Finance (No. 2) Bill

Public Bill Committee, 27 January 2026.

(Except clauses 1 to 8, schedules 1 and 2, clauses 9, 10, 69 and 62, schedule 12, clauses 63 to 68 and 83 to 85, schedule 13, clause 86 and any new clauses or new schedules relating to the subject matter of these clauses and schedules.)

Roger Gale (Conservative, Herne Bay and Sandwich)

Good morning, everyone. We are now sitting in public and the proceedings are being broadcast. Before we begin, I remind Members to please switch electronic devices to silent. Tea and coffee are not allowed in the room. Members may remove their jackets if they wish to do so.

We will now consider the programme motion and the motion to enable reporting of written evidence for publication. In view of the time available, we will take these matters formally, without debate.

Roger Gale (Conservative, Herne Bay and Sandwich)

Copies of written evidence that the Committee has received will be made available in the Committee Room.

We will now begin the line-by-line consideration of the Bill. The selection list for today’s sitting is available in the room and on the parliamentary website. It shows how the clauses and schedules have been selected, and amendments have been grouped together for debate. Let us be clear about this, because I suspect that there may be Members present who have not been on a Public Bill Committee before, or any Committee before. The lead amendment is the first amendment in the group. That is the only one that, at the start of that debate, will be moved. All the others will be debated but moved later, if necessary. In clause stand part debates, the Minister will be called first. Other Members are then free to indicate if they wish to speak in the debate by bobbing. It would help if Members bobbed when they want to speak; we are all quite good at this but we do not have second sight.

The decision on clause stand part is usually taken at the end of the debate on each clause. You can either have a stand part debate at the end or during the debate on the amendments, but you cannot have both. I am fairly relaxed about this; other Chairs may take a different view. Sometimes it is more convenient to have a fairly wide debate on the clause at the start of the debate about amendments to the clause. That is perfectly in order as far as I am concerned, but you cannot do it twice. The Chair—in this case, me—will judge whether or not the clause then warrants a stand part debate. That is my decision, not yours, and it is final. Basically, that ball is in your court.

At the end of the debate on amendments and new clauses, I shall call the Member who moved the lead amendment—the one at the start of the group—or new clause. Before they sit down, it would be helpful if they could indicate whether they wish to move the amendment or withdraw it. It would also be helpful to whoever is in the Chair for there to be an indication if anybody wishes to force a Division on other amendments in the group.

The amendments are grouped by the Clerks, who are very expert in this, but in some cases they may relate to matters that come much further on in the Bill. People may say, “Hang on a minute! Why haven’t we voted on that?”—the answer is, we will when we get to it, if you want to. If any Member—the Minister, shadow Minister or anybody else—is speaking to an amendment that they want to move, it would be very helpful for the Chair to have an indication early on, so that when we get to that point we have a marker down that you want to force a Division. Within reason, we shall allow that.

If there are any queries at any time during the process—which is fairly arcane—do not be shy. None of us has a monopoly of wisdom, so just ask. I probably won’t know the answer either, but the Clerks will.

Clause 11 - Charge and main rate for financial year 2027

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss clause 12 stand part.

Lucy Rigby (Labour, Northampton North)

I am very pleased to be opening the first debate in this Finance Bill Committee. Clause 11 sets the charge for corporation tax for the financial year commencing in April 2027 and sets the main rate at 25%. Clause 12 sets the small profits rate at 19% for the same period.

The Government are committed to a stable and predictable tax system for businesses, and we are supporting businesses by creating the economic stability and fiscal sustainability needed for future growth. That is why we are delivering on our commitment, set out in the 2024 corporate tax road map, to cap corporation tax at 25% for the duration of this Parliament. The changes made by clauses 11 and 12 will establish the right of the Government to charge corporation tax for the financial year beginning in April 2027.

Mark Garnier (Conservative, Wyre Forest)

Thank you for your guidance, Sir Roger. I am very grateful that you are in the Chair, because although I have been doing this for 15 years, as you know, and this is about my fifth Finance Bill, I do not have a clue how any of it works.

Roger Gale (Conservative, Herne Bay and Sandwich)

You are in good company.

Mark Garnier (Conservative, Wyre Forest)

It is of course standard practice—as with income tax—for the Government to legislate the charge for corporation tax every year. These rate levels have remained unchanged since Labour came into office. As my hon. Friend the Member for Grantham and Bourne (Gareth Davies) pointed out last year, Labour promised to cap the corporation tax rate at 25% for the whole of this Parliament. That has not been done in legislation, although we have had an indication from the Minister that that is still the Government’s intention.

I will make just one small political point. The Government did promise that they would not increase taxes on working people, but we have seen national insurance contributions increase—that was obviously in a different Bill. None the less, the more the Minister can say about capping corporation tax at 25%, the more confident businesses and our economy will be that something will not be slipped in during the next three and a half years before the general election. We have no other objection to this measure.

Lucy Rigby (Labour, Northampton North)

I am grateful to the hon. Member for Wyre Forest for his comments and for highlighting the fact that we have kept our manifesto commitment on tax. This is part of that: we are capping corporation tax at 25% in line with our corporate tax road map.

Clause 13 - Enterprise management incentives: thresholds and period for exercise

Lucy Rigby (Labour, Northampton North)

I beg to move amendment 37, in clause 13, page 7, line 37, at end insert—

“( ) In section 169I(7D)(b) of TCGA 1992 (material disposal of business assets)—

(a) for ‘tenth ’ substitute ‘specified’;

(b) at the end insert ‘(with “specified anniversary” having the meaning given in section 529(2A) of that Act)’.”

This amendment to TCGA 1992 would reflect the changes made to section 529 of ITEPA 2003 by clause 13 of the Bill.

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss the following:

Government amendment 38.

Clause stand part.

Lucy Rigby (Labour, Northampton North)

Clause 13 significantly expands the enterprise management incentives scheme eligibility to allow greater access for scaling companies. Specifically, the changes made by the clause will expand the EMI company eligibility limits to maintain the world-leading nature of the scheme.

Government amendments 37 and 38 are consequential to the business asset disposal relief legislation, updating it to align with the EMI maximum holding period expansion provided by the clause. The change will significantly expand the EMI limits and expand access for scale-up companies.

New clause 24 would require reports to the House of Commons on the impact of the clause on recruitment and retention in qualifying companies, on high-growth and innovative businesses and on the Exchequer finances. The Government have published a tax information and impact note setting out the impact of the EMI expansion. That showed that the measure will cost £585 million in 2029-30. The expansion is expected to support an extra 1,800 of the highest growth scale-up companies over the next five years, allowing them to reward an estimated 70,000 more employees.

The Government keep all taxes under review, and monitor and evaluate tax policy changes on an ongoing basis. We have also launched a call for evidence to gather views from founders, entrepreneurs, scaling companies and investors on tax policy support for investment in high-growth UK companies.

James Wild (Conservative, North West Norfolk)

It is a pleasure to serve under your chairship, Sir Roger, and on the Committee considering this 536-page doorstop of a Bill. We are grateful for the written contributions and evidence provided to the Committee, but I think the usual channels should consider having oral evidence sessions for future Finance Bills, so that people can make important representations on significant pieces of legislation.

I will turn to clause 13 and new clause 24 tabled in my name. We need to have an enterprise economy that incentivises investment. The tax regime clearly has an important role to play in helping to achieve that, and in doing so, backing much needed growth in the economy. Clause 13 amends the Income Tax (Earnings and Pensions) Act 2003 to expand the enterprise management incentives scheme. That scheme helps attract, keep and motivate staff by allowing employees to buy shares in the company with tax advantages. That includes no income tax or national insurance contributions at the time of grant and exercise, with gains eventually being taxed under the more favourable capital gains regime, rather than as income tax.

The changes in the clause should make it easier for start-ups and growing companies to use the enterprise management incentives scheme, helping them reward staff and link employees’ success to the company’s growth. That is something that we support and the British Private Equity and Venture Capital Association has also welcomed the change. The clause increases the company options limit from £3 million to £6 million, raises the gross asset limit from £30 million to £120 million, and doubles the employee limit from 250 to 500. It also extends the exercise period to 15 years. These are all welcome changes.

However, one important element that is not due to change under these provisions is that the scheme allows qualifying companies to grant employee share options up to a maximum value of £250,000 per individual. Has the Minister considered going further and raising the cap beyond £250,000 to attract the brightest and best to grow businesses?

In its report on competitiveness, published yesterday, TheCityUK states that,

“the UK’s tax schemes such as…Enterprise Management Incentives (EMI) offer lower relief thresholds and tighter eligibility than international equivalents such as the Qualified Small Business Stock regime in the US, weakening incentives to scale and retain activity domestically.”

I have tabled new clause 24, which would require the Government to assess and report to Parliament on the impact that the changes have on the recruitment and retention of skilled employees in qualifying companies, on high-growth and innovative companies and on the Exchequer.

The Minister referred to the tax information and impact note, but clearly that is a forecast of what the Government hope will happen, not a review of what has actually happened. I think that will be a debate that we have many times as we consider the Bill: a TIIN is not a review of what has actually happened. The numbers that the Minister gave may be higher or lower, but we need to have a post-implementation review.

According to the Budget 2025 policy costings, the objective is to increase eligibility to allow scale-ups, as well as start-ups, to access the scheme. That is, of course, something we support. Will the Minister commit to keeping the scheme under review to ensure it is delivering on its aims to support high-growth firms and to consider whether further action, such as on the individual threshold, is needed?

Given the substantial investment, can the Minister clarify what behavioural assumptions underpin these projections? How many companies just above the existing threshold are expected to utilise these expanded limits? The BVCA has said that the enterprise management incentives scheme is

“long overdue for reform: high growth companies are often unable to grant EMI options due to the constraints of the £30m gross assets and 250 employee limits.”

Does the Minister have figures showing how much these limits have actually restricted growth?

Joshua Reynolds (Liberal Democrat, Maidenhead)

It is a pleasure to serve under your chairmanship, Sir Roger, on what is not only my first Finance Bill Committee, but my first Bill Committee—a nice, simple one to start me off. The Liberal Democrats welcome the changes made by clause 13. We need to support our British start-ups and British start-up culture to grow and develop.

We would of course like the Government to go further than clause 13 in what they promise. We need to ensure that we have a British start-up culture where start-ups do not, after five or 10 years, head off to the United States, taking that capital and leaving the UK with a brain drain. I have only one question to the Minister: how can we go further to ensure that once we have implemented the Bill, we will be in a position to say that fantastic UK companies will not head overseas, taking that capital and culture with them?

Lucy Rigby (Labour, Northampton North)

The hon. Member for North West Norfolk made a series of important points. I come back to the fact that the Government have opened a call for evidence on tax in this area. The Committee will come to the enterprise investment scheme and venture capital trusts scheme, which the call for evidence also covers. Importantly, the call for evidence covers the changes we have made to the enterprise management incentives scheme. All of those changes, as well as the clauses we are about to discuss, are important to the Government’s objective of making sure that the UK is the best place in the world to start and grow a business, and I encourage any views to be fed into that call for evidence.

The hon. Member referred to an important report from TheCityUK and PwC; I attended its launch yesterday. I am pleased to tell him that the Government’s objectives on the growth of financial services very much align with that report. Our objectives and the report have much in common, but most importantly, we share the sense of urgency and ambition that it outlines.

The hon. Member for Maidenhead referred to his desire to see more companies remain in the UK. That is imperative, and it is behind the Government’s reforms to a series of tax incentives in this area. We believe that the UK is already the best place in the world to start a company, and we have to make sure that it continues to be, but it must also be the best place to scale and to list a company. That is why the reforms are so important—so that companies stay.

Clause 14 - Enterprise investment scheme: increase in amounts and asset requirements

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss the following:

Amendment 29, in clause 15, page 10, line 23, leave out subsection (2).

This amendment would maintain the rate of income tax relief for investments into venture capital trusts at 30 per cent.

Government amendments 3 and 4.

Clause 15 stand part.

Lucy Rigby (Labour, Northampton North)

Clauses 14 and 15 double the maximum amount that a company can raise through the enterprise investment scheme and venture capital trusts scheme, as well as the gross assets limit for companies using the scheme. The VCT income tax relief will also be reduced from 30% to 20%.

The changes made by clause 14 will mean that, from April 2026, the EIS annual company investment limits will increase to £10 million, or £20 million for knowledge-intensive companies. The lifetime company investment limits will increase to £24 million, or £40 million for knowledge-intensive companies. The gross assets test will increase to £30 million before share issue, and £35 million after. Likewise, clause 15 will mean that from April 2026, the VCT company investment limits and gross assets test will increase to the same levels. Alongside that, as I said, the VCT up front income tax relief will decrease from 30% to 20% from April 2026.

Government amendments 3 and 4 fix wording in clause 15 so that the annual and lifetime investment limits consistently apply to “the relevant company”, removing any ambiguity in how the VCT limits should be interpreted.

Amendment 29 would remove the VCT income tax reduction, leaving it at 30%, which would cost a total of £415 million over the scorecard period. The tax relief offered across the various venture capital schemes differs in several ways. For example, the venture capital trust scheme offers tax relief on dividend income, but the enterprise investment scheme does not.

Once the changes have been made, the VCT scheme remains a very attractive and generous option for investors seeking tax-efficient investment in UK start-ups and scale-ups, with 100% tax relief on dividend payments and 100% capital gains tax relief on the sale of shares, alongside the up-front 20% income tax relief.

I urge the Committee to reject amendment 29, to accept Government amendments 3 and 4 and clauses 14 and 15, and to reject new clause 1.

James Wild (Conservative, North West Norfolk)

Clauses 14 and 15 are a story of two halves. As the Chartered Institute of Taxation rather adeptly put it—we are grateful for its support in scrutinising the Bill—these changes give with one hand and take with the other. We support clause 14, but we have doubts about clause 15.

