation tax, and the time limits for assessing chargeable gains and claiming allowable losses, when an asset is disposed of under an unconditional contract.

When an asset is disposed of in that way, its date of disposal for capital gains purposes is treated as being the date on which the contract is made and not the date on which the asset is conveyed or transferred, if this is different. HMRC subsequently has four years from the end of the tax year or accounting period in which the disposal is treated as taking place in which to assess any tax that is due. Similarly, there is a four-year time limit for making loss claims. If there is a long gap between the disposal contract being entered into and it being performed, that can result in HMRC and taxpayers having little or no time in which to make a tax assessment or a claim.

We recognise that the measure removes potential avoidance opportunities by ensuring that HMRC can assess tax due in circumstances in which more than four years pass between an unconditional contract being entered into and an asset being conveyed or transferred. It also provides the taxpayer with a safeguard by allowing a corresponding period to claim allowable losses. We will therefore not oppose the clause.

As we heard, clause 41 makes changes to the rules that apply to transfers of assets between spouses and civil partners who are in the process of separating. It provides that they be given up to three years in which to make a no gain, no loss transfer of assets between themselves when they cease to live together, and unlimited time if the assets are the subject of a formal divorce agreement. It also introduces special rules that apply to individuals who have maintained a financial interest in their former family home following separation and that apply when that home is eventually sold.

Essentially, the clause seeks to make fairer the capital gains tax rules that apply to spouses and civil partners who are in the process of separating. It gives them more time to transfer assets between themselves without incurring a potential charge to capital gains tax. No gain, no loss treatment is currently available only in relation to disposals made in the remainder of the tax year in which the spouses or civil partners cease to live together. After that, transfers are treated as normal disposals for capital gains tax purposes. The measure extends the time available to give separating couples at least three years to make no gain, no loss transfers between themselves for capital gains tax purposes.

It is worth noting that the “Background to the measure” section of the Government’s policy paper on this matter refers to the Office of Tax Simplification and its consideration of how the capital gains tax rules apply to individuals who separate and divorce. The Government responded to the Office of Tax Simplification recommendations by agreeing that the no gain, no loss window on separation and divorce should be extended, and that is what the clause implements.

There is at the very least something ironic about a Government who use one clause of a Finance Bill to implement a recommendation of the Office of Tax Simplification and another clause of the same Bill to abolish that institution. As the Chartered Institute of Taxation has pointed out, the changes to be made by the clause are a result of an Office of Tax Simplification report. In fact, they are the third recommendation from that report to be implemented: it also recommended an increase in the notification period for the disposal of residential properties from 30 days to 60, and the incorporation of capital gains tax into a single customer account.

Will the Minister offer her views on that when she responds, and set out how the Government reconcile the apparent worth they seem to attribute to the Office of Tax Simplification, as evidenced by their decision to implement its recommendation in clause 41, with their decision to scrap it later in the Bill?

We understand that clause 42 will introduce a new elective basis of taxation for carried interest that will tax it earlier than under the current rules. In the UK, carried interest is that charged to capital gains tax, and is taxable at the time it arises to an individual. Some individuals may be liable for tax in more than one country on the same income or gain. To avoid double taxation in such situations, the UK has negotiated treaties with more than 100 countries.

UK resident individuals who pay tax on carried interest are sometimes unable to claim double taxation relief from other countries because carried interest is recognised and charged to tax at a different time between the two jurisdictions. That is the issue the clause seeks to address. We will not oppose the clause, although it does not address the change we believe is needed, which is for carried interest to be taxed as income rather than a capital gain. Will the Minister consider that change?

I also want to ask the Minister for more information on how the Exchequer impact of the clause has been calculated. The documentation on the clause shows a positive impact of £80 million this year followed by £10 million in each of the remaining years in the forecast period. The Budget policy costings document explains that:

“The costing accounts for a behavioural response, reflecting those taxpayers who choose to take up the elective accruals basis.”

Will the Minister set out the detail of that behavioural response so that we can better understand how the predicted Exchequer impact of the clause has been calculated?

Finally on clause 42, the Minister will forgive me if I missed this, but I am not sure that she addressed Government amendment 8 and the changes it makes. I would be grateful if she would set out the detail of its impact on the clause, given that the details of the amendment were circulated to the Committee only in the past 24 hours or so. In addition, I would be grateful if she could explain whether, assuming it passes, it will have any effect on the Exchequer impact.

Clause 43 makes changes to the legislation on capital gains tax roll-over relief and private residence relief to ensure that limited liability partnerships and Scottish partnerships that hold title to land are included. The measure provides consistency for different types of partnership in different parts of the UK on capital gains tax roll-over relief and private residence relief and will have effect for claims for relief made on or after 15 March this year. We will not oppose the clause.

Victoria Atkins (Conservative, Louth and Horncastle)

On amendment 8, I had read out that it seeks to refine the calculations of carried interest for the purposes of clause 42. It modifies the calculation methodology so that it also works in circumstances where managers are entitled to more carried interest if investors receive fund profits earlier. That will mean that the measure will better deliver in practice the opportunity to claim relief from double taxation on carried interest, as intended.

James Murray (Labour/Co-operative, Ealing North)

I apologise to the Minister for missing her comments about Government amendment 8 and remind her that I would like to know whether the amendment, if it is passed, will have any effect on the overall Exchequer impact of the measure.

Victoria Atkins (Conservative, Louth and Horncastle)

I will come to that later.

The hon. Gentleman should send his questions about the farmer scheme to DEFRA, which is responsible for the Rural Payments Agency, which operates the scheme. He will know that we are confining ourselves to the tax implications of the scheme, so he ought to direct his questions there.

The hon. Gentleman asked about the Office of Tax Simplification, and that debate awaits us in our next day of consideration in Committee. I will not trespass on those deliberations, but we are in fact going further than the OTS’s recommendation, as we consider that that will give a fairer outcome to the parties involved in complex separation and divorce proceedings. We received representations that the OTS’s recommendations did not go far enough and we wanted to address the issues about the former family home that, for many divorcing and separating couples, is their main asset. We want to try to relieve the pressure during what can be a very upsetting and emotional time for the people involved and to try to ensure that they have time to resolve important family disputes.

In relation to carried interest being taxed as income, depending on the circumstances carried interest can be subject either to income tax rates or to the higher capital gains tax rate of 28% for higher and additional rate taxpayers. This is a balanced approach and one that is followed by comparable jurisdictions. We are supportive of the wider role and importance of the asset management sector. Amendment 8 has no impact on clause 42; it is designed to make the measure work as intended.

Clause 41 - Separated spouses and civil partners

Clause 42 - Carried interest: election to pay tax as scheme profits arise

Clause 44 - Meaning of “alcoholic product”

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss the following:

That schedule 6 be the Sixth schedule to the Bill.

Clauses 45 and 46 stand part.

Clause 49 stand part.

Gareth Davies (Conservative, Grantham and Stamford)

It is a great pleasure to serve under your chairmanship, Ms McVey. Clauses 44 to 46 and 49 introduce part 2 of the Bill, which delivers on the Government’s commitment to reform alcohol duty. Clauses 47 and 48 were debated in the Committee of the Whole House, which accepted that they should stand part of the Bill. The clauses change the structure of alcohol duty by creating a standardised series of tax bands based on alcohol strength.

At Budget 2020, the Government announced that they would take forward a review of alcohol. This legislation is the result of that review and makes changes to the duty structure for alcohol, moving from individual product-specific duties and bands to a single duty on all alcohol products and a standardised series of tax bands based on alcohol strength. In making these changes, the Government aim to support public health, encourage innovation and ensure that the duty system reflects modern drinking practices.

Clause 44 sets out what is meant by “alcoholic product” and points to definitions in schedule 6. Clause 45 explains the meaning of alcohol strength and gives HMRC the power to make regulations about how strength is to be determined for duty purposes. Clause 46 gives His Majesty’s Treasury the power to amend the categories of alcohol product and treat products as falling within a certain category, even though they may otherwise have fallen in another. Clause 49 explains when excise duty on alcohol is payable, how the amount is determined and how it is paid.