Both clauses deal with our risk capital schemes—the enterprise investment scheme and venture capital trusts. EIS was introduced in the UK in 1994 to stimulate economic growth and, along with VCTs, these Government-backed schemes encourage individuals to invest in smaller high-risk trading companies by offering tax reliefs on their investment. As a former adviser in the Department for Business, Innovation and Skills, I helped to develop these schemes, as well as the seed enterprise investment scheme. I recognise their importance.

As the venture capital industry has noted, these are essential tools in unlocking private capital for early-stage, high-growth UK businesses, which we all support, particularly in the knowledge-intensive sectors such as life sciences, clean energy and deep tech; however, companies now routinely require £20 million to £30 million in funding before they start to sell their products. The previous limits had prevented UK investors from following their initial investment with more capital, forcing businesses to turn to overseas capital too early. That is a problem I think we all want to fix.

The main difference between the schemes is that with EIS an investor buys shares directly in an eligible company, whereas with VCTs the investor buys shares in a listed fund-like vehicle, which then spreads their money across a portfolio of qualifying companies. These clauses increase the annual and lifetime investment limits for the EIS and VCTs in Great Britain and raise the gross asset thresholds for qualifying companies.

Clause 14 increases the annual and lifetime investment limits for the EIS and VCTs, and raises gross asset thresholds. These limits have not been uprated since 2018 for knowledge-intensive companies and 2015 for other companies. Now, all limits are being doubled, which is welcome. As we have heard, for both schemes, the limit will rise from £10 million to £20 million. The total amount that can be raised over time will increase to £40 million for those knowledge-intensive firms. The gross assets yield for qualifying companies will go up to £30 million before a share issue and £35 million thereafter. TheCityUK has said that schemes such as EIS remain vital for crowding in early-stage finance and these changes are welcomed by the industry.

Clause 15 heads somewhat in the opposite direction. This clause reduces the rate of income tax relief for investment in VCTs from 30% to 20%. This is where our doubts begin to grow. The 2025 Budget policy costings reveal a calculated trade-off. The increased limits in clause 14 will cost the Exchequer £60 million in 2027-28. Meanwhile, the reduction in VCT income tax relief will raise £125 million in the same year, delivering a net yield of approximately £65 million. The policy costings state that this rate reduction is intended to

“better balance the amount of upfront tax relief…and ensure funds are targeting the highest growth companies”,

but the costings’ own assumption that

“investors alter or reduce the way they invest into VCT”

is an acknowledgment that the relief cut will dampen investor appetite.

I am concerned by how much that tax increase will reduce investment in these high-growth companies that we all support. The British Private Equity & Venture Capital Association has been explicit about its concerns, warning that this reduction

“could lead to a decline in fundraising that would impact the high growth and high-risk investments that the Government is looking to encourage”.

VCTs are a key part of the UK’s capital mix, providing one of the few consistent sources of long-term equity for early-stage and scaling companies. Any reduction in their ability to raise funds would directly affect the pipeline of innovative businesses that the UK needs to grow.

The reduction in VCT relief to 20% creates a fundamental risk to venture capital funding, precisely when scale-ups face capital constraints. For early-stage companies dependent on VCT funding, the reduced relief translates directly into a higher cost of capital and reduced funding availability. The Budget relies heavily on revenue raising from less visible and more complex parts of the tax system. This VCT change exemplifies that approach, shifting costs to venture investors rather than implementing transparent broad-based taxation.

New clause 1 would require the Chancellor to report on the impact of the cuts to VCT allowance on early-stage investment volume, investor participation and international competitiveness. Given the Government’s own admission that this will alter investment behaviour, such reporting is essential, and I reiterate that a TIIN does not review what actually happens in practice. Amendment 29 would simply remove the provision in clause 15(2) that reduces the rate relief from 30% to 20%, keeping the relief at its current level to support investment in high-growth firms. I believe both amendments would be supported by industry and, subject to what the Minister says, I intend to press amendment 29 to a vote.

The Government are expanding VCT investment limits while simultaneously cutting the relief to 20%. How would the Minister address the concerns of the investment sector that the combined changes will dampen investor appetite for venture capital trusts at the very moment we need to encourage them?

Lucy Rigby (Labour, Northampton North)

I welcome the shadow Minister’s welcoming of the majority of the changes that we are making. To address his criticism of what we are doing in relation to the venture capital trust income tax relief, I come back to the impetus behind this package of reforms as a whole on EMI, EIS and VCT, which is to make sure that the UK is the best to start, scale, list a company and to ensure that companies stay.

The specific change to VCT to reduce the income tax relief from 30% to 20% is to help rebalance the up-front tax reliefs offered across the schemes, where the VCT scheme offers tax relief on dividend income, which the EIS scheme investors do not get. VCTs tend to invest in larger, less risky, scaling companies compared with EIS scheme investors. The reduction in income tax relief therefore reflects the overall reduction in investment risk that comes with investing in later-stage companies.

It is important to bear in mind that the VCT scheme remains very generous with, as I said, 100% tax relief on dividend payments and 100% capital gains tax relief on the sale of shares, alongside that 20% income tax relief. I know that the shadow Minister does not like TIINs in general—he has made that point in the Chamber—but they do contain the full details of the assumptions and impacts, and indeed the policy rationale. I therefore commend clauses 14 and 15 and Government amendments 3 and 4 to the Committee, and ask that amendment 29 and new clause 1 be rejected.

Clause 15 - Venture capital trusts: rate of relief and amounts and asset requirements

Clause 16 - CSOP schemes and EMI: PISCES shares

Lucy Rigby (Labour, Northampton North)

Clause 16 will enable the existing enterprise management incentives scheme and company share option plan contracts agreed before 6 April 2028 to be amended to include a sale on the private intermittent securities and capital exchange system—known by its much more catchy acronym of PISCES—as an exercisable event, without losing the tax advantages. The legislation will have retrospective effect from 15 May 2025. In the interim, His Majesty’s Revenue and Customs will be able to use its collection and management powers to not collect tax on exercise.

That means that this change will benefit PISCES trading events that happen before the Finance Bill receives Royal Assent. The change will therefore support more employees of growing UK companies to access the tax advantages of EMIs, and ensures that the tax system keeps pace with innovation in the wider economy. It also, of course, supports the launch of PISCES, which will provide a key stepping stone for public markets, supporting our world-leading capital markets. I commend clause 16 to the Committee.

James Wild (Conservative, North West Norfolk)

As the Minister says, clause 16 addresses a specific but important matter by permitting employers to amend existing company share option plan and enterprise management incentives option agreements, to allow PISCES trading events to serve as exercisable events without sacrificing the valuable tax advantages. Employers frequently offer share options to employees in recognition of their service and commitment, and to grow their businesses, and when employees exercise such options, they naturally face income tax and national insurance consequences. To encourage this form of employee ownership, successive Governments have introduced tax-advantaged schemes, including CSOP and EMIs, that provide relief from those taxes when certain conditions are satisfied.

As Members may recall from debates on last year’s Finance Bill—I believe the hon. Member for Burnley was a member of that Committee, so he must have annoyed someone to be back this year—PISCES emerged from the previous Government’s commitment to embrace innovation in financial services. While in government, we introduced substantial reforms to the UK’s listing regime, creating a more supportive environment for public markets and companies that choose to list here.

PISCES represents a genuinely novel approach—a new type of stock market, enabling occasional, intermittent trading in private company shares within an accessible, safe and properly regulated environment. We continue to support its core objectives, which are well conceived. It makes trading in private shares more transparent and efficient; gives private companies a practical means of offering liquidity to shareholders without the burden of a full listing; supports capital raising by facilitating the trading of existing shares; and provides a natural stepping stone to eventual listing on public markets.

The PISCES sandbox came into effect on 5 June last year, to run for five years, allowing for the development and testing of the new regulatory regime. I welcome the Government’s continued support for PISCES, which will form an important part of the UK’s offer to growing companies.

I must turn, however, to a concern that has been raised with me by the Association of Taxation Technicians. The Bill introduces an arbitrary cut-off date of 5 April 2028. Under the current drafting, options granted on or before that date may be varied to permit exercise on a PISCES trading event while preserving tax-advantaged status. Yet otherwise identical options granted from 6 April 2028 onwards would likely forfeit that status if varied in exactly the same way.

Herein lies the problem: given that PISCES is expected to remain in its sandbox phase until 2030, awareness of the system—despite our desire—will quite possibly remain limited by April 2028. The Association of Taxation Technicians therefore sensibly recommends that this easement be extended to at least 6 April 2030, better aligning the provision with the Government’s stated policy objectives and allowing proper time for awareness of PISCES to develop among businesses and advisers. While that would still involve a cut-off point, it would be considerably more coherent with the broader policy framework, which we support. I welcome the Minister’s response on that point.

While I appreciate that it is too early to determine PISCES’ success, given its sandbox stage, I would be grateful if the Minister could update us on how the operation of PISCES is progressing. It will be essential, in any event, that HMRC provides clear guidance to accompany the changes. Unfortunately, such guidance is not always provided in a timely fashion, as we are all familiar with from engagement with businesses in our constituencies. Can the Minister commit to publishing proper and timely guidelines to ensure that employers and employees can navigate the provisions with confidence?

Lucy Rigby (Labour, Northampton North)

The Government delivered the regulatory framework for PISCES in May 2025, and the shadow Minister has, fairly, asked for an update. I am pleased to tell him that the Financial Conduct Authority has since approved, as he may know, two PISCES market operators: JP Jenkins and the London Stock Exchange. We are hopeful that the first trading events on PISCES will take place soon.

I understand the impetus behind the shadow Minister’s other points. PISCES can, of course, be written into new contracts when they are agreed, meaning that those contracts should not need to be amended to include PISCES, because it can be there ab initio. However, it is fair to say that companies might not yet be aware of PISCES, as it was only recently introduced. That is exactly why we have the April 2028 extension, to allow PISCES to become more embedded and therefore more standard in EMI and company share option plan contracts. As I said, I understand the impetus behind the suggested change; I just do not think it is necessary.

Clause 17 - Employee car and van ownership schemes

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss clauses 18 and 19 stand part.

Lucy Rigby (Labour, Northampton North)

Clauses 17 and 18 will bring employee car ownership schemes into the benefit-in-kind regime from 2030, with transitional arrangements until 2032. Clause 19 will ensure that the introduction of new emissions standards does not lead to a sharp increase in benefit-in-kind tax for plug-in hybrid electric vehicles.

On clauses 17 and 18, the costing, published alongside the Budget, accounts for a behavioural response whereby a significant number of taxpayers switch towards alternative vehicles or move away from using company cars altogether. That has been updated since the 2024 autumn Budget, taking into account further evidence on the impacts of the measure provided by the sector.

Private use of a company car is a valuable benefit, and it is right that the appropriate tax be paid on it. This measure will ensure fairness to other taxpayers, reduce distortions in the tax system and reinforce the emissions-based company car tax regime, which incentivises the take-up of zero emission vehicles. To support the automotive industry and provide employers with more time to adjust to the changes, the Government have delayed implementation of the measure to 6 April 2030 and have introduced transitional rules.

On clause 19, new emissions standards being introduced in the UK reflect the higher real-world emissions of PHEVs. It is important that a car’s official emissions figures reflect real-world emissions, but that can lead to tax increases where tax is linked to emissions levels. The Government recognise that although it is right that higher-emitting vehicles pay more tax, lower-emission company cars such as plug-in hybrid vehicles continue to play an important role in supporting our transition towards zero emission vehicles and the decarbonisation of transport. The changes made by the clause will introduce a temporary benefit-in-kind tax easement for employers providing, and employees being provided with, PHEVs as company cars. I commend clauses 17 to 19 to the Committee.

Mark Garnier (Conservative, Wyre Forest)

I thank the Minister for her comments, but we are concerned about the unintended consequences of the three clauses.

We are concerned about how clause 17 will affect automotive industry jobs and vehicle sales. Approximately 76,000 workers use ECOS, across 1,900 medium-sized and large businesses. Those workers have utilised ECOS for essential, affordable and reliable personal transport. We believe that the clause risks making ECOS vehicles unaffordable for the workers who currently use them. In fact, using the scheme arrangements and paying tax from 2030 to 2032 onwards means that such workers face, in effect, a pay cut. That is especially unfair because those people who most use the schemes rely on a vehicle for their job much more than those in most other industries. There is a risk of further knock-on effects on the automotive industry if workers abandon ECOS completely.

The chief executive of the Society of Motor Manufacturers and Traders, Mike Hawes, who is one of the leading voices in the automotive industry, has expressed strong disapproval of the Government proposal to change ECOS. That is because 100,000 cars are provided through the schemes each and every year, which alone amounts to 5% of the new-car market in the UK. The SMMT predicts that changing the schemes will endanger 5,000 manufacturing jobs in the UK; it claims that that will bring about a loss of half a billion pounds a year due to fewer sales, lost VAT and lost vehicle excise duty receipts. That more than outweighs the £275 million in revenue that the Treasury predicts it will take within the first year of the tax changes taking effect.

We do not feel that clause 18 adequately protects the automotive industry and its workers. Under current ECOS arrangements, employers can sell a vehicle to an employee below market value, at a discounted price. For many employers, that has acted as an additional benefit to form a competitive employee recruitment package and has helped to improve staff retention. These criteria effectively stipulate that vehicles must be sold on the same terms as in the open market. Although exempt employers will not pay benefit-in-kind tax, they will inevitably have to pay a higher price for the vehicle itself. The SMMT estimates that that could become unaffordable for its members’ staff and automotive workers. The knock-on effects outlined in the discussion of clause 17 will remain. Fewer employees will be attracted to purchasing a vehicle. That will lead to fewer employers purchasing vehicles from car manufacturers, and the risk to manufacturing jobs and lost revenue will therefore still apply.

Clause 19 aims temporarily to ease the benefit-in-kind tax treatment for plug-in hybrid electric vehicles. We understand the intention behind this legislative change. We want people to take up low-emission electric vehicles, and the taxation system is an effective tool to encourage that. We are also conscious that stricter emission tests will be implemented over time. That could push plug-in hybrid emission vehicles into higher emission bands, and more tax will therefore be paid on them in the future. The knock-on effects on electric car manufacturers and the environment could be stark.

Joshua Reynolds (Liberal Democrat, Maidenhead)

The Liberal Democrats share the concerns of the SMMT. Given that the sector is struggling with severe uncompetitiveness across the country, anything that undoes the progress that the Government are seeking to make would not be welcome. Nissan tells us that its plant in Sunderland is the most expensive for electricity of any of its plants worldwide. That is not good for British business or for British car manufacturers. The SMMT worries that these proposals will not be good for British car manufacturers either.

On clause 18, we would like some draft guidance on proposed new section 116A to be published this year and consulted on. A number of the definitions could be clarified to give the industry some certainty about what will and will not be included.

Lucy Rigby (Labour, Northampton North)

On the points made by the shadow Minister, the hon. Member for Wyre Forest, we have listened very carefully indeed to the sector’s concerns and have responded. That is exactly why we are delaying the proposed changes to employee car ownership schemes until 2030. That is the reasoning behind the delay.

The Government are firmly committed to our modern industrial strategy, and specifically to the automotive sector. That is why in the past year we have committed £2.5 billion to automotive investment and research and development, increased flexibilities in the ZEV mandate, funded the roll-out of more charge points and announced plans to cut electricity costs for energy-intensive manufacturers. Various points have been made about the tax incentives, but underpinning all of them is our commitment to support the automotive industry in a challenging fiscal environment.

We will publish in due course the guidance that the hon. Member for Maidenhead requests.

Clause 20 - Employment income: miscellaneous exemptions

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss clauses 21 to 23 stand part.

Lucy Rigby (Labour, Northampton North)

Clauses 20 to 23 relate to other employment income. Clause 20 will simplify the rules on common workplace health and equipment costs, reducing administrative burdens for employers and giving greater clarity to the tax treatment of these costs. It will exempt reimbursements for accommodations, supplies or services used in performing employment duties, such as homeworking equipment; it will extend the existing exemptions for eye tests and corrective appliances to cover reimbursements; and it will introduce a new exemption for both the direct provision and the reimbursement of flu vaccinations. Uptake will depend on employer practice, but these changes will make the rules simpler and fairer for those affected. The Exchequer impact is negligible, but this change will allow employers to support staff without having to handle the sourcing and provision of minor items themselves. This will reduce time and resource costs.

Clause 21 relates to homeworking expenses. It will remove the process by which employees can claim an income tax deduction from HMRC if they have incurred additional household costs when required to work from home. The changes introduced by the clause aim to address concerns around non-compliance and to ensure fairness across the tax system.

Clause 22 will introduce changes that confirm the income tax treatment of payments made by zero-hour or similar limited-hour workers for a cancelled, moved or curtailed shift. This measure will put the tax treatment of such a shift beyond doubt. These tax changes will have an impact only on a small subset of workers, as the vast majority of such payments are taxable under existing legislation. The measure confirms that payments received in the event that a shift is altered at short notice are taxable in all scenarios, including in relation to agency workers and workers employed under umbrella companies.

Clause 23 puts beyond doubt the answer to whether earnings for duties not performed should be treated as UK earnings or overseas earnings for non-UK residents. The clause will establish a general principle to determine the tax treatment of earnings that relate to duties that have not been performed. It will also make a consequential amendment to foreign employment relief, commonly known as overseas workday relief, to ensure that this clarification also applies to UK residents who claim it. I commend clauses 20 to 23 to the Committee.

Mark Garnier (Conservative, Wyre Forest)

Clause 20 will introduce specific exemptions for minor expenses incurred by an employee on behalf of their employer. The Opposition particularly welcome subsections (3) to (6). As the Institute of Chartered Accountants in England and Wales says, it is a positive step that focuses on prevention rather than cures. It is also about the trade-off between tax relief and reduced future healthcare spending.

As the Association of Taxation Technicians has asked, will the Minister consider whether the covid-19 vaccination could be included in this provision? The Government’s explanatory notes state that corresponding changes to NICs for influenza vaccines and homeworking equipment will be made through separate regulations. Will the Minister provide more detail on when we can expect those regulations to be introduced?

On clause 21, the Government’s policy paper suggests that there will be no direct impact on business. However, there may be an indirect impact, as employers feel pressured to change their policies on reimbursement. As the Chartered Institute of Taxation points out:

“This creates an uneven situation in which two employees with identical working arrangements and costs are treated differently for tax purposes solely on the basis of their employer’s reimbursement policy.”

It also seems to follow our party’s scepticism about solely remote working. During the passage of the Employment Rights Act 2025, the Government said repeatedly that the right to work from home boosts productivity. Clause 21 seems to go against that by making it more difficult to work from home. It also seems to be a further attack on private sector employees, despite the fact that in 2024 HMRC spent £82 million on remote working devices for its workers, while the Home Office spent £53 million. Is this another example of the Government hitting the private sector while protecting the public sector?

Clauses 22 and 23 confirm that payments received in Great Britain for cancelled, moved or curtailed shifts are subject to income tax. In the explanatory notes, the Government state that this would also allow for

“the introduction of regulations to ensure that payments are also subject to National Insurance contributions”.

We think it would help to provide fairness in the tax system to support the clarity that the clause provides, so can the Minister confirm when the Government will seek to introduce those specific changes?

More generally, I want to make a point that my hon. Friend the Member for Mid Buckinghamshire (Greg Smith) made on the Employment Rights Bill Committee. While the clause provides fairness in the system between employees, the Government are still providing little support for businesses if they have to cancel, move or curtail shifts in circumstances that are unexpected or out of their control. Will the Minister commit to working with her colleagues in the Department for Business and Trade to assess how they can better support businesses when such situations arise?

Oliver Ryan (Labour/Co-operative, Burnley)

As ever, Sir Roger, it is a pleasure to make a short contribution while you are in the Chair. On clause 20, I will not echo the point that has just been made, but the Minister will have seen the written evidence submitted by the Association of Taxation Technicians, which discussed potentially widening the new initiative of including flu vaccinations in expenditure deductible from employment income, so that it also includes covid vaccinations. Has the Minister given that any thought?

On clause 22, it is a pleasure to see the Employment Rights Act being enacted and to address shifts being missed by people on zero-hours contracts, such as those in my constituency. It probably takes us into a wider debate that the Opposition have raised about having oral evidence sessions. It is clear from the evidence pack that the Chartered Institute of Taxation, the Association of Taxation Technicians and other taxation professionals have quite a lot of comments to make. If submissions on the clause were opened to my constituents, I am sure that there would be mass evidence from the public saying how much of a good thing it is. Does the Minister have any comments on that?

Joshua Reynolds (Liberal Democrat, Maidenhead)

Clause 21 will increase unfairness. Those required to work from home are currently divided into two groups: one group who receive reimbursement for costs without incurring income tax but are not reimbursed by their employer, and another group who take that via a taxation route. This measure will exacerbate that split and create a greater divide between the two. Where two employees hold exactly the same position or role, but in different companies, one may receive the payment and the other may not. The figures suggest that about 300,000 people will be affected by this measure. Can the Minister comment on how we can be in a position whereby two employees in the same job, but with different employers, are treated differently for tax purposes?

Lucy Rigby (Labour, Northampton North)

The shadow Minister, the hon. Member for Wyre Forest, and my hon. Friend the Member for Burnley referred to vaccinations and asked about the extent to which covid vaccinations might be part of the scheme. We are limiting relief to flu vaccinations because employers have consistently highlighted them as a common relief in relation to which reimbursement would be helpful. Flu vaccinations are low in cost, seasonal and widely offered by employers as part of routine health support to employees. By contrast, other vaccinations vary significantly in cost and frequency. Importantly, however, many of them can be accessed free through the NHS.

As you might expect, Sir Roger, I completely reject the shadow Minister’s assertion that any of these measures is an attack on private sector workers. Not at all—far from it.

It is important to be clear that clause 21 will not impact employers’ existing ability to reimburse employees for costs relating to home working, where eligible, without deducting income tax and national insurance contributions.

The question of national insurance was raised in relation to clause 22 on payments for cancelled shifts. These payments will be subject to national insurance. My hon. Friend the Member for Burnley was entirely right to refer to the Employment Rights Act and its significance. I think I am right in saying that a question was also raised about the taxable nature of payments for cancelled shifts. I can confirm that payments received for short-notice shift cancellations or changes are regarded as earnings. They are paid in lieu of the payment that workers would have received had they completed the shift, and as such they are taxable in all relevant scenarios, irrespective of the arrangement or the employment structure.

Clause 24 - Umbrella companies

Lucy Rigby (Labour, Northampton North)

I beg to move amendment 5, in clause 24, page 28, line 25, at end insert—

“61Z2 Disclosures to liable persons

(1) Subsection (2) applies where an officer of Revenue and Customs considers that a person is, or may be, jointly and severally liable to pay an amount as a result of this Chapter.

(2) The officer may at any time disclose to the person such information as the officer considers appropriate (whether or not such a disclosure would otherwise be permitted under section 18(2)(a) of CRCA 2005 or any other enactment) for the purposes of informing the person about that liability (‘the joint liability’) including—

(a) the identity of any person who is an umbrella company, a purported umbrella company or the worker in relation to the arrangements to which the joint liability relates, and

(b) information about the nature and extent of the liability of an umbrella company or a purported umbrella company that (by virtue of this Chapter) results, or may result, in the joint liability.

(3) Information disclosed in reliance on subsection (2) may not be further disclosed without the consent of the Commissioners for His Majesty’s Revenue and Customs (which may be general or specific).

(4) Where a person contravenes subsection (3) by disclosing information relating to a person whose identity—

(a) is specified in the disclosure, or

(b) can be deduced from it,

section 19 of CRCA 2005 (offence of wrongful disclosure) applies in relation to the disclosure as it applies in relation to a disclosure in contravention of section 20(9) of that Act.

(5) In this section ‘CRCA 2005’ means the Commissioners for Revenue and Customs Act 2005.”

This amendment permits disclosures (whether or not permitted as a result of provision elsewhere) to persons who may be jointly and severally liable as a result of new Chapter 11 of Part 2 of the Income Tax (Earnings and Pensions) Act 2003.

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss the following:

Government amendments 6 to 8.

Clause stand part.

Lucy Rigby (Labour, Northampton North)

Clause 24 will make changes to ensure that recruitment agencies are responsible for accounting for pay-as-you-earn on payments made to workers that are supplied via umbrella companies. Many umbrella companies operate diligently and support their employees, but a significant number are used to facilitate non-compliance, including tax avoidance and fraud. Clause 24 is intended to encourage increased due diligence among businesses that choose to use umbrella companies to engage workers. It will do so by introducing joint and several liability for the PAYE taxes that umbrella companies are required to remit to HMRC.

Government amendments 5 to 8 will ensure that the legislation works as intended by making a small technical change. This will ensure that HMRC is able to recover underpayments of tax from businesses that are within scope of the new rules because they purport to be umbrella companies, in the same manner that underpayments will be recovered from the other businesses that are within scope of the new rules. Amendment 5 will ensure that HMRC is able to keep taxpayers informed about its investigations concerning sums to which they are jointly and severally liable. That will help taxpayers to take action to mitigate their exposure to unpaid liabilities.

I commend clause 24, together with Government amendments 5 to 8, to the Committee.

Mark Garnier (Conservative, Wyre Forest)

Back in 2023, the Conservative Government opened a consultation on how to tackle non-compliance in the umbrella company market, because there was evidence of widespread non-compliance that deprived workers of their employment rights, distorted competition in the labour market and led to a significant tax loss to the Exchequer. In the 2024 autumn Budget, the Chancellor announced that she would follow up the consultation, hence this clause.

The Government state in their explanatory notes that the clause seeks

“to drive behavioural change among businesses that use umbrella companies in the supply of workers by giving them a financial stake in the compliance of the umbrella companies that they use.”

I think there is broad agreement about the need for this measure in tackling tax non-compliance in the umbrella company market. However, the Chartered Institute of Taxation has raised two particular issues, and I would be grateful for the Minister’s comments on them.

First, there seems to be an absence of safeguards. Currently, HMRC can transfer liability to the agency regardless of its circumstances. When an agency has done all it can to ensure the integrity of the supply chain, but has been the victim of fraud by the umbrella company, we think there should be safeguards in place to prevent the transfer of debts.

Secondly, there is some concern that the definition of “purported umbrella company” is too wide. The clause defines such a company so as to include any entity supplying an individual with services where that individual has a material interest in the entity. That means that, for instance, personal service company arrangements could fall within the definition. Is it the Government’s intention to include personal service company arrangements within the definition of a purported umbrella company? I should declare an interest: I have a personal service company. Can the Minister expand on what discussions on the clause have taken place with industry organisations such as the Freelancer and Contractor Services Association, which provides accreditation for many umbrella companies?

Lucy Rigby (Labour, Northampton North)

On the shadow Minister’s final question, I am afraid that I do not know what discussions have taken place with the organisation he referred to, but I can write to him and let him know. Ultimately, whether to use an umbrella company when supplying a worker to a client is a commercial decision for agencies. That commercial decision has been incentivised not just by the ability to outsource administration to umbrella companies, but by the shielding from exposure to tax risk that that model provides. It is good to hear the shadow Minister welcome the impetus behind the changes in that regard.

The current legal framework provides few incentives for agencies to ensure that the umbrella companies they use are compliant. We think it—and it sounds like the shadow Minister agrees—that that has contributed to the proliferation of non-compliance in the umbrella company market. It is important that agencies take steps to ensure that their labour supply chains are compliant, and some agencies already do. HMRC has published guidance on how to undertake checks.

The shadow Minister asked about which agencies may be treated as umbrella companies, given the breadth, or otherwise, of the definition. We are, of course, aware that some agencies engage workers as employees, and where that is the case, and they meet the other conditions of the legislation, they will be treated in the same way as umbrella companies and this measure will apply. Employment is a fundamental characteristic of how most umbrella company workers are engaged and is the key aspect in determining when this legislation will apply. I think that will be the key legal test.