The changes made by the alcohol duty clauses are expected to impact up to 10,000 businesses that produce alcohol, import alcohol or supply it wholesale. This impact will be down to changes in how they calculate the amount of duty that is due on their products. The entire alcohol reform package will cost £155 million in 2022-23 and £880 million across the scorecard period.

To conclude, the clauses and accompanying schedule form an essential part of the Government’s ambitious reform of alcohol duty and will modernise the tax treatment of alcohol. I commend the clauses and schedule to the Committee.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

It is a pleasure to serve with you in the Chair, Ms McVey. I wish you and Committee members a good afternoon. I take this opportunity to formally welcome the Minister to his new post. I am looking forward to this afternoon’s discussion, which I hope continues to be as productive as this morning’s was.

The clauses are in part 2 of the Bill, on alcohol duty. As the Minister said, clause 44 and schedule 6 introduce the term “alcoholic product” and set out what it means. The term is defined as spirits, beers, ciders, wines and any other fermented products if they have an alcoholic strength of more than 1.2%. Schedule 6 provides a definition for each of the categories I just listed.

The clauses introduce the new alcohol duty regime, which was touched on in the Committee of the whole House. In that debate, I made it clear that the Labour party agrees with the principles behind the alcohol duty review. Indeed, we want to see an alcohol duty system that is simpler and more consistent, while recognising that there is a balance to be struck between supporting businesses and consumers and protecting public health—as the Minister mentioned—and retaining a source of revenue for the Exchequer.

The clauses are administrative in detail so we will not oppose them, but let me lay out some of our underlying concerns about messaging and decision making, which will drive Labour’s scrutiny of the clauses. The Committee may remember that the Government announced a call of evidence on potential alcohol duty reform way back in October 2020. The aim of the review was to make the system

“simpler, more economically rational and less administratively burdensome on businesses and HMRC”.

But since then businesses have seen indecision, U-turns and delays.

The Government’s response to the alcohol duty consultation was published in September 2022, just before the chaotic Tory mini-Budget that crashed the British economy. In that mini-Budget, the then Chancellor announced a freeze on alcohol duty that was due to come into place in February 2023. The new Chancellor then scrapped the planned freeze in October’s autumn statement.

Businesses were scrambling to get their heads around the changes, and some scrapped product lines and slimmed back orders, losing out on the revenue they would expect to see in the run-up to Christmas. The situation has been reflected in many conversations that I have had with businesses up and down the country. I am sure it has caused real distress and difficulties for businesses involved in the supply chain—whether in manufacturing or hospitalities—in the constituencies of all Committee members.

Then, in December, the Government announced a screeching halt and another U-turn. They decided that the freeze was back in place and would last until August 2023. This caused a sigh of relief among businesses facing uncertainty, but it was too late to undo the damage inflicted on their balance sheets. We all know a pub that is facing closure as soaring inflation becomes unmanageable, or perhaps a small brewery that employs local people and has now had to reconsider its expansion plans. Such businesses desperately need certainty, so I hope that the Minister can confirm today that there will be no further U-turns or changes.

The new duty regime will see duty rates adjusted in line with inflation and moved to a system that links them to the ABV—alcohol by volume—of drinks. Clause 45 sets out how alcoholic strength is to be measured and understood, and provides for HMRC commissioners to make regulations on determining the strength of alcoholic products. Alcoholic strength, otherwise known as ABV, is what it says on the tin: the proportion of alcohol contained in a product’s total volume, expressed as a percentage. It is calculated while the product is at a temperature of 20°C.

Clause 46 will allow the Treasury to amend by regulation the categories and definitions of alcoholic products listed in schedule 6. It also provides that any product exceeding 1.2% strength can be treated as a different category from the listing in schedule 6, even if it would otherwise come under another category. To help us to better understand that, will the Minister explain precisely what the intention is and give an example of a situation in which it might be necessary to recategorise a product?

Finally, clause 49 provides for the determination of the excise duty point, the amount of alcohol duty chargeable and how it is to be paid. The clauses lay out the framework and definitions for the new duty regime, so we will not oppose them.

Angela Eagle (Labour, Wallasey)

I take this opportunity to welcome the hon. Member for Grantham and Stamford to his new position as Exchequer Secretary to the Treasury. I am told that this is his first Committee as a Minister. I trust that he has been having sleepless nights about it in the run-up, and that he has had his advisers put every size of bottle and every alcohol stamp on his desk, so that he could get to understand how the system works.

Esther McVey (Conservative, Tatton)

But has not been sampling them.

Angela Eagle (Labour, Wallasey)

Of course not; otherwise, I am sure the Minister would be in a much worse situation than we find him in today. However, we will make that judgment after he has finished answering our questions. I genuinely welcome him to his position. It is a fantastic job, and he will be fascinated by it. He will wake up suddenly to realise that his job is to tax all vices, and how interesting that can be.

The Minister is inheriting a completely different regime of alcohol taxation from the one that is about to make an exit. As he heard from my hon. Friend the Member for Erith and Thamesmead, in principle, the Opposition are not opposed at all to the changes, but although there is that agreement, there is an awful lot of detail, potential issues and problems. He will find that definitional issues are not always easy, not least because if tax and duty are to be based on alcohol by volume, the manufacturers will switch the volumes around to get from one band into another. I am interested, philosophically, in what he thinks the right banding is to prevent too much of that.

The public policy reason for having that kind of duty system is, I presume, to persuade people gently that if they are to drink alcohol products with a higher percentage of alcohol in them, they will have to pay more tax, because in general higher-alcohol products are thought to have a greater effect on health than products with less alcohol. That was always the reason, philosophically, for moving to such a system. The Minister will find that, at the margins, manufacturers will try to ensure that their products are in a lower rather than a higher band, although some of the most glorious alcoholic beverages cannot begin to do that. I am thinking of spirits, such as whisky, which are much higher in alcohol.

If we look at the reaction of business and manufacturers to this change, there seems to be an equal division between those with higher alcohol by volume percentages, who find themselves in the higher-taxed bands, and those in the lower-tax bands, such as beer manufacturers. There is an inverse relationship between manufacturer satisfaction and where they are in the ABV bands. The beer and cider manufacturers are basically happy, whereas the wine and spirit manufacturers are less happy. Presumably the Minister will, if he has not already, have them in his office, making it quite clear to his face precisely what they think about that.

Issues other than definitional ones will come to bear on the new system, which will come into being on 1 August. I assume the entire system and HMRC are ready for that; it is a big change. The Minister is presumably confident that when 1 August comes along, the system will come into place seamlessly, and as the old system exits, the new system will appear. I assume he will confirm today that he is more than confident that this large change will come off without any problems. Obviously, we eagerly await his reassurance that there will not be some disaster as the new system comes in.

What, if any, work has been done on the implications for our export trade of changing the way we tax alcohol products? Obviously, countries have different ways of categorising products for tax purposes. I seek reassurance our deviating from a system that used to be EU-wide will not have any deleterious effect on our capacity to export what are often well-known products. I am thinking of not just Scottish whisky—we know how important that industry is to the Scottish economy, but other well-known products associated with this country, which we see when we are on holiday abroad. I assume that he is happy with that.

The OBR has said that it expects alcohol revenue to be £13.1 billion this year. Again, I assume the Minister is confident that the changes will not have an unpredictable effect on alcohol revenue. The OBR expects that to rise to only £15.8 billion by 2027-28. Given that we will have a 10.1% increase—I assume that will happen on 1 August, when the uprating happens—that seems like quite a small amount of increased revenue. I note the uprating is by retail price index when that suits the Government, because it means that they get more revenue, but we learned from our earlier conversations that they link by the consumer prices index when indexing something that gives money out. RPI makes some sense, but I just note that in passing.

Will the Minister talk about the transitional arrangement? There is quite a lot of worry in the trade about certain products that do not qualify for wine industry support. The more general rate is meant to be a transitional arrangement, lasting for the 18 months before the different ABV levels are brought it, in full force. Will he talk about draught relief? When I was Exchequer Secretary, there were big issues between the on-trade and the off-trade. It looks like the trade relief is trying to deal with some of the issues between the on-trade and the off-trade through tax. If I have understood correctly, it looks like there will be tax relief for the on-trade in order to balance out the price differential with the off-trade, and presumably to prevent people from loading up down the shop before they go into a pub. I assume it is an attempt to support the licence trade and the on-trade at the expense of the off-trade, given the “buy one, get one free” discounting that goes on in our supermarkets.