Clause 25 - Loan charge settlement scheme

Lucy Rigby (Labour, Northampton North)

I beg to move amendment 9, in clause 25, page 30, line 21, at end insert “, or

(ii) a director or shadow director of such a person.”

This amendment expands the persons to whom the Commissioners are not required to make a loan charge settlement offer so as to include directors and shadow directors of a promoter or introducer.

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss the following:

Government amendment 10.

Clause stand part.

Clause 26 stand part.

Government amendment 11.

Clause 27 stand part.

Lucy Rigby (Labour, Northampton North)

Clauses 25 to 27 provide for the Government to create a settlement opportunity in line with their response to the independent review of the loan charge, and to encourage those who have not yet settled with HMRC to come forward and do so.

Clause 25 sets out some of the main features of the scheme, including how the new settlement amount will be calculated. Clause 26 will ensure that inheritance tax is not charged as part of any settlement where it relates to disguised remuneration arrangements in scope of the loan charge. Clause 27 makes supplementary provision for the settlement scheme to ensure that it can operate as intended.

In some places, the Government have gone further than the review recommended. In addition to removing late payment interest and inheritance tax, and allowing for generous tax deductions to represent amounts assumed to have been paid to promoters, the Government will also write off the first £5,000 of each individual’s liability. Because of these changes, around 30% of people within scope of the review could see their liabilities removed entirely, while most other individuals will see their liabilities reduced by at least half.

Turning to Government amendments 9 to 11, HMRC is aware of a number of promoters who have made use of their own disguised remuneration schemes and would be within scope of the settlement opportunity. I am very clear that it would be wrong for those individuals to be able to access the generous settlement terms on offer rather than paying every penny that they owe. Clause 25 makes provision for the exclusion of tax avoidance promoters from the settlement opportunity. Amendments 9 and 10 tighten those provisions to ensure that HMRC is able to prevent the controlling minds behind promoter companies from inappropriately accessing the settlement opportunity, in line with the Government’s announcements at the Budget. Amendments 9 to 11 also clarify that where an employer still exists, it can enter into a settlement on behalf of its employees who used disguised remuneration schemes.

New clauses 25 and 26, which would require HMRC to publish a report on the operation and scope of the loan charge settlement opportunity and a report on the treatment of disguised remuneration arrangements falling outside the scope of the loan charge, are unnecessary. The Government published a comprehensive response to the review, setting out our position, at the Budget. That outlined the decisions the Government made to help draw this matter to a close for those impacted, and explained why the scope of the review had been set as it had. It explained that the settlement opportunity will apply to disguised remuneration use between December 2010 and April 2019, because that is the period to which the loan charge applies. While people who used tax avoidance schemes outside that period will not be able to access the scheme, HMRC will work sensitively and pragmatically to help people to resolve their cases, including by taking account of people’s means and offering generous payment terms where appropriate.

I am sure that everyone will be aware that the loan charge is already subject to significant parliamentary scrutiny. HMRC officials and Treasury Ministers routinely provide updates on their work to the Treasury Committee and the Public Accounts Committee, and the Treasury Committee asked the HMRC permanent secretary about this topic just last month. I therefore urge the hon. Member for Maidenhead not to move his new clauses, and commend clauses 25 to 27, and Government amendments 9 to 11, to the Committee.

Mark Garnier (Conservative, Wyre Forest)

The Conservatives welcome the independent review and the thrust of clause 25. If we were to have a criticism, it would be to do with fairness, on which we had concerns shared with us by the Low Incomes Tax Reform Group. A key objective of the McCann review, which the Minister referred to and which was set up by the Government, was to ensure fairness for all taxpayers. However, by not extending the more generous settlement opportunity to those who have already fully settled and/or paid the loan charge, the provision arguably does not achieve fairness for all taxpayers. It will effectively put those who chose not to comply with their tax obligations in a better position than those who did. That could create perverse incentives, harm future tax compliance and damage trust in the tax system. Could the Minister provide a little more detail as to why the Government have excluded those who have already settled their claims?

Joshua Reynolds (Liberal Democrat, Maidenhead)

New clause 25, which I hope to press to a Division, would require the Government to undertake a report to consider a number of issues pertinent to the loan charge settlement scheme outlined in the Bill. The Liberal Democrats are clear that the settlement opportunity should be fair to everybody affected, including those who have already paid or settled, so as to ensure that people outside the loan charge years are not treated differently without clear reason. Unequal treatment can create the perception of unfairness, even if the policy is technically and soundly legal. It seems to us that if perceived unfairness in the system could be reduced, we should strive to do so, in order to protect the public’s trust in HMRC and the wider tax system. Is it right that someone who has already settled should be ineligible for the loan charge settlement? Surely, that tells people that in future they should just hold off and not settle or come to agreement, because that will leave them in a better position.

James Wild (Conservative, North West Norfolk)

We will look sympathetically on the hon. Gentleman’s new clauses if he chooses to press them to a vote. I have constituents who were heavily pressured by HMRC and ended up settling, which left them at a considerable financial loss, so I share his concern that those people, who were effectively bullied by HMRC, will now not get the same support as people who held out.

Joshua Reynolds (Liberal Democrat, Maidenhead)

The hon. Gentleman is completely correct. The place we are in now is that someone who settled and came to an agreement with HMRC is excluded from the opportunity laid out in the Bill. That means that when something like this happens again—and we all know that it will—those individuals will not want to come to an agreement with HMRC. They will know that if they hold off, a better solution and a better agreement will come through.

The report required by new clause 25 would outline a range of things, including whether the loan charge settlement opportunity is available to individuals who have settled, which is really important and something that we need to ensure; whether the settlement opportunity applies to individuals with disguised remuneration outside the loan charge years; and the extent of the impact of differential treatment between those two groups and those who are eligible. The extent of the impact is the most important thing, because for those individuals it will be severe. The report would also include an assessment of whether extending more favourable settlement terms to excluded groups would improve fairness and consistency with HMRC overall.

Lucy Rigby (Labour, Northampton North)

The purpose of the review, as I think is well known, was to bring the matter to a close for those who had not yet settled and paid their loan charge liability to HMRC. That by its very nature meant focusing on open cases and outstanding liabilities. The Liberal Democrat spokesman, the hon. Member for Maidenhead, referred to something like this happening again. I think we would all agree that we hope it does not. However, we would probably also agree that it is crucial that any resolution to this issue is fair to the wider tax-paying population that has never avoided tax.

The Government believe that this settlement opportunity is the most pragmatic solution to draw a line under the issue for as many individuals with outstanding liabilities as possible. The settlement opportunity being provided is substantially more generous than any opportunity HMRC has previously offered and will substantially reduce the outstanding liabilities of people who have yet to settle with HMRC, particularly those with the lowest liabilities. Most individuals, as I said, could see reductions of at least 50% in their outstanding loan charge liabilities. We estimate that 30% of individuals could have their liabilities written off entirely.

James Wild (Conservative, North West Norfolk)

In her opening remarks, the Minister referred to promoters of disguised remuneration schemes not being eligible for this settlement scheme, which I welcome. Perhaps she could update the Committee on whether HMRC is proactively pursuing such individuals, who caused such distress to my constituents and, of course, to people across the country who were sold schemes, advised that they were legitimate and had been agreed with HMRC, and then discovered they were not and have lost their homes and their life savings as a result.

Lucy Rigby (Labour, Northampton North)

I managed to give way just before the end of my speech. The shadow Minister raises a good question and a fair point. Through the new measures and existing rules, HMRC will have powers that can result in criminal prosecution of promoters of tax avoidance, including the new universal stop regulation proposal, which will ban the promotion of the most fanciful schemes outright and allow the HMRC commissioners to ban by regulation the promotion of other arrangements that HMRC thinks will not work. We will consult on further measures to target promoters in early 2026—indeed, it is 2026 already, so the shadow Minister may assume that that will happen soon.

Clause 27 - Loan charge settlement scheme: supplementary

Roger Gale (Conservative, Herne Bay and Sandwich)

Mr Reynolds, I heard you say you wanted to press your new clauses to a vote. New clauses, for general consumption, are always taken at the end of the Bill, so many weeks from now you will get your chance to have your vote.

Clause 28 - Main rate of writing-down allowances for expenditure on plant or machinery

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss the following:

Clause 29 stand part.

Lucy Rigby (Labour, Northampton North)

Clause 28 will reduce the main rate writing-down allowance for corporation tax and income tax, and clause 29 introduces a new first-year allowance available for expenditure on plant and machinery. As I am sure all hon. Members are aware, capital allowances allow businesses to write off the costs of capital assets, such as plant or machinery, against their taxable income. The UK continues to offer one of the most generous capital allowances systems globally and ranks top among OECD countries for plant and machinery capital allowances.

Clause 28 will reduce the main rate writing-down allowance from 18% to 14%, starting on 1 April 2026 for corporation tax and 6 April 2026 for income tax. That allows the Government to fund a new first-year allowance while also fairly raising revenue to protect the public finances. Clause 29 will introduce the new 40% first-year allowance, which will support future investment. The new allowance is available for expenditure on plant and machinery, including assets bought for leasing and assets bought by unincorporated businesses, from 1 January 2026.

The changes made by clauses 28 and 29 will raise approximately £1.5 billion per year by the end of the scorecard. The changes are UK-wide and will impact businesses with pools of historic main rate expenditure, which predate the introduction of the super-deduction or full expensing regimes for companies, as well as historic expenditure or future main rate expenditure that does not qualify for first-year allowances, or where first-year allowances were not claimed. We have heard the calls to expand full expensing to more assets and businesses. Although the fiscal climate limits what we can do now, the new first-year allowance moves us closer to that goal in a responsible way.

New clause 2 seeks to mandate reporting the impacts of clause 28 to the House. The Government have published documents much loved by the shadow Minister, the hon. Member for North West Norfolk—tax information and impact notes—setting out the impact of the reduction to main rate writing-down allowances, alongside the introduction of the new 40% first-year allowance. I therefore reject new clause 2 and commend clauses 28 and 29 to the Committee.

James Wild (Conservative, North West Norfolk)

I want to get on the record that I do not have a problem with TIINs, but they serve a different purpose from reviewing legislation after the event. I would not want any Treasury officials to feel that the Opposition do not value TIINs.

I will speak to clauses 28 and 29 as well as new clause 2, which is tabled in my name. Capital allowances are one of the primary mechanisms through which our tax system supports business investment. They enable firms to deduct the cost of purchasing plant and machinery from taxable profits, thereby reducing their tax liability and helping them to invest and grow, which we all support. The annual investment allowance is perhaps the most straightforward example. It allows businesses to deduct the full cost of most plant and machinery up to £1 million annually, in the same the year that the expenditure occurs.

Beyond that, there are the first-year allowances with no annual cap. The most generous of those is full expensing, which the Minister referred to, which provides a 100% deduction for qualifying main rate assets and a 50% allowance for certain special rate assets. Those measures were introduced by the previous Conservative Government in order to stimulate faster investment and drive up what have been, I think it is fair to say, historically low levels of business investment throughout all parties’ periods in government. I think that we are all committed to try and address that.

Where businesses cannot or choose not to utilise those more generous allowances, they rely on writing-down allowances. They spread tax relief over several years by permitting a set percentage of the remaining pool balance to be written off annually, with assets allocated to either a main rate or special rate pool, depending on their classification.

Clause 28 reduces the main rate from 18% to 14% a year, while the special rate remains at 6%. The relevant date is 1 April 2026 for corporation tax purposes, and 6 April 2026 for income tax. For periods straddling that change, a hybrid rate will apply. New clause 2 would require the Chancellor to produce a report that examines the impact of those reductions on business investment levels, capital investment sector employment, the manufacturing sector, small and medium-sized enterprises and public finances.

The 2025 Budget policy costing document presents that as a part of capital allowance reform, but the reduction in the main writing-down rate will alter the cash flow position of capital-intensive businesses, slowing the rate at which they can recover investment costs through tax relief. Businesses with substantial brought-forward main pool balances will see their tax relief decelerate, with corresponding impacts on cash flow and the overall tax benefit. For companies planning significant investment, timing has now become more important. This is yet another structural tax increase on businesses with large asset bases, which will now recover their investments more slowly.

Make UK has described this Budget as

“a case of two steps forward one step back for manufacturers.”

The 4% in reduction in the writing-down allowance is undeniably bad news for business. It is little wonder that polling by the Institute of Directors reveals that four in five business leaders view this Budget negatively, and I think that those findings were replicated across the Federation of Small Businesses, the CBI and many other business organisations. The delayed recovery of capital costs will constrain reinvestment in modernisation and automation, precisely when UK manufacturers are already facing strong headwinds, not least from the very high energy costs that they face in this country. The reduction from 18% to 14% will diminish the speed at which businesses can recover these costs. Has the Treasury assessed the impact on business investment intentions, particularly for small and medium-sized enterprises in manufacturing and logistics? If not, I am sure that the Minister looks forward to supporting new clause 2.

Clause 29 is an attempt to balance the changes made in clause 28. It introduces a new 40% first-year allowance from 1 January 2026 for new, unused main rate plant and machinery. The new allowance expands relief to unincorporated businesses and firms that buy assets to lease out, which do not qualify for full expensing or the 50% special rate allowance once they go over the £1 million annual investment allowance. The explanatory notes highlight that this new allowance represents an expansion to include leasing, which we welcome—those activities that have traditionally been excluded from such reliefs. The allowance is not available for special rate expenditure, second-hand or used machinery, expenditure under disqualifying regimes or general exclusions.

We support the expansion set out in this clause. While these measures may have good aims, introducing an additional rate adds some complexity to the system. There is also the length of the Finance Bill that we are considering—536 pages of dense text—and that we expect businesses and individuals across the country to comply with, else HMRC will come after them. I urge the Government to monitor closely the impact on business investment and to look at options for a more streamlined or neutral capital allowances structure in future. What steps are being taken to tell businesses about these new allowances and freedoms they have to invest in leased assets—for example, by working with business organisations to get the word out? Opposition Members will certainly do that with businesses in our constituencies.