This may make the Minister very unpopular in the southern part of the country, but I note that there is still what is known as cider exceptionalism in the levels. Cider is taxed less than other alcoholic beverages, even though it is the same ABV as them. He might have an explanation for the cider exceptionalism. Now that we are not in the EU, he does not have the excuse that I had that: we could not do anything about cider exceptionalism because of EU rules. I note that he has decided to continue with cider exceptionalism. Perhaps he will tell us why. Does the Treasury prefer cider as a drink, or is there some terrible prejudice against beer that is being found out through this?

The changes introduce a huge range of different forms of taxation. Nobody objects to the principle, but there are quite a lot of anomalies. There are issues between the on and the off-trade, definitional issues, and issues surrounding revenue—why does it continue to be so flat, unlike the beer being taxed? I look forward to the Minister’s response, and I hope that he will not mind me leaping up if he says something that piques my interest, so that we can have a debate about it.

Kirsty Blackman (Scottish National Party, Aberdeen North)

Who knew that a debate on alcohol would be so popular in this place? I will try to limit myself to the clauses that we are talking about, but I will mention a couple of general issues. In Committee of the whole House, we discussed our specific issues with rates. In particular, we discussed the concerns raised by the Scottish whisky industry. We gave our wholehearted backing to the amendment on the subject tabled by the right hon. Member for Orkney and Shetland (Mr Carmichael), because we had concerns about the changes and increases. However, as I said, that has already been discussed, so I will not major on that.

This is a direction of travel for which we have been calling for a very long time. We are pleased that the Government are moving towards applying differential tax rates based on the alcohol in beverages. I share the concerns raised just now about cider, and about exceptionalism for a certain type of product, rather than going simply by the alcohol by volume ratio. It would have been more sensible and fairer across the board to be more consistent.

It is pretty unusual for me to criticise explanatory notes, but those on this part of the Bill are not particularly good. They mention that 77 clauses relate to the changes to alcohol duty, but they give a very general explanation of what the clauses do, rather than a specific explanation of what each clause does. Therefore, we cannot see easily by looking at the explanatory notes what each clause is intended to do. For example, I will ask questions later about clause 87. The explanatory notes could have answered my questions, had an actual explanation been written in there, but the notes just say, “This is what we intend to do with the entirety of the alcohol regime,” rather than providing a commentary on each clause. I understand that a commentary on each clause would have been significantly more work, but presumably the Treasury has an idea of why it is putting forward each clause; it would not have cost it too much to expound on that in the explanatory notes.

My last question relates to HMRC commissioner regulation timelines and guidance. The provisions mention commissioner regulations that will come through; there will also be guidance. Can the Minister give reassurances that the guidance and the regulations will come through in good time, so that everybody can take it into account when making decisions about producing alcohol, and will understand the tax that they are likely to pay? The changes are not that far off, and it takes quite a long time to produce some alcohols. I am thinking of Scottish whisky; I am aware that other spirits and alcohols are generally an awful lot faster. Even those who are brewing take decisions and build up their production lines significantly more than six months in advance. If people do not have the guidance or the regulations in good enough time, they cannot make investment decisions properly, because they will not properly understand the changes in the tax regime.

It would be incredibly helpful if the Minister could be clear that he intends and hopes that the guidance will come out as quickly as possible, so that people have as good an understanding of it as possible—I am talking about the guidance and regulation that is not in this Bill, but will follow. That would ensure that businesses and companies could make the best and most informed decisions.

Gareth Davies (Conservative, Grantham and Stamford)

That was an extensive display of preparation and reading, and quite right too, because that is exactly what we are here to do—scrutinise the Bill. Let me try to answer some of the many points that were raised in the three speeches. First, let me thank Opposition Members for their very generous and kind words. It is a great pleasure to serve in this position in the Treasury.

First out of the gate, let me say that the reforms were extensively consulted on; a lot of the comments related to that. As was pointed out, the reforms were first mentioned in 2020. The hon. Member for Wallasey is quite right: one of my first meetings was on this subject. Engagement with industry is paramount, and that is an ongoing process. Many in the various industries affected by the reforms very much welcome the public health focus that is driving this significant change. Many also welcome the simplification that we are bringing in across the board, and the fact that we are correcting several inconsistencies. I was asked by Opposition Members to give several examples. I can do that. One that springs to mind is the fact that sparkling wine pays 28% more duty than still wine, yet has significantly less or the same alcohol content. The driving principle behind the reforms is that the more alcohol in a product, the more tax that the producer pays. That is very clear for businesses to understand.

We were asked at the beginning about our support for businesses, and were told that businesses require certainty. I completely accept that, and we are providing it with the reforms. This is a massive simplification of our tax system for alcohol, and it builds on all the support that the Government have provided through covid and the energy crisis, as hon. Members will be well aware.

Let me try to rattle off a couple of quick responses to the hon. Member for Wallasey. I was asked about the differences in banding and how certain categories of alcohol can fall into different bands. That is true of spirits; Scotch whisky is required to be over a certain level of alcohol, but cocktails in a can and other items that I am aware of are lower in alcohol content, and so will have a lower tax requirement. That is very pertinent to businesses that have a portfolio of different products in their range.

The question about HMRC readiness is absolutely fair, and we are very confident that the processes have been put in place and businesses are ready to adapt to the new system. As I say, it is based on an extensive programme of consultation and engagement. The hon. Lady asked about exports. They are not subject to alcohol duties, although we are aware of the importance of exports to our alcohol industry. That is a live discussion that we have with the Scotch whisky industry all the time.

Let me address the point about the wine easement, which also relates to the question that the hon. Member for Aberdeen North asked about engagement with industry and others. There is a unique circumstance involving wine that comes from fresh grapes: the alcohol content changes by season, according to seasonal factors. That is different from fortified wine, which involves a more artificial process in which spirits are put into the wine to achieve a specific alcohol content. As part of the consultation that I mentioned, we listened to the wine industry, and for 18 months we have put in place a transitional arrangement for still wine of between 11.5% and 14.5% derived from fresh grapes to enable the industry to transition accordingly.

The hon. Member for Wallasey asked about draft relief. If she will forgive me, that was fully covered in Committee of the whole House, but she is right that it will benefit drinkers of pints in a pub over supermarkets. Draft relief applies to all alcohol below 8.5%. It is something that we are doing in support of beer drinkers and to support our community pubs, which are a vital part of all our communities.

Finally, I will just say that cider is also subject to the general principle that we seek to adhere to—namely, that the higher content of alcohol, the more cider producers will pay. Producers of super-strength ciders above 8.5% will pay more duty, but those of fruit ciders will pay significantly less. At the moment, on certain fruit ciders that are not apple or pear cider, producers pay two to three times the amount of duty. The outcome of these reforms will be a range of differential impacts for the cider industry. I will always support the cider industry, because it is incredibly important to the south of our country, but also to those across the country who enjoy drinking cider in the pub or at home.

Angela Eagle (Labour, Wallasey)

The Minister talked about simplification, and changing the system to make it easier for people to understand often brings important benefits. However, the reliefs that are coming in complicate it again. Is he satisfied that he has the right balance in extending the reliefs to the new simplified system, particularly the draft relief and the transitional relief?

As the person who brought in the small brewers relief, I have a certain attachment to it, although we will not be talking about that. What revenue does the Treasury believe these reliefs will rob it of, and does he think he has the right balance in imposing a more complicated relief-based system on his simpler system?

Gareth Davies (Conservative, Grantham and Stamford)

It is a fair question. We are seeking to simplify the entire system of alcohol taxation, and in the round that is broadly what we are doing. However, we are conscious that certain sectors are under acute pressure—smaller cider makers may have particular vulnerabilities to some of these reforms, for example, and we are mindful of that.

However, we are still applying the principle that I have discussed: the higher the alcohol content, the more tax will be paid. As I mentioned, the wine easement is a reflection of the particular and unique circumstances that I heard about from the wine industry. That is a transitional arrangement, not a permanent reform; overall, we are seeking to simplify the system.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

I thank the Minister for his explanations so far. I want to get clarification on a few points. As I mentioned, clause 46 and schedule 6 have been drafted to allow the reclassification of categories. Is any guidance being drafted at the moment? Can the Minister give us more information about how the operation will be carried out to make sure that no issues are identified later? The legislation is not very clear.

To follow on from the points made by my hon. Friend the Member for Wallasey, extra work will be given to HMRC as a result of this. I know that the Government have done work on the issue for some time, but I would like reassurance that adequate processes are in place. How much resource has been allocated to ensure that this is carried out? There will be extra work for HMRC to make sure that the alcoholic strength regulations are determined. It is important that we know whether there have been issues for HMRC in delivering because it has been under a lot of pressure. More information about that would be very helpful.

Gareth Davies (Conservative, Grantham and Stamford)

Let me answer the point about guidance. I assure the hon. Lady as well as the hon. Member for Aberdeen North that guidance will be issued very shortly. The hon. Member for Erith and Thamesmead will be able to review that and it should answer a lot of the questions that she has just asked.

Let me repeat what I said about HMRC. The organisation has some incredibly hard-working staff who I have had the pleasure of meeting just in my first two weeks. As a Treasury, we have been preparing for this for quite some time. I have every confidence that our colleagues at HMRC are ready and waiting to implement the system. I have nothing further to add on this, so I urge that the clauses stand part of the Bill.

Kirsty Blackman (Scottish National Party, Aberdeen North)

I have a brief comment about the guidance. I appreciate that a proportion of the stuff coming out is guidance so will not need to go through any parliamentary processes. However, some of the issues are to do with statutory instruments. Is the Minister satisfied that enough parliamentary time would be given for those, whether under the negative or affirmative procedure? Will they happen as quickly as possible? Clause 119 is about procedure and regulations. Will there be enough time for all that as well as for the less formal guidance coming through from HMRC?

Gareth Davies (Conservative, Grantham and Stamford)

We all take parliamentary scrutiny incredibly seriously and of course we will allow appropriate time for scrutiny of the Bill and all the guidance in the appropriate way.

Angela Eagle (Labour, Wallasey)

Given the newness and thoroughness of the changes that the Minister has outlined, and obviously extensively consulted on, I am presuming that the Treasury will also have a review process once the introduction has happened, so that it can look at how the changes have gone and whether further tweaks are necessary. Certainly, but not surprisingly, some aspects of the industry at the higher ABV end wish the transitional arrangements for wine to be extended beyond 18 months, as the Minister would expect. Is there going to be a review process? Could the Minister briefly outline the kind of time scales that are on his mind?

Kirsty Blackman (Scottish National Party, Aberdeen North)

Does the hon. Lady share my concern that the post-legislative review scrutiny that is supposed to take place in Government Departments does not always take place—and does not always take place timeously? Does she also share my sense of thanks to the Treasury Committee, which does get hold of and scrutinise the post-legislative review guidance? I am hoping that, as part of the Treasury Committee, she will be keen for the review to take place and for the information to go to the Committee so that it can do the appropriate scrutiny of whether the legislation has achieved what was intended.

Angela Eagle (Labour, Wallasey)

I agree with the hon. Lady’s comments about the potential role of the Treasury Committee, although I am not the Chair—I am only one modest member. She might want to have a word with the current Chair to ask whether that is appropriate. We are clearly all interested and want the system to work effectively. We do not, however, want to see a sudden reduction in revenue, unless that is because people have started drinking less high-ABV products, and are out running and being very healthy all of a sudden. In that case, they are going to live longer and put much less pressure on our NHS.

Will the Exchequer Secretary give an outline of the Treasury’s thoughts on when it will do a review? Will he also bear in mind the balance between having changes to definitions and those detailed things that make up the essence of a system such as this, which are required by negative and affirmative procedures in this House, and guidance, which does not get to be looked at in the House? That would ensure that his welcome comments about respecting the rights of this House to effectively scrutinise how the system beds in and evolves in the future are realised.

Will the Exchequer Secretary give us an undertaking that he will bear in mind the right of the House to have appropriate scrutiny rights over some of those things—not just shove everything into guidance, which does not have to come before the House at all?

Gareth Davies (Conservative, Grantham and Stamford)

All taxes are always under review, as the hon. Lady knows. The Treasury Committee, of which we were both members, plays a vital part in the scrutiny process—of course it does. That process started when the Chancellor appeared before it, and carries on through the parliamentary procedures we are going through right now. The Treasury is unusual in that it has two fiscal events per year—

Angela Eagle (Labour, Wallasey)

Or more!

Gareth Davies (Conservative, Grantham and Stamford)

I was waiting for that.

The Treasury has two fiscal events in which the full House has the opportunity to scrutinise our decisions. That also gives the Treasury the opportunity to review existing rates and systems, which is what we are doing as part of the spring Budget.

Clause 61 - Mergers: general provisions

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss clauses 62 to 71 stand part.

Gareth Davies (Conservative, Grantham and Stamford)

Clauses 61 to 71 provide for transitional arrangements for small businesses that merge under the new small producer relief and provide definitions for terms used in the chapter.

The Government are committed to modernising and reforming alcohol duty. Part of the reform package is a new small producer relief for businesses that make alcoholic drinks of a strength less than 8.5% alcohol by volume. That will extend the benefit of progressive duty rates enjoyed by small brewers to the producers of other alcohol products. The provisions on mergers and acquisitions mean that small businesses that merge will not face a cliff-edge duty increase in the first year of the merger; instead, their duty rates will increase gradually over a three-year period. The clauses also include some general provisions around definitions for the purposes of the relief.

Clause 61 introduces the concept of a post-merger group, which is a company formed from the merging of two or more companies, and explains how each of the three years in the transitional period will be referred to. Clause 62 sets out the conditions which must be met for a newly merged business to qualify for the relief. Clause 63 explains what is meant by the “relevant production amount” during the transition period. Clause 64 explains what is meant by “post-merger amount”, which determines the level of relief available to newly merged businesses.

Clause 65 provides for termination of a transition period where the amount of alcohol produced by a post-merger group decreases. Clause 66 explains the treatment when another merger takes place during an ongoing transition period. Clause 67 explains the treatment of mergers involving more than two small producers at the same time. Clause 68 provides that that the transition period ends when businesses demerge. Clause 69 gives definitions of “production premises”, “production groups” and “connected premises” for the purposes of small producer relief. Clause 70 explains that the definition of “connected persons” for the purposes of the relief mirrors that in the Corporation Tax Act 2010. Clause 71 provides a table of expressions used throughout the small producer relief chapter.

Around 10,000 businesses in the UK produce alcohol, import alcohol or supply it wholesale. The clauses will help small businesses compete with larger businesses, such as multinationals, and support them as they grow. The entire alcohol reform package will cost £155 million in 2022-23 and £880 million across the scorecard period. These clauses and accompanying schedule form a key part of the Government’s ambitious alcohol duty reform and will support small alcohol producers to grow and thrive.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

The clauses under discussion in this group form part of chapter 3 on small producer relief, as the Minister mentioned. I thought it would be helpful to remind the Committee that Labour introduced the small brewers relief in 2002, and we are proud of the effect it has had in supporting small brewers, creating the vibrant UK beer scene, and supporting British business. We therefore support its extension to other producers.

In the context of small producer relief, clauses 61 to 68 specifically deal with the regulations and provisions for when mergers take place. Clause 61 sets out general provisions, determining that a merger of two small producers is to be called a post-merger production group, and is deemed to be in a transition phase for the three years following the merger. Clause 62 introduces modified conditions to determine whether the premises of two small producers that newly merge are small production premises for the purposes of small producer relief. A merged small producer will be eligible for small producer relief if the adjusted post-merger account does not exceed the small producer threshold of 4,500 hectolitres and if, for each set of premises in the group, fewer than half of the alcoholic products produced on those premises in the previous year were produced under licence.