The new allowance will provide some up-front support for qualifying new investment, partly offsetting the impact of reducing the main writing-down rate to 14%. Once again, the Government are giving with one hand and taking with the other. The uplift will be of use for unincorporated and leasing businesses, but for most other businesses with historical or non-qualifying assets, there is no uplift at all. They simply face a slower rate of relief, going down to 14%, stretching allowances over a longer period and affecting their cash flow.

The Minister referred to Office for Budget Responsibility forecasts that suggest these combined measures will cost businesses more than £1 billion in 2026–27, rising to around £1.5 billion a year thereafter. That is a significant burden at a time when companies are grappling with weak investment and, to put it bluntly, the higher costs imposed in the first Budget. The £20 billion jobs tax has had a big impact, as we saw in the data earlier this week and as we see in the number of graduates who are struggling to find jobs.

As I say, the inclusion of leasing is welcome, but we do think there is benefit in reviewing those measures after the event and coming back to Parliament to explain what has happened.

Lucy Rigby (Labour, Northampton North)

The shadow Minister referred to the new 40% first-year allowance, which is bringing forward relief for the leasing sector and unincorporated businesses, which have historically been carved out of the first-year allowance. In doing so, it allows for immediate relief on a significant amount of their investment from their corporation tax or income tax bill in the year in which they make that investment.

As the Chancellor has repeatedly made clear, the fiscal environment is challenging. We cannot make unfunded commitments on tax. The shadow Minister referred earlier to being an adviser to the previous Government, which is not, I suspect, to suggest that he had a role in creating the fiscal environment that we unfortunately inherited from the previous Government. We have heard the calls to expand full expensing to more assets and businesses. When the fiscal climate allows us to do so, we will look into that.

Oliver Ryan (Labour/Co-operative, Burnley)

The Minister makes a very good point about the expansion of exemptions and the fact that the Government are minded to look at this in future Budgets. I welcome clause 29, which talks about the leasing of plants and machinery and affects many businesses in my constituency. I think it will have a genuine impact and, much as the Opposition might say, “This is a very good thing,” and welcome it, I hope they will vote with us today. However, the question has to be asked why, after 14 years in government, they did not bring this in. For various businesses in my constituency that lease large equipment, this would have made a massive difference. Unfortunately, it is being brought in by us later in the day because it was not done by the Conservatives.

Lucy Rigby (Labour, Northampton North)

My hon. Friend makes a very good point.

The shadow Minister asked about working with businesses to get the word out. We have been working closely with industry on the expansion to leasing and we are consulting businesses on guidance to ensure that understanding of the new rules is as full as possible. The TIINs beloved of the shadow Minister, we now hear, make it clear that the OBR’s “Economic and fiscal outlook” sets out that the measure is not expected to have significant macroeconomic impacts, and for future investment the present value and cost of capital for businesses that claim the new first-year allowance remains broadly the same following these changes. For all those reasons, I maintain the view that new clause 2 should be rejected.

Roger Gale (Conservative, Herne Bay and Sandwich)

As an old hand, Mr Wild will know that a decision on new clause 2 will come at the end, if he wishes to press it to a Division.

Clause 30 - Expenditure on zero-emission cars and electric vehicle charging points

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss new clause 3—Review of the impact of section 30—

“(1) The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of the expiry in 2027 of the 100% allowance made under section 30.

(2) The report under subsection (1) must assess the case for long-term capital allowance support for zero-emission cars and electric vehicle charging points to maintain UK competitiveness in green technology.”

This new clause would require the Chancellor of the Exchequer to review and report on the impact of the expiry in 2027 of the 100% allowance made under section 30, including the case for ongoing capital allowance support for zero-emission cars and electric vehicle charging points.

Lucy Rigby (Labour, Northampton North)

Clause 30 will extend the 100% first-year allowance for qualifying expenditure on zero emission cars and plant or machinery for electric vehicle charge points by a further year to April 2027. More specifically, it will extend the availability of these capital allowances to 31 March 2027 for CT purposes and 5 April 2027 for income tax purposes, ensuring that investments in zero emission cars and charge point infrastructure continue to receive the most generous capital allowance treatment.

New clause 3 would require the Chancellor to review and report on the impact of the expiry in 2027 of the 100% first-year allowances made under clause 30, including the case for ongoing capital allowance support for zero emission cars and electric vehicle charging points. Alongside the 2025 Budget, in which the extension was announced, a policy costings document and a TIIN were published that set out the expected economic, business and other impacts of the changes, including impacts on incentivising businesses to purchase zero emission vehicles. Those documents are of course available online.

The Government annually review the rates and thresholds of taxes and reliefs to ensure that they are appropriate and reflect the current state of the economy. For that reason, new clause 3 is unnecessary. I commend clause 30 to the Committee, and ask that new clause 3 be rejected.

James Wild (Conservative, North West Norfolk)

As we have heard, clause 30 will extend the 100% first-year allowance for expenditure on zero emission cars, including EVs, and EV charging points. As the Minister said, the extension runs for a year to March 2027 for corporation tax and April 2027 for income tax purposes. Our new clause, consistent with other amendments that we have tabled, would simply ask the Chancellor to come back and report to Parliament, and to the public, on the impact of her measures. I do not really understand this reluctance to understand the actual impact of the measures. As part of the Government’s broader regulatory reform approach, they seem keen on post-implementation reviews, but the Treasury holds out alone against its homework being scored, it would seem. We want to consider whether long-term support should continue to be provided to maintain UK competitiveness in green technology. It is, in essence, a call for evidence that could make a difference to business confidence and investment.

The allowance was first introduced in 2002 for low emission cars, and the threshold was tightened over time, reaching zero emissions from April 2021. The extension continues that policy, but only for a year, and the Government’s own costings suggest that the extension will cost £145 million. Businesses planning multi-year fleet transitions and charging infrastructure investments face repeated cliff edges. Each year, a one-year window does not help a company planning to electrify its fleet in two years’ time; it simply rewards those who are able to accelerate the investment within the next 12 months.

Does the Minister recognise that it creates a stop-start approach that could discourage investment, undermine industry confidence and, ultimately, slow the UK’s transition to clean, green technology? That is odd when, in many ways, the Government are accelerating full throttle towards 2030 electrification across the grid. Members may have pylons and other pieces of grid infrastructure being dumped in their constituencies, with no public recourse, in the name of the Energy Secretary’s net zero goals. It is worth asking whether their policy is joined up if it includes these incremental extensions.

In that spirit, I have tabled new clause 3 so that hon. Members can judge whether the Government have a coherent approach. It would require the Chancellor to assess, transparently and on the record, whether a long-term support system is justified to keep Britain competitive in the global race for green manufacturing. A formal assessment would give Parliament and businesses the information they need to plan ahead.

In the debate on clause 11, the Minister referred to the long-term certainty provided by committing to a 25% corporation tax rate for this Parliament. Of course, that is not actually in the legislation, but we welcome that commitment and the greater certainty, and similar certainty could be given in this area. A formal assessment could also ensure that public money is being used wisely and that policy provides the certainty to unlock the investment we all want to see.

Given their 2030 obsession, why have the Government again chosen a one-year extension that provides limited certainty for fleet operators or for the charging infrastructure sector? I see that the hon. Member for Banbury is getting ready to dive into the debate. Will the Minister support new clause 3 and commit to a proper assessment of the lasting framework that is needed to secure Britain’s place in the green technology economy of the future?

Sean Woodcock (Labour, Banbury)

The shadow Minister talks about a stop-start approach from this Government. I find that a bit brass neck, to be frank, considering the record of the previous Government, who shifted the dates and forced all sorts of investment with regard to EVs.

I welcome the measure. As part of the just transition, it is important to encourage the roll-out of EV infrastructure and charging points, particularly in rural constituencies such as mine where that is a significant challenge. Members will not be surprised to hear that I do not support the official Opposition’s new clause, but there is an important debate about how we ensure that investment is rolled out more equitably into constituencies such as mine. I ask the Minister to comment on how the Government see the roll-out of EV infrastructure in areas where there are issues with the electricity grid and network, so that the just transition can happen in those areas as well.

Joshua Reynolds (Liberal Democrat, Maidenhead)

The Liberal Democrats wholeheartedly support electrifying our vehicle fleet. It is a shame that some other political parties and politicians have stopped at a red traffic light when it comes to electrification. [Hon. Members: “More!”] I will not make any more traffic jokes—apologies.

That is why it is quite concerning to see the 2027 expiry date for the capital allowance. When potential EV owners are surveyed, their biggest concern is charging their vehicles, and it is the same for big employers. We all know that businesses need long-term security and a long-term commitment. That is why businesses were not doing well under the last Government, and why they retreated when the 2024 Budget brought in so many changes for businesses.

Long-term security is clearly what businesses need to invest. One-year extensions on top of one-year extensions do not give the certainty that businesses need to invest in the electrification of fleets—they need to do it this year or not at all. Once we take away that capital bid, it is very difficult to get back, so I would like to see that changed.

James Wild (Conservative, North West Norfolk)

The hon. Member and I agree about the importance of long-term certainty. People who are watching the proceedings may wonder why we did not just table an amendment to extend the scope to 2030, but due to the narrowness of the measures passed by the House, we are unable to do so. As I weigh up whether to push my new clause to a vote in a few weeks’ time, will the hon. Member consider supporting it?

Joshua Reynolds (Liberal Democrat, Maidenhead)

We can look into whether to support new clause 3 in a few weeks’ time. There seems to be very little in the new clause that we as Liberal Democrats would not support. Let us face it: we need to review the impact of the 2027 expiry date. We do not believe that the allowance should expire in 2027; it needs to be extended significantly further, so we would certainly consider supporting a review of whether 2027 is the right place.

That is my question for the Minister, really: why are we saying that the expiry date will be in 2027? Will we all be sitting here excitedly after the next Budget, looking at a 2028 expiry date, and so on for 2029 and 2030?

Lucy Rigby (Labour, Northampton North)

On new clause 3, I think I have been as full as I can. The Government annually review the rates and thresholds of taxes and reliefs to ensure that they are appropriate and reflect the current state of the economy. We therefore do not need the review that is suggested in new clause 3.

On the broader points made by the shadow Minister, the hon. Member for North West Norfolk, we are, as I say, fully committed to supporting our automotive sector. On the suggestion that we might look further ahead, the Chancellor makes decisions on tax policy at fiscal events in the context of the public finances. My hon. Friend the Member for Banbury is right that support for infrastructure in this area is critical; indeed, that is the wider policy of the Government. On the suggestion from the hon. Member for Maidenhead that we might go beyond one year, we need to balance support for the industry with the impact on the public finances.

In our debate on clause 30, we have had “stop-start”, “accelerate”, “full throttle” and “red light”. I now encourage the Committee to greenlight the clause.

Roger Gale (Conservative, Herne Bay and Sandwich)

As we are nearing the end of the sitting, let me make three brief housekeeping announcements.

First, for operational reasons, the central door has been locked during the sitting. It will be opened very shortly before we adjourn so that Members may leave through it if they so wish.

Secondly, it has been drawn to my attention that, since the start of the sitting, the temperature has dropped dramatically, presumably because of the weather. Whether we can do anything about it during the lunch hour I do not know, but we will try.

Thirdly, the doors will be locked between now and the afternoon sitting. Given the weight of papers that everybody has been given, those Members who wish to leave them in the room may do so.

Clause 31 - Payments for surrender of expenditure credits

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss clauses 32 and 33 stand part.

Lucy Rigby (Labour, Northampton North)

Clause 31 will make changes to clarify the tax treatment of payments made by companies in return for receiving expenditure credits. The changes made by the clause will set out a treatment for companies to follow. Payments made in return for credit must be ignored for corporation tax purposes, both by the surrendering company and by the recipient company.

Clauses 32 and 33 will introduce technical amendments to the legislation on video games expenditure credit and audiovisual expenditure credit. The changes made by clause 32 will add a new transitional rule to modify the video games expenditure credit calculation so that it accounts for both European and UK expenditure. The changes made by clause 33 will prevent incorrect amounts from having an impact on the intended generosity of special credit. They will do so by preventing some incorrect amounts from occurring and by setting out how to resolve others when they arise. Noting that clause 32 will close a loophole, I commend clauses 31 to 33 to the Committee.

James Wild (Conservative, North West Norfolk)

As the Minister said, these clauses are mainly technical, tidying-up measures, but they are worthy of debate none the less.

Clause 31 clarifies the corporation tax treatment of payments made in return for the surrender of research and development expenditure credit, audiovisual expenditure credit or video games expenditure credit for payments made on or after November 2025. This technical clarification ensures that, when companies sell or surrender tax credits, the accounting treatment is consistent and correct.

R&D expenditure credit has been in place since 2013 to support companies carrying out R&D, and these creative industry expenditure credits will fully replace the old film, high-end TV, animation, children’s TV and video games tax reliefs from April 2027. At the moment, there is no agreed approach between tax authorities and companies on how to treat payments received when these credits are surrendered for corporation tax purposes, which has created uncertainty.

Clause 31 will hopefully put that beyond doubt by setting out a clear tax treatment in law, and HMRC will update its guidance manuals to reflect the new rules. Does the Minister have any figures—I do not have the TIINs to hand on this one—on whether that uncertainty has cost companies, or cost the Government, in lost revenue?

Clause 32 corrects transitional rules between the video games tax relief and the video games expenditure credit to ensure that the new expenditure credit works fairly for games that are moving over from the old relief. It corrects how the expenditure credit is calculated for transitional games—those that already have tax relief claims and then opt into the new scheme—so that companies do not get too much or too little relief, simply because the old regime used European expenditure while the new one uses UK expenditure.

In effect, clause 32 ensures that companies switching schemes do not get double relief or under-relief. Can the Minister provide an estimate of how many video games development companies will be affected by this transitional correction, and whether any have suffered financial detriment under the previous rules?