Clause 63 sets out that, in calculating small producer relief for a post-merger group, the adjusted post-merger amount is used for the “relevant production amount” as set out in section 59. Subsection (3) sets out that the exclusion in clause 58(c) does not apply to the premises in a merger transition year. The Minister will not be surprised that I want to ask why that is the case. I cannot find anything about the purpose of the subsection in the explanatory notes, and it would be helpful to get the background as to why it exists.

Clause 64 provides a definition of the adjusted post-merger amount, which is used to determine eligibility and calculate the rate of small producer relief for companies transitioning post merger. Clause 65 sets out that a merger transition period will end early if the total amount of alcohol produced on all premises by a post-merger group in the preceding production year is less than the adjusted post-merger amount for the current year.

Clause 66 lays out provisions for subsequent mergers of alcohol producers. If a second merger takes place, the producer is no longer considered to be in its merger transition period for the first merger. The second merger could be considered a new merger transition period if the eligibility conditions are met. On the other hand, clause 67 lays out provisions for simultaneous mergers, setting out which producers will be considered the “larger producer” and the “smaller producer” for the purposes of determining the small producer relief. Clause 68 sets out what happens when a production group demerges and the regime to be applied for demerged businesses looking to receive small producer relief.

As we know, clauses 69 to 71 provide some guidance on the interpretation of chapter 3. Clause 69 lays out definitions of the terms producer, production premises, group premises and connected premises. Production premises are premises where alcoholic products are produced, including premises outside the UK. Group premises are all the premises on which the same person produces alcoholic products. A production group includes the group premises and all connected premises. A producer is a person who produces alcoholic products.

Clause 70 states that two people will be considered to be connected persons if they meet the test contained in section 1122 of the Corporation Tax Act 2010, although HMRC’s commissioners can overrule that if they think it necessary. Finally, clause 71 provides a table of expressions used in the small producer relief chapter. These clauses are all administrative in purpose, and we will not oppose them.

Gareth Davies (Conservative, Grantham and Stamford)

I am very grateful to the hon. Lady for her comments. Let me start by acknowledging the success of small brewers relief. We have seen the number of breweries increase six times since its introduction, and I think we should applaud a good policy, wherever it originates. In fact, we are seeking to build on it by expanding its principles to the new small producer relief and extending it to all alcohol products under the parameters that she has outlined. There was a very specific point of clarification, which I am afraid I do not have to hand at the moment, but I am happy to set out in writing the detailed answers that she seeks.

Clause 72 - Exemption: production for personal consumption

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss clauses 73 to 81 stand part.

Gareth Davies (Conservative, Grantham and Stamford)

Clauses 72 to 81 reproduce existing exemptions and reliefs from excise duty on alcohol products. These reliefs and exemptions will continue to operate in the same way as they do now. To reform the alcohol duty system, we are legislating for a restructured duty system and two new reliefs. To ensure that all primary legislation relating to the production and use of alcoholic products is contained in one place, existing exemptions and reliefs from alcohol duty unaffected by the reforms but still needed in the new duty system have been re-enacted in the Bill. The relevant legislation in the Alcoholic Liquor Duties Act 1979 and Finance Act 1995 will be repealed.

The clauses make no policy changes. They reproduce existing exemptions and reliefs from the charge to alcohol duty. In some clauses, changes to the structure and language have been made to modernise and simplify the legislation, but the operation of the exemptions and reliefs remains the same. The clauses reproduce exemptions and reliefs from the charge to alcohol duty for the production of alcoholic products other than spirits for personal consumption, spirits contained in imported medical articles, spirits contained in food and drink flavourings used only for the purpose of research or experiments, alcoholic products that become spoilt or unfit for use, alcoholic products that are used as an ingredient in qualifying food products less than 1.2% ABV, and spirits used for the manufacture of medical products or for scientific purposes.

In summary, the clauses are an administrative measure to ensure that current exemptions and reliefs from alcohol duty will continue in the newly reformed alcohol duty system.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

The group of clauses sets out circumstances in which producers will be exempt from alcohol duty. Clause 72 sets out that alcoholic products, except for spirits, produced by an individual for their own personal consumption are not subject to alcohol duty. Clauses 73, 74 and 75 provide for alcohol duty to be remitted or repaid when the alcohol is used for research or experiments, where the product is spoilt or unfit for use, and where alcohol was used in the production of qualifying food products or beverages, such as chocolate and vinegar.

The next part of the group of clauses concerns exemptions from alcohol duty for spirits. Clauses 76 and 77 set out that alcohol duty will not be charged on any spirits contained in imported medical products or in flavourings. Clause 78 sets out some circumstances in which a person may receive spirits without the payment of alcohol duty, including where spirits may be used for art or manufacture. Clause 79 provides for alcohol duty to be remitted on spirits contained in imported goods that are not for human consumption. Finally, clauses 80 and 81 set out a penalty regime for people who make unauthorised use of exemptions, such as by claiming the medical exemption for goods that are then not used for medical or scientific purposes.

We do not take issue with the exemptions, so will not oppose the clauses, but will the Minister lay out in more detail how clauses 80 and 81 will work in practice, and whether there will be a monitoring system to ensure that unauthorised exemptions are prevented?

Kirsty Blackman (Scottish National Party, Aberdeen North)

Alcohol hand sanitiser is obviously not for human consumption, but is it considered to be a medical item and so exempt under clause 76(2), or to be not fit for human consumption and so exempt under clause 79? However it is considered, will the Minister clarify that it is exempt from alcohol duty? Many of us had not often used it prior to 2020, but these days it is a significant part of our lives. It would be a concern if it received an alcohol duty charge, because it is part and parcel of keeping us safe and ensuring that we stop any further spread of covid or anything else.

Gareth Davies (Conservative, Grantham and Stamford)

As I set out at the beginning, the changes are largely administrative. To answer the question directly, there is no change whatsoever in terms of how the provisions are operationalised; they are carried over. The whole point is to consolidate the legislation in one place. I think our alcohol taxation system dates back to 1643, and the last change was in the 1990s. A lot of the changes are administrative, and the hon. Member for Erith and Thamesmead should take assurance from that.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

I appreciate that a lot of these clauses are administrative. In that case, is the Minister able to tell me whether there has been any work done on unauthorised exemptions? Has that issue come up, does he have data on it and is he confident that unauthorised exemptions are being prevented? Could he give more information about what schemes or measures may be put in place? I appreciate that the clauses are administrative, but there is nothing in them about how to ensure that the system is not being abused.

Gareth Davies (Conservative, Grantham and Stamford)

There are penalties already in place if a person uses products or carries out activities that are not approved. The hon. Lady should take my assurance that these are carry-over provisions that come with the protections that we already have in place. I really do not have anything more to add, other than the fact that what was in existence prior to this legislation is being carried over. To answer the specific question on hand sanitizer, it is exempt.

Clause 82 - Approval requirement: producers

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss clauses 83 to 89 stand part.

Gareth Davies (Conservative, Grantham and Stamford)

Clauses 82 to 89 make changes to the approval and registration requirements for alcohol producers, ensuring that they are harmonised across all products. The new alcohol duty rates and reliefs will take effect from 2023, but the commencement of changes to approvals will come into force at a later date. The Government are committed to simplifying the current alcohol duty system, which is complicated and outdated. The clauses repeal and replace the Alcohol Liquor Duties Act 1979, as well as sections 4 and 5 of the Finance Act 1995.

The changes made by the clauses will standardise the approval processes for all alcohol producers, regardless of which alcoholic product they produce. Clause 82 sets out the requirement for a person to be approved by HMRC in order to produce alcoholic products. Clause 83 stipulates that an approval may cover multiple premises and product types, and that HMRC may vary or revoke an approval at any time. Clause 84 provides an exemption from the requirement to be approved for those who make alcoholic products for their own consumption, although that does not apply to spirits.

Clause 85 provides an exemption from the requirement to be approved for those who produce alcohol only for research and experiments. Clause 86 restricts the mixing of multiple alcoholic products except in certain circumstances. Clause 87 reproduces a section of the Alcoholic Liquor Duties Act 1979 with minor changes to update terminology. Clause 88 gives HMRC the power to make regulations regarding the administration and collection of alcohol duty. Clause 89 details the penalties and forfeiture that may apply if a person does not comply with the approval requirements. Overall, the clauses simplify and standardise approval requirements for alcohol producers.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

We come to chapter 5 of the Bill and a group of clauses concerning regulated activities and approvals. Clauses 82 and 83 would require any person producing alcohol products to be approved by HMRC as a fit and proper person to do so, as determined by the HMRC commissioners. Clauses 84 and 85 provide exemptions from the approval process, so that a person may produce alcoholic products for their own consumption or for research into, and experiments in, the production of alcoholic products without needing approval from HMRC.

Clause 86 restricts the mixing of multiple alcoholic products, except in certain circumstances, such as if it is done in an excise warehouse and the mixing occurs before the duty point; the alcoholic products being mixed are all of the same type and strength; or the alcohol duty on each product has been paid and the resulting mixed product is to be consumed at the place where the mixing took place, such as a pub or bar. Clause 87 sets out that a person cannot mix water or any other substance with alcoholic products if the mixing is after the duty point, the mixed product is to be sold, and the resultant product would have attracted a higher amount of alcohol duty if the mixing were done prior to the duty point.

Clause 88 provides for HMRC to make regulations concerning the production, packaging, keeping and storing of alcoholic products; charging alcohol duty in reference to a strength that might reasonably be reached; relieving alcohol products from alcohol duty in certain circumstances; and regulating prohibition of the addition of substances and mixing. Before the Minister says that these are all largely administrative clauses, which I do not dispute, these seem like quite wide powers. I am interested to see that they will be subject to the negative procedure. Perhaps he can explain why that is the case?

Clause 89 sets out the penalties or forfeiture that can occur if a person fails to comply with clauses 82, 86 and 87, and any regulations made under clause 88, as we have just discussed. As we know, this is an administrative set of clauses laying out a reasonable approval and exemptions process, so we will not oppose it.

Kirsty Blackman (Scottish National Party, Aberdeen North)

As I said both in the Committee of the whole House and earlier today, I have a number of questions about clause 87, which relates to the post-duty point dilution of alcoholic products. The Minister mentioned that all the exemptions, some of the technical language, and some of the definitions mentioned in this part and in the previous part are carried over from the Alcoholic Liquor Duties Act 1979 and the Finance Act 1995. I understand that, but the post-duty point dilution changes are relatively recent; they have not been in place particularly long. The clause replicates section 55ZA of the 1979 Act, which I think was added to it in the last few years in relation to concerns that were raised about the post-duty point dilution.

The clause relates to products such as Bacardi Breezers and WKD blue. Hooch was a drink that existed when I was first able to drink alcohol. Basically, it is things that are mixers, in bottles. It was a significant issue because they were effectively being taxed at the wrong rate because they were being charged duty in advance of the dilution. They would have been liable for more tax had they been taxed after the dilution rather than before it. They were being taxed on the basis not of the sold product but of the created product, which was very different. I understand the Government’s intention in introducing the measure, but because it is a relatively new one that is simply being replicated in the new regime, I wonder how much information the Minister has about how well the change has worked. Has it actually done what was intended?

I am slightly unclear about the Government’s intention in relation to the clause. From reading the Bill, it looks like the intention is that no mixing can take place: no other liquids can be added to spirits. If a company adds orange juice to vodka and sells it, the tax rate will not be lower. Have we seen in practice that companies are not mixing? Are they paying the duty at a different point in the journey rather than not creating these products anymore? What effects have the Government’s previous changes had?

My other question is about the terminology changes. The Minister said that the changes to the language of the Alcohol and Liquor Duties Act 1979 relate to terminology, but clause 82 changes its application, not just its terminology. Section 55ZA of the Act specifically relates only to wine and made-wine. It does not talk about any other types of alcohol that things can be mixed into. Why has the Minister chosen to widen that section out to all alcohol? I do not necessarily disagree with the change; I am just interested in the logic behind it. Have the previous changes had the effect the Government hoped they would? If they did not, is there any point in replicating them? Do we need to tighten up the law or change it even further?

I appreciate that clause 89 gives HMRC powers to take action against people who transgress and break the rule. I appreciate that that happens and that action is taken against people when necessary, but hopefully we have seen a behavioural change. It would be great to have some clarity from the Minister about whether there has been a behavioural change among companies and whether they are now paying their tax or have stopped making these products. I would also like clarity about why the proposal no longer applies just to wine and made-wine but has been broadened out to all spirits.

I am aware that not everybody is quite as geeky about this issue as me—I had a constituent come to me and spend many hours explaining it in huge detail, so I have a specific interest in it—so if the Minister does not have answers today, I am happy to receive them later.

Angela Eagle (Labour, Wallasey)

It is obviously important, when we get on to enforcement, that we are confident that HMRC is on top of this. The Minister was a bit coy about when these clauses will come into being, so perhaps he can explain that, given that they are quite important. They are about the fitness, rightness and properness of the characters out there producing alcohol, who must be properly registered by HMRC.

The Minister gave the impression that this is just a technical thing—that it is a hold-over from older laws dealt with in a more simplified and perhaps modernised way—but he was not very explicit about how it will be simpler or modernised. Can he give us some idea? Will it all be done online? Is there some modernisation such as that? If he can give us a handle on how the administration of the scheme will change, that might give us an idea of HMRC’s intention.

The Minister is about to introduce a new scheme, whereby the taxation of alcohol is based on the alcohol by volume level. That creates a completely different incentive for adulteration along the production process. HMRC’s decisions about which category of duty a product is in become important in terms of what tax is due. That creates new forms of incentives for fiddling. I am not saying that everyone in the alcohol industry, by definition, wants to fiddle and avoid tax, but there will be temptations along that line, given the new focus on alcohol by volume as a way of calculating what tax is due. That makes adulteration and fiddling potentially much more valuable for avoiding tax. It also means that HMRC has to be vigilant in protecting revenue from those taxes.

Will the Minister therefore say a little about enforcement? Given the new dangers around alcohol by volume and the approach to what duties are due, will HMRC beef up its enforcement regarding not only approved producers but checking along the production line when decisions are made on what tax will be due on the particular product being manufactured?

Gareth Davies (Conservative, Grantham and Stamford)

Let me respond to those questions in turn, but I will come to the post-duty point dilution last, if that is okay. I was asked about scrutiny in the first instance by the Labour spokesperson, the hon. Member for Erith and Thamesmead. The powers mirror those that we have already, and we are putting exactly the same procedures in place in the Bill, but I will outline, and give an example of, how the Government could use the powers.

The powers allow HMRC to make adjustments to the new reforms by regulation, if needed. It will have that flexibility, given the scale and novelty of the reforms. That is a sensible precaution to allow HMRC to make changes quickly if the reforms are not working as intended. Today, reviewing and tweaking as necessary have come up consistently. We are carrying over a lot of the legislation, and this is one power, in particular, that we are able to use.

The overarching policy is one of simplification and putting in place a simpler, streamlined process, where we have one single approval process for all alcohol products, to answer the hon. Member for Wallasey. She also asked about HMRC’s readiness and, as I have already said, I have full confidence in our colleagues at HMRC to be able to process the changes and—she also asked about this—to enforce the rules, regulations and laws we are putting in place. Furthermore, we are looking to deliver a digitised application process, which will happen at a later date, once robust systems are put in place. As she would rightly expect, we want to get that absolutely right for producers first.

Let me directly answer the question of post-duty point dilution. The hon. Member for Aberdeen North raised that with my predecessor in 2018, and she is a great champion of her constituent, who raised the issue with her. Following the question to my predecessor, we introduced post-duty point dilution specifically to address wine, I think. We now go further by extending the provisions to all alcohol products and not just wine. That goes back to the overarching principle that we are trying to impose a consistent, simplified approach to all alcohol categories. That is why we are doing it, and we believe that it is impactful. I have no anecdotes, but if I obtain any, I will certainly write to her.