Clause 33 makes changes to the special credit for visual effects, which is part of the audiovisual expenditure credit, as the Committee will be aware. It prevents the calculation for additional credit from producing incorrect results, correcting anomalies in the visual effects credit calculation. The explanatory notes explain that, without this fix, certain combinations of expenditure could generate incorrect credit amounts or negative values, so clause 33 ensures that the scheme operates as intended and that the special credit scheme is neither more nor less generous than intended. Does the Minister have any figures on how many production companies have experienced calculation errors as a result of the previous rules?

Matt Turmaine (Labour, Watford)

It is a pleasure to serve under your chairmanship, Sir Roger. I will speak briefly on clause 32, as a member of the all-party parliamentary group for video games and esports, to say to the Minister that I welcome the closing of this loophole. Does she agree that the change will support the British video games industry, which is industry-leading across the world, and deliver the best for our economy?

Lucy Rigby (Labour, Northampton North)

I wholeheartedly agree with my hon. Friend the Member for Watford about the impact of these measures.

In relation to clause 31, if only the shadow Minister, the hon. Member for North West Norfolk, had the TIIN to hand; if he did, he might have been aware that we estimate that the payments for the surrender of expenditure credits will have an impact on roughly 12,000 claimants of R&D expenditure credit, audiovisual expenditure credit and video games expenditure credit.

The shadow Minister asked about the impact on video games companies: I think it is fair to say that if a company has a game that switches from the video games tax relief to the video games expenditure credit, it simply needs to make sure that it uses the modified version of step 2 when calculating how much credit it is entitled to. This will affect only games that are already in development and need to switch reliefs. There are no figures available to show the impact on companies; it is normally in the tax line, so it is not treated as taxable by most companies. I think that answers all of his questions.

Clause 34 - R&D undertaken abroad: Chapter 2 relief only

Lucy Rigby (Labour, Northampton North)

Clause 34 makes a minor legislative amendment to the R&D tax relief rules to put beyond doubt that the overseas restrictions apply to R&D expenditure credit claimants with a registered office in Northern Ireland. The Government are making this amendment to provide clarity to businesses and ensure that the legislation aligns with the original policy intent of the Finance Act 2025. I commend clause 34 to the Committee.

James Wild (Conservative, North West Norfolk)

Clause 34 will amend the Corporation Tax Act 2009 to clarify restrictions on relief for overseas R&D applied to companies across the entire United Kingdom, including Northern Ireland and Great Britain. It applies retrospectively on claims made on or after October 2024. It puts beyond doubt that the geographical restriction on R&D expenditure credit relief applies uniformly across all jurisdictions. Can the Minister confirm that, notwithstanding this clarification, exemptions under the enhanced R&D intensive support scheme still apply to firms based in Northern Ireland?

Lucy Rigby (Labour, Northampton North)

I thank the shadow Minister for his question. The Government are committed to supporting R&D investment across the UK through R&D tax reliefs; they of course play a vital role in supporting the mission to boost economic growth, which he will know is this Government’s No. 1 priority.

The legislation clarifies that the rules are the same for all R&D expenditure credit companies across the UK. The overseas restriction was introduced in regulations in 2024 before being included in the Finance Act 2025. It was always intended to apply to R&D expenditure credit claimants across the UK, so the change is purely to clarify the Finance Act 2025 to put that position beyond all doubt.

Clause 35 - Restriction of relief on disposals to employee-ownership trusts

Roger Gale (Conservative, Herne Bay and Sandwich)

With this it will be convenient to discuss the following:

Lucy Rigby (Labour, Northampton North)

Clause 35 reduces the amount of capital gains tax relief available on disposal of company shares to the trustees of an employee ownership trust. The Government are committed to building on the success of the existing scheme so that the UK remains a leader in the field of employee ownership. However, the Government have to consider the public finances and the important issue of fairness in our tax system.

The current regime allows business owners to dispose of valuable shareholdings for significant capital gains without paying any tax at all. The cost of the CGT relief alone reached £600 million in 2021-2022, and forecasts suggest that it could rise to more than 20 times the original costing to £2 billion by 2028-29, if action is not taken. The changes made by clause 35 will restrict the amount of CGT relief available to company owners who dispose of shares to the trustees of an EOT. For disposals on or after 26 November 2025, half of the gain on disposal to the trustees of an EOT will be treated as the disposer’s chargeable gain for CGT purposes, and charged to tax according to the usual applicable rules. The remaining half of the gain will be not charged to tax at the time of disposal.

Overall, this means that disposals to an EOT will benefit from a rate of tax that is broadly equivalent to half of the usual rate, which will still constitute an effective incentive to encourage company owners towards employee ownership.

Restriction of relief on disposals to employee-ownership trusts

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss the following:

Lucy Rigby (Labour, Northampton North)

Turning to the non-Government amendments, new clause 28 asks His Majesty’s Revenue and Customs to assess the potential benefits of establishing a digital application process for taxpayers seeking to pay capital gains tax by instalments following disposals to employee ownership trusts. The facility to pay CGT in instalments is a long-standing feature of the tax code and is well understood by both taxpayers and HMRC. The process for applying to pay by instalments is clearly set out within HMRC guidance and applications are dealt with swiftly once they have been received by HMRC. My officials have met representatives from the employee ownership sector to provide bespoke guidance on how these instalment payment provisions apply to disposals to EOTs. That engagement continues. I therefore ask the hon. Member for Maidenhead to withdraw new clause 28. In any event, it should be rejected.

New clause 29 asks the Chancellor to lay a report before the House within the next 12 months assessing the impact on small and medium-sized enterprises of the changes made under clause 35. The Government monitor the impact of all changes made to existing tax reliefs. However, publishing a report on the change introduced by clause 35 within the next 12 months would not be reasonable as the first full tax year of these changes is the tax year 2026-27, so HMRC will not have complete information to assess their impact. New clause 29 should therefore be rejected.

In addition to rejecting new clauses 28 and 29, I commend clause 35 to the Committee.

Mark Garnier (Conservative, Wyre Forest)

Clause 35 introduces a 50% chargeable gain on shares sold by a company to an EOT. That will have a direct effect on trustees’ ability to benefit company employees. The 2014 Conservative Government introduced 100% capital gains tax relief to incentivise companies to transition to EOT models. EOTs have benefited employees by rewarding and motivating them—for example, by distributing annual tax-free bonuses of up to £3,600 a year to each employee. These tax changes would hurt employees most of all.

The Office for Budget Responsibility’s “Economic and fiscal outlook” from November 2025 forecasted that this will raise just £900 million a year on average from 2027 to 2028. However, the OBR also gave this measure a “very high” uncertainty ranking. The OBR highlighted the fact that these tax changes could have a behavioural effect: company owners would instead hold on to their shares for longer before realising gains. That means that company owners will slow the flow of shares they sell to trustees, so trustees will receive far fewer shares and, as a result, less value will be passed on to employees.

Joshua Reynolds (Liberal Democrat, Maidenhead)

New clause 28 in my name would require HMRC to assess the potential benefits of establishing a digital application process for taxpayers to pay capital gains tax by instalments in respect of disposal to employee ownership trusts. The digital application process would make it far easier for taxpayers to apply to pay capital gains tax by instalments, reducing delays and administrative burden. The Government aim to make tax digital—this digital application process would be a small way to help to get there. It would help to ensure that the new relief works in practice, not just in theory, smoothing the implementation process and ensuring that taxpayers know where they stand. The digital process could help improve speed, accuracy and the consistent handling of instalment applications. Including this requirement in the Bill would promote modernisation and better taxpayer services and would signal that HMRC should consider practical delivery as well as policy. I hope the Minister will support it.

New clause 29, also tabled in my name, would require the Chancellor to lay a report before the House on the impact of clause 35 on small and medium-sized enterprises. It is fairly simple. It would explain whether clause 35 is achieving the policy goal by tracking the number of employee-ownership trust transactions compared to previous years. Not until we are in the process will we actually know what the impact will be. By tracking the numbers, we can see whether the policy the Government are undertaking has been a success. I hope the Minister will support it.

Lucy Rigby (Labour, Northampton North)

To the comments from the shadow Minister, the hon. Member for Wyre Forest, it is important to bear in mind that on the changes we are making to EOTs, even post these changes, the relief that will be on offer remains more generous than for many other options and deeds, such as business asset disposal relief. Of course, the fiscal climate is relevant to the changes we are making. He referred to the point at which the last Government introduced this relief, but as I said, the cost of the relief as a whole is projected to rise to £2 billion by 2029-30 without the action that we are taking. As I said, the fiscal climate is extremely relevant when looking at £2 billion of relief.

Importantly, the Employee Ownership Association has stated that the changes we are making are not such as to alter the fundamental strength and purpose of the employee ownership trust model, while also recognising that the previous level of relief, or the level of relief as it stands, was hard to sustain when set against the rapidly escalating fiscal cost. On the comments made by the Liberal Democrat spokesman, the hon. Member for Maidenhead, I set out the reasons why we reject new clauses 28 and 29. I maintain the position of rejecting those and maintaining clause 35 as it stands.

Clause 36 - Anti-avoidance: collective investment scheme reconstructions

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss clauses 37 and 38 stand part.

Lucy Rigby (Labour, Northampton North)

Clauses 36 to 38 make changes to the CGT anti-avoidance provisions that apply to company share exchanges and reconstructions, or the reconstruction rules, as they are known. Clause 36 revises the collective investment scheme reconstruction anti-avoidance rule to align with modern provisions with a similar purpose. Clause 37 revises the share exchanges and company reconstruction anti-avoidance rule to align with modern provisions with a similar purpose, too. Clause 38 does exactly the same. The changes made by these clauses, which take effect from Budget day, modernise the anti-avoidance rule so that it focuses directly on arrangements where the purpose, or one of the purposes, is the avoidance of tax.

The amendments introduced by the clauses will allow HMRC to address situations where arrangements have been added to otherwise commercial transactions that reduce or eliminate, rather than just defer, a tax charge, allowing them to be more effectively challenged. The rule has been updated so that it affects only the shareholders who benefit directly from the avoidance. Where HMRC agrees that there is no avoidance and the reorganisation is carried out within 60 days of the Budget announcement or if HMRC’s decision is later, the current legislation will apply. For those reasons I commend clauses 36 to 38 to the Committee.

Mark Garnier (Conservative, Wyre Forest)

On clause 36, we support tougher measures to tackle tax avoidance and close the tax gap. Under the previous Government, the tax gap of the total theoretical tax liabilities fell from 7.5% in 2005-06 to 5.3% in 2023-24. But it is crucial that legislation is not so broad to the extent that people entering into arrangements for legitimate commercial reasons face the brunt of HMRC’s enforcement powers. The scale of genuine tax avoidance as a proportion of the total tax gap is important to note.

According to HMRC, in 2023-24, avoidance behaviour as a share of the tax gap was just 1%. It was also 1% in the 2022-23 tax year and was 2% in 2021-22, 2020-21 and in 2019-20. Avoidance ranked lowest among the behaviours that contributed to the tax gap. Contrast that with 31% due to failure to take reasonable care, 15% due to error and 12% due to legal interpretation. What those behaviours have in common is they involve genuine mistakes being made, so pursuing the route set out in clauses 36 and 37 risks hurting those who enter arrangements for solely commercial purposes who may have simply made honest mistakes.

With regard to clause 37, we support tougher measures to tackle tax avoidance to close the tax gap. The methods of deferring tax for general company reconstructions and share exchanges are identical to each other’s and to that for collective investment schemes. The key difference between clauses 36 and 37 is the business practice to which the anti-avoidance measures apply when arrangements are made to avoid tax liability. Clause 36 applies to CISs, and clause 37 applies to share exchanges and company reconstructions, so the argument pertaining to the general principle and practicality of the Government’s new anti-avoidance measures also applies to those clauses.

With regard to clause 38, we support tougher measures to tackle tax avoidance to close the tax gap. The clause seeks to change the no gain/no loss rules if HMRC suspects that a transfer of business has taken place to secure a tax advantage. Those rules have been instrumental in the process of transferring a business. They are especially useful for arrangements between complex structures. No gain/no loss rules can ensure fluidity throughout the transfer process, and they stave off cash-flow issues during the process itself.

While we support tackling tax avoidance, we must also recognise the role that no gain/no loss rules play during delicate business practice. We understand that there are already safeguards in place from HMRC, such as the general anti-abuse rule. Nevertheless, we must also ensure that no business that utilises no gain/no loss for legitimate commercial purposes is penalised or hung out to dry through denied relief claims.

Lucy Rigby (Labour, Northampton North)

I welcome the support that was expressed, on the whole, by the shadow Economic Secretary to the Treasury. I suspect that that support is born from a recognition that we really do need to make the changes. Recent court decisions have shown that the rules as they stand, which date back to the ’70s, do not work as intended, especially when the avoidance carried out is a smaller part of a larger commercial reconstruction.

The main effect of the rules will be to discourage the minority—and it is very much a minority—who would otherwise seek to avoid tax. It is about protecting our tax base from abuse for the benefit of the majority of taxpayers who apply the rules correctly. For those reasons, I truly believe that the clauses strengthen the protection against avoidance and will catch tax avoiders.

Clause 39 - Incorporation relief: requirement to claim

Lucy Rigby (Labour, Northampton North)

Clause 39 makes a change to incorporation relief for CGT, requiring taxpayers to make a claim for relief and, as a result, improving the data available to HMRC to undertake analysis and compliance activity. Specifically, the change will mean that taxpayers need to make a claim for incorporation relief on their self-assessment return. That will apply to transfers of a business on or after 6 April 2026, and it will allow HMRC to monitor the relief and tackle avoidance more effectively, protecting revenue and helping to close the tax gap, with an additional £225 million expected to be collected over the scorecard period.