Kirsty Blackman (Scottish National Party, Aberdeen North)

I appreciate the logic behind the original measure and behind the change. Had I been the Minister, I would have been talking positively about the change and about the fact that we are moving from made-wine and wine to everything. He is right that this is a simplification and a good thing, and it will ensure that everyone ends up paying the right tax. He is playing it down a bit by saying that it was just about terminology changes. That is another of the issues I had with the explanatory notes, which could also have sung the praises of the changes that are being made, rather than simply describing them as minor terminology changes to tidy things up. This is a change in the application, and I am glad the Minister has confirmed and clarified that from the virtual Dispatch Box. That will make this change easier for people to understand when they read about it in concert with the Minister’s statements in Committee.

Gareth Davies (Conservative, Grantham and Stamford)

I always take constructive feedback on presentation and talking up the policies we are implementing, so I completely accept that. For the record, we believe this is a really important anti-avoidance measure, which will protect the integrity of the duty system we are implementing, and I want to be really clear about that.

Clause 90 - Denatured alcohol

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss clauses 91 to 97 stand part of the Bill.

Gareth Davies (Conservative, Grantham and Stamford)

Clauses 90 to 97 reproduce the existing exemption from excise duty on denatured alcohol. The exemption will continue to operate in the same way as it does now. As mentioned during the debate on clauses 72 to 81, we are legislating to ensure that all primary legislation relating to the production and use of alcoholic products is contained in one place.

No policy changes are made by these clauses. They reproduce an existing exemption from the charge of alcohol duty for denatured alcohol. In some clauses, changes to the structure and language have been made to modernise and simplify the legislation, but the operation of the exemption remains the same. The clauses reproduce the exemption for denatured alcohol, which is used for the manufacture of products that are not for human consumption, such as paint fillers, cosmetics and toiletries.

The clauses are an administrative measure to ensure that the current exemption for denatured alcohol will continue as now in the newly reformed alcohol duty system. I therefore urge that the clauses stand part of the Bill.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

We now come to chapter 6 of the Bill, which concerns denatured alcohol. Clause 90 states that the definition of “denatured alcohol” will be provided by the HMRC commissioners. Perhaps the Minister could give us an idea of what that definition might look like. The clause also sets out that alcohol duty will not be charged on denatured alcohol.

Clause 91 specifies that a person must be licensed as a denaturer to legally denature alcoholic products or be a wholesaler of denatured alcohol. Clause 92 provides the HMRC commissioners with a sweeping set of powers, such as allowing them to regulate the denaturing of alcoholic products and the supply, storage and sale of denatured products. Perhaps the Minister could outline the purpose of this wide set of delegated powers or give an example of where he would expect them to be used.

Clause 93 sets out that failure to comply with the regulatory regime for denatured alcohol, as set out in chapter 6, will attract a penalty under section 9 of the Finance Act 1994. Clauses 94 and 95 lay out the circumstances in which denatured alcohol is liable for forfeiture or penalty—for example, when a person produces or possesses more denatured alcohol than they are licensed to.

Clause 96 gives HMRC officers a power to inspect, at any reasonable time, premises being used to produce denatured alcohol, and to take samples. Finally, clause 97 lays out the circumstances in which it is an offence for a person to use denatured alcohol—for example, preparing denatured alcohol as a beverage or purifying denatured alcohol. Most of these clauses simply update and integrate into the Bill provisions already laid out in the Alcoholic Liquor Duties Act 1979, so we will not oppose them.

Gareth Davies (Conservative, Grantham and Stamford)

Let me again provide reassurance that we are not changing the definition of denatured alcohol, and we have no need to do so—this is a legislative update. However, the hon. Lady should know, for interest and further exploration, that the definition is found in the Denatured Alcohol Regulations 2005. In this measure, we are simply re-enacting existing powers. She should take reassurance from that.

Clause 98 - Definitions

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss the following:

Clauses 99 to 105 stand part.

That schedule 10 be the Tenth schedule to the Bill.

Clauses 106 and 107 stand part.

Gareth Davies (Conservative, Grantham and Stamford)

Clauses 98 to 107 and schedule 10 simply reproduce existing provisions for excise controls on anyone making wholesale transactions in duty-paid alcoholic products.

As mentioned during the debate on clauses 72 to 81, and clauses 90 to 97, we are legislating to ensure that all primary legislation relating to the production and use of alcoholic products is located in one place. Clauses 98 to 107 and schedule 10 reproduce the requirements for the wholesaling of controlled alcoholic products. Those controls and requirements will continue to operate in the same way as they do now.

To conclude, these clauses and schedule 10 are an administrative measure to ensure that all primary legislation relating to the production and use of alcoholic products for duty purposes are contained in one place.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

We now come to chapter 7 of the Bill, which concerns the wholesaling of controlled alcoholic products. Clause 98 provides several definitions relevant to the chapter, and clause 99 allows HMRC commissioners to make specific definitions concerning whether goods are to be considered wholesale or retail sale. Clause 100 lays out an approval process to allow a person to carry out wholesale activity. Again, that simply reproduces, with updated terminology, sections of the Alcoholic Liquor Duties Act 1979.

Clause 101 requires HMRC to keep a publicly available register of all approved wholesalers, and clause 102 provides HMRC with powers to regulate the wholesale system. I would be grateful if the Minister could humour me and give me more information on how the register will be made publicly available, what timescales have been given to HMRC and what publication dates will be required for that information.

Clause 103 turns the focus to purchasers of alcoholic products, specifying that a person may not buy controlled alcoholic products unless they are buying from an approved wholesaler. Clauses 104 and 105 and schedule 10 make it clear that a penalty could be incurred if a person knows, or reasonably suspects, that they have bought alcoholic products from someone who is not suitably approved.

Clause 106 defines a group for the purposes of the alcoholic product wholesaler provisions, and clause 107 provides definitions for some of the terms used in the chapter. We do not take issue with this set of clauses concerning wholesale transactions, and we will not oppose them.

Gareth Davies (Conservative, Grantham and Stamford)

I appreciate the points that the hon. Lady has raised. I reassure her that these are technical updates to consolidate the legislation, so that, for simplification purposes, we have in one place all the legislation for alcohol duty and measures—isn’t that a wonderful thing that we are doing?

The hon. Lady made a good point on communication. We will ensure that all communication is as good as it can be, and we will come up with further details on that in due course.

Clause 108 - Reviews and appeals

Esther McVey (Conservative, Tatton)

With this it will be convenient to discuss the following:

That schedule 11 be the Eleventh schedule to the Bill.

Clauses 109 to 112 stand part.

That schedule 12 be the Twelfth schedule to the Bill.

Clauses 113 and 114 stand part.

That schedule 13 be the Thirteenth schedule to the Bill.

Clauses 115 to 120 stand part.

Gareth Davies (Conservative, Grantham and Stamford)

Clauses 108 to 111 and schedule 11 make supplementary changes for the reformed alcohol duty system. The provisions are necessary consequential amendments as a result of changes made elsewhere in the Bill. Clause 112 and schedule 12 reproduce the requirements for duty stamps on alcoholic products. Those controls and requirements continue to operate in exactly the same way as they do now. Clauses 113 to 116 make changes to repeal outdated legislation and provide transitional arrangements for wine businesses and small cider makers as they move to the new duty system. Clauses 117 to 120 allow for regulations to be made to supplement the provisions in primary law.

The Government are committed to simplifying the current system for alcohol duty, which is complicated and outdated. As mentioned in debate on previous alcohol duty clauses, we are legislating to ensure that all primary legislation relating to the production and use of alcoholic products is contained in one place. Clauses 113 to 116 and schedule 13 repeal some parts of the Alcoholic Liquor Duties Act 1979 that are no longer needed, and they ensure that all primary legislation relating to alcohol duty is now contained in one place. They also include specific transitional provisions for cider and wine products, which face the biggest challenges as we move to the new strength-based system. Clauses 117 to 120 allow the Government to commence different parts of the primary legislation at different times by appointed day order.

Clause 108 and schedule 11 provide a right to reviews and appeals for decisions that HMRC makes. Clause 109 ensures that the forfeiture provisions across the reformed alcohol duty system are consistent. Clause 110 updates legislation relating to certain movements of alcohol products from a warehouse so that it applies equally to alcohol products removed from premises that have the new alcohol approval. Clause 111 extends brewers’ existing ability to offset a claim for refunds of excise duty against liability on their monthly return. Clause 112 and schedule 12 reproduce the requirements for duty stamps on alcoholic products. Those controls and requirements will continue to operate in the same way as they do now.

Clause 113 provides a list of repealed legislation. Clause 114 makes consequential amendments to other legislation, which is required as a result of the policy changes. Clause 115 is a temporary provision for producers and importers of certain wine products, to help them to manage the transition to a strength-based system. That will be in place for 18 months, and it will ease the administrative burdens of moving to calculating the duty on wine based on strength. Clause 116 is a temporary provision for small cider producers to maintain the effect of the exemption from registration and paying alcohol duty that they currently hold until the approvals provisions are given effect next year.

Clause 117 provides an index of terms used in this part of the Bill and references to where further detail can be found regarding each. Clause 118 provides a power to make regulations in relation to this part of the Bill and how the power may be used. Clause 119 explains the parliamentary procedure that must be used to make regulations using the various powers included in this part. Clause 120 concerns commencement and states that, other than these clauses and other regulation-making powers, none of the provisions in the Bill concerning alcohol duty takes effect until an appointed day order is laid.

These clauses and accompanying schedules are administrative measures that ensure that the Government’s ambitious alcohol reform is underpinned by modern legislation, and that the transition to the new system is smooth. The clauses conclude the part covering alcohol duty reform, and I commend them to the Committee.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

With this group of clauses, we turn to chapters 8, 9 and 10 of the Bill concerning supplementary items, repeals, further amendments, transitional provisions and final provisions. Clause 108 and schedule 11 make relevant amendments to the Finance Act 1994. They appear to be purely administrative, but perhaps the Minister could clarify that? Clause 109 specifies that HMRC may destroy, break up, or spill anything seized as liable to forfeiture. Clause 110 inserts new subsections into the Customs and Excise Management Act 1979. As this is quite technical, perhaps the Minister could explain precisely what the clause achieves, because I found that the explanatory notes did not cover it in depth. [Interruption.]

Esther McVey (Conservative, Tatton)

Order. I will suspend the sitting while we vote.

Abena Oppong-Asare (Labour, Erith and Thamesmead)

Clause 111 provides that producers of alcoholic products can offset amounts of alcohol duty that are owed to them against other amounts of alcohol duty that they have been charged. Clause 112 and schedule 12 make provisions about duty stamps.

The next measures in the group cover repeals, further amendments and transitional provisions. Clause 113 provides a list of legislation repealed as a consequence of this Bill, including the Alcoholic Liquor Duties Act 1979 and sections 4 and 5 of the Finance Act 1995. I can see that that is because the Bill will replace those pieces of legislation. Clause 114 and schedule 13 make minor and consequential amendments to other legislation.

The next clauses within the group concern transitional provisions included in the Bill. Clause 115 provides for a temporary period for treating wine of between 11.5% and 14.5% ABV as if the strength were 12.5% ABV, lasting for eighteen months after the new system comes into force. Clause 116 provides a temporary exemption from the new alcohol duty regime for cider that is produced before the new approvals system comes into force, as long as the cider is produced by a cider maker producing less than 70 hectolitres a year. I know that many affected businesses will be grateful that transitional arrangements are being put in place, but they will want to know precisely how those arrangements will be implemented and any tapering, and they will want confirmation of the time periods involved.

We are now at the final set of clauses within this group, concerning final provisions. Clause 117 provides an index of terms defined in this part of the Bill, with a reference to where further detail can be found for each term. That includes terms that we have already discussed, such as “alcoholic strength”, “excise duty point” and “qualifying draught product”.

Clauses 118 and 119 provide broad delegated powers to the HMRC commissioners to provide supplementary provisions to the alcohol duty regime. Will the Minister outline examples of what those supplementary provisions might be, why the negative procedure has been thought appropriate and how affected groups will be consulted prior to any further changes?

Finally, clause 120 concerns the commencement of the new alcohol duty regime. At this stage, perhaps the Minister could confirm—he did not when I asked him previously—when the new alcohol duty regime is expected to come into force, and that there will be no further U-turns or delays.

As has been the trend, we will not be opposing these measures. I look forward to continuing our discussion of the new alcohol duty regime on Report, where I hope to be able to extract the detail and certainty that businesses so desperately need from this Government.

Kirsty Blackman (Scottish National Party, Aberdeen North)

I will follow up with several similar questions about dates, so that people have a level of certainty about when they will be expected to comply and when transitional provision will run out. On the temporary provision for wine in clause 115, I understand what the Minister said about how the strength of wine fluctuates depending on the time of the season when the grapes were grown or picked. After the 18 months, what does he expect to happen with this fluctuation? Does he think that wine producers will somehow regularise the alcohol percentage of the wine that they produce? I am not sure how they could do that; they cannot do it by dilution. How exactly might they do that, or does he expect that they will pay different rates depending on the percentage of each bottle? I am not hugely fussed about which he thinks will happen, but it would be interesting to know what the Government expect those wine producers to do.

The case that the Minister has laid out around transitional provision for wine makes sense. I understand that the measure will be brought in fairly shortly and does not give wine producers the time to make seasonal adjustments at this point, but this will give them time to make such adjustments before the end of the 18-month period.

In relation to the temporary provision on cider, my understanding from clause 116 is that the current relief is being extended until the new approvals process comes into place, so those who currently qualify to benefit from relief will continue to do so. The date that has been chosen is the date on which the approvals process comes into force, rather than the date on which the new rates come in. I understand from what was said earlier that the approvals process will come into place later than the rest of the Bill, and I wonder whether there is clarity on how much later. Do we have a date on which the process will kick in? If not, do we have a date for when we will know? That would at least mean that people knew that from September, for example, they would have a level of certainty about when the transitional relief will end and the new approvals process will begin.

Two different sets of dates have been chosen. Clause 120 is about commencement, and there is a level of flexibility built in. Can the Minister confirm when the majority of this part of the Bill will commence, and whether only the approvals process will lag behind? Given the dramatic change from one regime to another and the fact that there might be a significant change in rates—as he has made clear, however, there will not be a significant change in exemptions; only the calculation of rates will be changed—does he expect the new rates to be charged from day one? Let us say he picks 1 August; will the old rates be charged until 31 July and the new rates kick in on 1 August?

To prevent any fiddling of the rate, is there clarity about when people will pay it? Is there a risk that they might, for example, stop putting caps on bottles for a period of time to ensure that they are subject to the new rate rather than the old one? If so, is HMRC aware of that, and will it ensure that people pay the appropriate rate and can prove they are eligible for that rate?

There is quite a cliff-edge change. The rates will go up dramatically for some people; they will go down dramatically for other people; and for some people they will stay the same. For an awful lot of people, there will be a change. When the new regime comes in, we need to ensure that it is fair and is applied fairly, so that those who go out of their way to try to swizz the system are not allowed to benefit at the expense of those who are being sensible and paying the correct rates when and where they should be.

Gareth Davies (Conservative, Grantham and Stamford)

Let me first address the request from the hon. Member for Erith and Thamesmead for me to further explain certain clauses. Clause 108 ensures that the legislation works, basically, and detail is provided in the explanatory notes. If she requires more detail, I am happy for her to write to me. Clause 110 ensures that this measure works with amended legislation, because it is about the movement of alcohol from excise warehouses to authorised people. Clause 115 basically sets out the period of 18 months that I am about to address. Clause 116 relates to when the period ends and approvals come into force.

The hon. Member for Aberdeen North makes some good points, and she asked a good question about the 18-month period for the wine easement. It has been determined, through consultation and engagement with the wine industry, that 18 months is sufficient time for it to put in place the operational requirements, such as labelling, for it to be able to meet the alcohol reforms that we are making. As I set out at the beginning, some types of wine will see a reduction in duty. Simplification is driving these reforms, and we are moving to the principle that the more alcohol a product contains, the more tax it attracts, so there will be increases and decreases as part of all this.