Mark Garnier (Conservative, Wyre Forest)

Clause 39 requires taxpayers to claim incorporation relief or pay CGT up front. It is key that sole traders and other eligible people understand the changes the clause makes. What concerns us is whether enough awareness has been made to affected people, and that is crucial as claiming incorporation relief has always been a passive process because it happens automatically. Soon, people who have been accustomed to this passiveness must acutely manage their relief claims. We do not want anybody who has been conducting legitimate business to suddenly be hit with an unexpected tax bill. Landlords, for example, are a common entity who claim incorporation relief. They do so by transferring their rental property portfolio into a limited company. Should a landlord undertake that process and then find themselves receiving an unexpected tax bill, that could add significant pressure on their investments, which in this case involve houses occupied by tenants.

It is not clear how awareness will be raised so that those eligible for relief do not pay such a tax bill. While I know HMRC has outlined the proposal and will provide guidance, there is no mass communication or awareness campaign. That means that any information campaign that does eventually happen may be too late.

Joshua Reynolds (Liberal Democrat, Maidenhead)

This is a small administrative change but a significant one. I share concerns about awareness on this topic and how the public will know that this has changed. For individuals who have been doing this for a significant period of time, the change will be quite significant for them. I would like to know how the Government will communicate that change to the public—what advice will be put forward, and how people will be made aware of it—rather than them being expected to know that the Government have made changes. I am pretty sure the public have not read all the pages of the Bill and understood them precisely—even though I know we all have. We would all like to how the public will be made aware of this.

Lucy Rigby (Labour, Northampton North)

While it is important to be clear about the fact that the additional data is being collected, the details required from taxpayers are brief, and that goes to the question of the additional burden or, indeed, lack thereof. They are brief details of the type of business, the tax calculations for the assets disposed of, and the value of the shares received for the business. The information HMRC requests will be used in analysis and compliance activity, which will tackle abuse of this relief for the benefit of the majority of taxpayers who apply the rules correctly.

The point on awareness was fairly raised. I can confirm that new guidance will be provided alongside the self-assessment return.

Clause 40 - Non-residents: cell companies

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to consider clause 41 stand part.

Lucy Rigby (Labour, Northampton North)

Clauses 40 and 41 make various changes to the capital gains rules that apply to disposals of UK land and property by non-UK resident persons.

Turning first to clause 40, the changes that are being made have been in effect since Budget day and ensure that, for the purposes of the non-resident capital gains legislation, each cell in a cell company is looked at individually for the purposes of the property richness rules. That will prevent the use and ongoing exploitation of such entities to avoid the non-resident capital gains rules and will protect the tax base.

Clause 41 makes changes to the rules for non-resident capital gains in respect of double taxation treaties and the requirement to claim double taxation relief, and it also clarifies some unclear terminology. The effect of the changes made by clause 41 is that investors are not required to make or deliver a return in order to claim relief in respect of a particular disposal. In fact, the clause reduces administrative burdens by clarifying when non-resident companies and individuals have to notify HMRC of a disposal. I therefore commend these clauses to the Committee.

Mark Garnier (Conservative, Wyre Forest)

Clause 40 tackles the use by UK non-residents of protected cell companies to avoid paying non-resident capital gains tax. We agree that corporate structures should not be exploited to shelter people from paying their fair share of tax. However, we must consider the practicalities of how an audit of one cell may affect other cells and the PCC itself.

PCCs have their benefits. For example, the ringfencing of assets and liabilities can ensure that any issue with one cell does not spread to others. In that sense, PCCs can be more robust and durable. Audits, of course, are absolutely necessary to ensure compliance and legality. However, they can also prove costly and stressful for a company owner who is simultaneously running a business. Cells do not have full autonomy; much of that resides in the core of the PCC.

Different cells may behave differently from each other or have differing risk appetites—therein lies the risk. A situation where one cell is investigated by HMRC, and the audit process proves frustrating because that cell’s conduct is aggressive or inappropriate, risks tarnishing the entire PCC in the assumption that the other cells behave similarly. Subsequent audits could then become more aggressive and difficult. As I said, we support measures that tackle any exploitation of the corporate structure to avoid paying tax. The Government must ensure that the implementation of clause 40 protects innocent parties that may be affected.

Clause 41 focuses on non-UK residents, individuals and companies in collective investment vehicles who sell UK land or property connected to CIVs under double taxation treaties. Under the clause, non-UK residents in CIVs will no longer be required to register for corporation tax or claim capital gains tax relief if the double taxation treaties fully cover the gains they have made. The Government’s rationale for that is to streamline paperwork and reduce redundant filing—hurrah! I cannot begin to explain my happiness about trying to reduce red tape. It is fantastic to get rid of it where we can. Our tax code is 22,000 pages long and has 10 million words. Anything that makes that easier is hugely welcome.

Lucy Rigby (Labour, Northampton North)

I welcome the “hurrah” from the shadow Minister. On his latter point about double taxation treaties, as he will know, many of the agreements were negotiated before the introduction of the non-resident capital gains regime. As treaties come up for renegotiation, as they do, or as we negotiate new treaties, we will seek to include a provision in the capital gains article to allow the UK to exercise our domestic taxing provisions in full.

On the shadow Minister’s point about cell companies and the extent to which they are used to avoid tax, there is anecdotal evidence that such structures have been created to help individuals avoid paying tax on gains made through the disposal of UK land and property, and the changes to the rules seek to cure that.

Clause 42 - Abolition of notional tax credit on distributions received by non-UK residents

Lucy Rigby (Labour, Northampton North)

Clause 42 abolishes the notional tax credit available to non-UK residents on UK company dividends. That credit no longer serves a purpose, under the modern dividend taxation system, and the change brings non-UK residents in line with UK residents, who do not receive the notional tax credit. It will impact fewer than 1,000 non-UK resident individuals who have UK dividend income and other UK income, such as property or partnership income, a year. The clause removes the outdated notional tax credit for non-UK residents receiving UK dividends, aligning their position with that of UK residents. I commend the clause to the Committee.

James Wild (Conservative, North West Norfolk)

As the Minister says, clause 42 abolishes the notional tax credit that non-residents have historically been able to claim on their UK dividend income. Under the current system, non-domiciled individuals can offset that notional credit against other UK income streams, such as rented income or partnership profits. However, from April, that arrangement will no longer apply. Non-residents will no longer be treated as having already paid UK tax on dividends received from UK companies, meaning that they will lose the ability to reduce their overall UK tax liability from using the credit.

It is worth noting that UK residents lost access to the notional dividend tax credit back in April 2016, so in one sense the clause simply removes what is perceived as a potential unfair advantage enjoyed by non-UK residents. The disregarded income regime will continue to operate, providing some limitation on the tax paid by non-residents in specific circumstances.

Lucy Rigby (Labour, Northampton North)

Again, I welcome the shadow Minister’s support for these measures. However, he is absolutely wrong to suggest that these measures and the broader package will discourage foreign investment in UK companies. He will have heard the titter of laughter when he talked about the importance of stability—that not being something that was provided by his party at all when it was in government. The removal of the notional tax credit will not discourage foreign investment in UK companies, as it will not impact the overwhelming majority of overseas investors who remain outside the scope of UK tax.

In order to be affected by the measure, overseas investors will also need to have other taxable UK income, typically rental income or partnership income. If they do not have that, their dividends will not be taxable in the UK while they remain overseas. The shadow Minister is right to refer to my earlier figure that fewer than 1,000 non-resident individuals have taxable UK income in addition to their UK dividends, and that remains the figure that we are working with.

Clause 43 - Non-resident, and previously non-domiciled individuals

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss the following:

Amendment 2, in schedule 3, page 268, line 14, at end insert—

“Part 1A - Amendment of transfer of assets abroad provisions

Lucy Rigby (Labour, Northampton North)

Clause 43 makes amendments to the residence-based tax regime that was introduced in the Finance Act 2025. These changes reflect feedback from the Government’s continued engagement with stakeholders to make sure that the regime works as well as possible. Clause 43 and schedule 3 consist of three parts. Part 1 of the schedule makes minor corrections to the foreign income and gains regime and to legislation connected with the ending of the remittance basis. Part 2 of the schedule makes technical amendments to the legislation for the temporary repatriation facility. Part 3 of the schedule amends the temporary non-residence rules by removing the concept of post-departure trade profits from legislation.

Clause 44 makes minor amendments to the residence-based tax regime, as introduced in the Finance Act 2025, to ensure that tax-free or exempt income is taken into account correctly under the settlements and transfer of assets abroad matching rules. The clause ensures that the internationally competitive residence-based tax regime operates as intended in relation to foreign income and gains from non-resident trusts and similar structures.

There are a series of non-Government amendments in this group. Amendment 1 is unnecessary as provisions already exist to prevent the double-counting that it seeks to address. Amendment 2 would introduce new part 1A and new paragraph 7A to schedule 3, amending the motive defence in the transfer of assets abroad provisions, such that avoidance motives for transactions made before 6 April 2025 are ignored if the person was a non-UK resident or a remittance basis user at that time.

Amendment 30 would amend the methodology of valuing amounts of overseas capital for designation purposes. The current position set out in the Bill ensures consistency and avoids distortions from market movements, and we therefore do not consider the amendment necessary. Amendments 31 and 32 would amend the start date set out in paragraph 13 of schedule 3 such that the provisions take effect from the date of the announcement and are not treated as always having been in effect. Again, we reject the amendments because paragraph 13 was always intended to operate in this way.

The Government will also reject amendment 33. The facility referred to here is designed to encourage individuals to bring their capital to the UK so that they spend and invest it here. Widening the scope of the facility to allow non-residents to benefit from the reduced charge without living or contributing in the UK would remove any incentive to become or remain a UK resident. We also reject amendments 34 and 35. I ask that the amendments are not pressed to a vote, and I commend clauses 43 and 44 and schedule 3 to the Committee.

James Wild (Conservative, North West Norfolk)

The Minister has skirted over quite a few detailed issues rather briefly. It will reassure the Committee to know that I intend to take a bit more time to go through what are detailed and important principles, and to reflect on questions raised in an earlier clause—how competitive we are, what we want to do, and whether we want to attract wealthy people to the country.

I will initially speak to clause 43, schedule 3 and amendments 30 to 35, which were tabled in my name. Clause 43 introduces schedule 3 of the Bill, and members of the Committee will see that the schedule runs to 14 pages of complex detail, so it is important that we properly scrutinise it. Those pages make various changes to the foreign income and gains regime brought into effect by the Finance Act 2025. On the surface, this may look like a simple tidying-up exercise, but on closer inspection it raises some important questions about the coherence of the Government’s overall approach to taxing globally mobile individuals.

While we support fair taxation, this Government have once again produced needlessly complex legislation that contains retrospective elements and leaves ordinary people potentially facing unexpected tax bills.

Oliver Ryan (Labour/Co-operative, Burnley)

Could the shadow Minister reflect on the fact that this clause has more amendments tabled to it than any we have dealt with so far? It deals with non-resident non-dom individuals who have previously tried to get away with paying certain levels of tax in this country. I know that he will take us through some of the details of that, but I would like to go back to the macro of his party position. If he talks about ordinary people, surely he should agree with the benefits of these changes. They would not only simplify the system but bring in much-needed tax revenue from those previously non-dom individuals who did a good deed for so long under the previous Conservative Government.

James Wild (Conservative, North West Norfolk)

Well, indeed. I will come on to the detail. On the broader point, we support the initiative behind these measures—to encourage people to bring more of their money to the UK, precisely so it can help fund our public services. Our concern is about the implementation, and I will come on to some of the comments that representatives of the Chartered Institute of Taxation, who are widely acknowledged as experts in this area, have raised about the complexity and the retrospective elements.

As I said, schedule 3 is in three parts. Part 1 relates to relief for new residents on foreign income and gains—FIG. Under the new FIG regime, when someone moves to the UK, they do not pay UK tax on their foreign income for the first four years here. That is very sensible, but the Government have made claiming that relief so complicated that honest taxpayers risk falling into traps simply through lack of awareness.

I hope the Government will take account of the following sensible steps suggested by the Chartered Institute of Taxation: first, to remove the requirement to report every possible element of FIG as part of the claim, and instead making relief from UK tax on FIG the default position; similarly, extending the relief to the personal representatives of a deceased individual who themselves qualified; and finally, simplifying the legislation by aligning the income tax position on trust distributions with the capital gains position. I would be grateful for the Minister’s response on those points when she winds up.

Part 2 relates to the temporary repatriation facility, clarifies how remittances to the UK under that temporary facility should be matched to their original source. For years, non-domiciled individuals could keep foreign money offshore, paying UK tax only if they brought it here. The TRF offers a window until 2028, precisely to encourage people to bring money to the UK at reduced rates of 12% in the next two years or 15% in ’27-28. That is, as I said to the hon. Member for Burnley, a good idea in principle, but the devil, as ever, is in the detail.

Our friends at the Chartered Institute of Taxation pointed out some serious concerns that there are several paragraphs within the schedule—which I see the hon. Member turning to—that do not appear to work as intended or that produce unintended consequences. First, they believe that, as drafted, the new offshore income gains paragraph introduced here leads to an anomaly in the way that trust distributions are matched where a trust has generated offshore income gains. That results in trusts with surplus pre-6 April 2025 capital gains tax being treated differently from those without. We do not believe that to be the Government’s intention; perhaps the Minister can clarify.

Secondly, investments clearly fall in value, but under this legislation, if someone invested foreign income overseas and it is now worth less, they will still pay the temporary repatriation facility charge on the original higher amount. That could mean paying 12% tax on £100,000 even though the investment is worth only £60,000. Do Committee members think that is fair? Do they think it will encourage or discourage the repatriation of funds that this facility is designed to encourage, to help support our economy and public services?

I would contend that the incentive, as a result, is to keep the money out of the UK, which is not what we on the Opposition side—or, I believe, on the Government side—of the Committee want to see. We therefore tabled amendment 30 to remedy this issue, and I encourage Members to support us on it when the moment comes.

Thirdly, the Bill contains retrospective taxation. Let us be clear: retrospective taxation should be reserved for the most egregious tax avoidance, but here, trustees who made payments to beneficiaries in good faith after April, relying on existing law, may now face double taxation because of rules that look backwards. That is not about closing a loophole; it is about changing the rules after people have already acted. Our amendments 31 and 32 would ensure that double taxation does not apply retrospectively.

Fourthly, in this clause and schedule the Government have created arbitrary restrictions so that the TRF is available only to UK residents. Why should someone temporarily living abroad not be able to use this facility? The temporary non-residence rule means that they will be paying UK tax when they return anyway, so why not let them use the TRF? The rules create a situation where someone who wants to pay tax voluntarily is not able to do so. Our amendment 33 would ensure that the TRF is available to both UK residents and non-residents.

Similar concerns have also been raised regarding offshore trusts. The temporary repatriation facility applies a 12% or 15% rate to the personal FIG of individuals who have previously used the remittance basis as well as certain capital payments from offshore trusts. This was to encourage the winding-up of foreign trust structures. Right now, though, the trusts part works only if the beneficiary getting the capital could have used the remittance basis in their own right. That creates an unfair outcome in families where one beneficiary has used the remittance basis but another has always paid full UK tax on worldwide income, because only the former can benefit from the lower temporary repatriation rate if the trust is wound up.

Perhaps I could give the Committee an example to illustrate this point further: a family has an offshore trust for two adult children and one child previously used special tax rules while the other has always paid full UK tax. Under this Bill, only the first child could benefit from the TRF when the trust is wound up. That does not encourage bringing money to the UK but, I would contend, actively discourages it. Amendment 34 would therefore enable offshore trust beneficiaries who have not themselves used the remittance basis to use the TRF. Amendment 35 would enable trustees to pay a temporary repatriation facility charge on the trust’s past FIG while retaining the funds within the trust, without having to make capital payments to the beneficiary.

Amendments 1 and 2, in the name of my hon. Friend the Member for Windsor (Jack Rankin), relate to this issue. The Government refer to the temporary repatriation facility as encouraging wealthy people to stay and invest here, and the Treasury is counting on these measures to raise a significant sum for public services, although I note that the OBR suggests there is considerable uncertainty about that. However, we know that the wealthiest people—the wealthiest investors, the people who are supporting our entrepreneurs and the high-growth businesses that we want to see—are leaving the UK as a result of steps that the Chancellor has taken. By some estimates, 10,000 people have already got on a plane and left—those are figures from Oxford Economics. We can debate whether the number is 10,000 or 5,000, but some figures suggest that the equivalent of 750,000 basic rate taxpayers have left the country. So this is not about ideology; it is about giving certainty and addressing the points that the Bill as drafted does not.

The TRF could become unusable for some because of the risks it exposes them to. There is the double taxation, which I have talked about, as well as the retrospective elements, but in addition, accusations of tax avoidance could arise from using a scheme that Parliament has itself created and lead to potentially lengthy investigations. People are leaving, and the Chartered Institute of Taxation has said that tax rules under the measure make the UK a less attractive destination for people. It should be easier to understand and apply measures aimed at getting people to bring money back to the UK. There is a risk that, as drafted, these measures drive against the Government’s intention.

Amendments 1 and 2 are tabled in a constructive spirit. Amendment 1 would stop the double counting, and amendment 2 is about the retrospective and unfair action. They would provide the certainty that, according to some experts in this field, is currently missing. Without the TRF being attractive, we will not be able to get the money coming into the country. I urge the Minister to respond more fully than she did in her opening remarks and to consider whether, on Report or at a later stage, amendments could be tabled to deliver the clarity that my amendments and those tabled by my hon. Friend the Member for Windsor offer.

Without clear guidance, ordinary commercial transactions could inadvertently be caught. The Government must publish comprehensive examples, or businesses and individuals will be left guessing. When Ministers replaced the long-standing non-dom regime last year, they promised a clean, modern and transparent framework, yet within a year we have a schedule of corrective provisions to make the legislation operate “as intended”. That rather suggests that the original drafting was not as watertight as claimed, and that further tweaks along the lines we have suggested might still be needed before the system settles.

Some of the issues I have highlighted have straightforward solutions, which our amendments address. The Government claim they want to simplify our tax system—the Minister and my hon. Friend the Member for Wyre Forest were hurrahing that earlier—and encourage investment in Britain, yet they produce legislation that is complex, sometimes retrospective and riddled with unintended consequences. We need tax law that is clear, fair and progressive, not a compliance minefield that catches the unwary while sophisticated advisers find ways around it. I listened carefully to the Minister’s response, in particular on the TRF issues that I raised, but my intention is to press my amendments.

Blake Stephenson (Conservative, Mid Bedfordshire)

I will speak to amendments 1 and 2 in the name of my hon. Friend the Member for Windsor. The Government and those of us supporting the amendments are trying to achieve the same outcome. The aim of the amendments is simple: to enable the Government to achieve their goal of raising billions in tax revenues from former non-doms—money that is needed to pay for public services, as the hon. Member for Burnley said earlier.

The Government set out the policy intention to replace non-dom status with a UK residency tax to raise more tax from those with the greatest capacity to pay, while simplifying the system. They introduced the temporary repatriation facility—or, given that we like three-letter acronyms, the TRF—as the central part of that strategy. It is designed to encourage people to remain in the UK, to come to the UK and invest in the UK, and to bring historically offshore capital into the UK tax net. The TRF offers a reduced rate of taxation of 12% on all non-UK assets brought into the country as an incentive to do just that. We all want the same thing: we want the TRF to work, because if it does not, the money does not come here and the Exchequer and the public lose.

The Government are relying on the reforms to raise very substantial sums—about £34 billion overall. The concern I express is not ideological or about the tax rate; it is about legal certainty and deliverability. The problem is that a number of the wealthiest people have left the country, and many more are doing so as we debate these amendments. Why? Odd as it may seem, it is not because they are unwilling to pay more tax; it is because of the legal uncertainty in the Bill as drafted.

Using the TRF as set out in the Bill exposes people to serious legal uncertainty. First, they are subject to double taxation through double counting of the same economic value. Secondly, they are vulnerable to retrospective taxation. Thirdly, they face allegations of tax avoidance simply for using a scheme that Parliament itself has created. Fourthly, they expose themselves and their families to potentially decade-long investigations into arrangements that were entirely lawful at the time they were entered into. That is why they are watching this Bill proceed with their bags packed, waiting to see if it will fix the problems.

The advisers of such people are warning them to leave, but I know that the Government’s intention is not to drive them away. We need their taxes, fairly paid, to fund the renewal of our public services. That is why amendments 1 and 2 were tabled, in a constructive spirit of co-operation, as my hon. Friend the shadow Minister mentioned. Amendment 1 would stop double counting; and amendment 2 would ensure that retrospective and unfair action does not continue. Had amendment 49, which goes further, been selected for debate, I would have spoken to it as well, but I will resist doing so because it has not been selected.

Amendments 1 and 2 would provide the needed certainty and make the TRF usable in practice, not just in theory. I hope that the Minister can give me some assurance that the Government recognise some of the technical problems highlighted by the amendments and intend to resolve them. I noted earlier that the Minister rejected amendments 1 and 2, giving a brief reason why, but given the representations, certainly by the Opposition, a more detailed response as to why the amendments have been rejected by the Government would be worthwhile.

Much careful work has gone into the construction of amendments 1 and 2. Again in the spirit of co-operation, I am sure that Conservative Members would be happy to provide input to the Minister and officials as they consider how best to address the issues. With that, I commend the amendments to the Committee.

Lucy Rigby (Labour, Northampton North)

A criticism of complexity has been made. The aim of these reforms is, of course, simplicity. I think it is recognised across the House that in matters of taxation, simplicity is better. We are ensuring that the legislation works as it is intended to do. The shadow Minister, the hon. Member for North West Norfolk, referred to the Chartered Institute of Taxation. It is important to note this quote from the institute:

“Moving from domicile to residence as the basis for taxing people who are internationally mobile makes sense.”

As well as being a major simplification, it is a fairer and more transparent basis for determining UK tax. Residence is determined by criteria far more objective and certain than the subjective concept of domicile. Replacing the outdated remittance basis is sensible, and the temporary repatriation facility offers a helpful transition.

Another criticism is retrospection. In this instance, the Government feel that a retrospective change is a proportionate response to protect revenue, which, as the hon. Member for Mid Bedfordshire said, is essential for public services. This change will prevent taxpayers from benefiting from unintended windfalls and promotes consistency in the application of rules, bringing the capital gains position into line with the income tax provision. In most cases, trusts will not yet have made capital distributions, meaning that beneficiaries and trustees will have advance notice and can plan their affairs.

A further topic that that came up is the reporting of every element of FIG. I have a note on that somewhere, so I will come back to it. I will deal first with the suggestion that restrictions on the TRF are arbitrary. The position of someone who is temporarily abroad arose. The TRF is designed to encourage people to be UK-resident and bring funds into the UK economy. Allowing non-residents to use the TRF would let individuals benefit from the reduced charge without living here or contributing to the UK economy, which would reduce the incentive to become or remain UK-resident.

Sean Woodcock (Labour, Banbury)

We have heard from Opposition Members that there are families watching this Finance Bill Committee with their bags packed in case their amendment does not pass. Does the Minister share my scepticism that people who hung around through a botched Brexit, Liz Truss and 11% inflation will leave the country on the basis of whether an amendment passes or not?

Lucy Rigby (Labour, Northampton North)

I am grateful to my hon. Friend for his intervention. I think it is right to say that the reporting of every element of FIG will not be necessary. I am afraid I shall have to confirm in writing exactly why that is the case.

Schedule 3 - Non-resident, and previously non-domiciled individuals

Clause 45 - PAYE for treaty non-residents etc.

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss schedule 4.

Lucy Rigby (Labour, Northampton North)

Clause 45 and schedule 4 will make changes to the pay-as-you-earn notification process that enables employers to give provisional in-year tax relief to globally mobile employees, including those eligible to claim overseas workday relief.

The majority of changes made by the clause and schedule are minor, technical changes that will help the legislation relating to the PAYE notification process to operate as originally intended, but a few are more substantial. For example, treaty non-resident employees—that is to say, UK residents who are covered by a double taxation agreement between the UK and another country—have been permitted to benefit from provisional in-year tax relief by concession, so they are now being added to the legislation to formalise that treatment. We will also specify that if the employer’s best estimate of qualifying employment income for an employee eligible for overseas workday relief is more than 30%, it must be limited to 30%. That should ensure that in most cases the provisional overseas workday relief received in-year does not exceed the relief that the employee can claim when they file their tax return.

These changes will place the treatment of treaty non-residents on a statutory basis, prevent excessive in-year provisional overseas workday relief and ensure that the PAYE legislation operates as intended. I commend clause 45 and schedule 4 to the Committee.

James Wild (Conservative, North West Norfolk)

Clause 45 will extend the PAYE notification process to include treaty non-residents and introduce the 30% cap, to which the Minister referred, on overseas workday relief that can be claimed through PAYE. In simple terms, clause 45 and schedule 4 will change how employers operate PAYE for people who move to the UK but are treated as resident in another country under a tax treaty. The clause will let employers agree with HMRC that the part of the employee’s salary that is expected to be exempt overseas be left out of PAYE during the year, and it will formally limit how much foreign employment relief can be given to 30%.

The changes under the clause will require employers to send further notification to HMRC whenever there is a change in the employee’s circumstances that affects the proportion of earnings subject to PAYE. That sounds reasonable in practice, but I want an assurance from the Minister about the potential administrative burden that it will place on employers. It could mean that employers will now be expected to monitor the day-to-day working practices of globally mobile working employees. They will need to track whether individuals are working from home or from a hotel room in Boston, which is not necessarily a simple task. For multinational companies with hundreds of employees, this represents a potentially significant compliance burden at a time when we want to reduce the burdens on business. For smaller businesses venturing into international markets for the first time, it could be a disincentive—indeed, a barrier—to their trying to do so.

The Government must provide clear, comprehensive guidance on exactly what level of review and monitoring employers are expected to undertake not to fall foul of the rules. Without that clarity and guidance, we risk creating a compliance minefield in which well-meaning employers inadvertently break rules that they could not reasonably be expected to follow. Guidance can help employers to comply with the law, as we all want them to do.

The Government like to talk about making Britain the best place to do business and to champion our competitive advantage in attracting global talent—we have just discussed one area in which that may or may not be the reality—but we should seek to avoid introducing measures that potentially add to the compliance burden without giving guidance to employers. I hope that the Minister can assure the Committee that she will look at the case for publishing clear guidance to ensure that businesses are not adversely impacted.

Lucy Rigby (Labour, Northampton North)

I can confirm that guidance will be forthcoming, and I am absolutely sure that it will be clear. I am also pleased to confirm that there will be no additional administrative burden on employers, because employers already have to enter a percentage figure on the PAYE notification form; as I say, this change will just require them to limit the in-year relief provided to no more than 30%. The guidance will be given to employers in April when the changes go live.

Clause 46 - Unassessed transfer pricing profits

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss schedule 5.

Lucy Rigby (Labour, Northampton North)

Clause 46 will introduce a new corporation tax assessing provision for unassessed transfer pricing profits. It will replace the diverted profits tax, a stand-alone tax that will be repealed in its entirety, providing a significant simplification.

The changes made by the clause will make the rules clearer and more straightforward for businesses to implement, and will support access to treaty benefits, including relief from double taxation under the mutual agreement procedure. The removal of the diverted profits tax as a stand-alone tax is a very significant simplification, and bringing the rules into the corporation tax framework will clarify the interaction with transfer pricing and access to treaty benefits. I therefore commend clause 46 and schedule 5 to the Committee.

James Wild (Conservative, North West Norfolk)

The clause introduces schedule 5, which will repeal the diverted profits tax and replace it with new rules to tax unassessed transfer pricing profits within the corporation tax regime, coming into effect for periods beginning on or after 1 January. The diverted profits tax will continue to apply for prior accounting periods. In effect, the clause creates a higher tax charge on profits that should have been taxed here, but were shifted out of the UK by using non-market prices between groups.

Like the DPT, the new transfer pricing profits rules are intended to target structured arrangements that are designed to erode the UK tax base by omitting profits that are subject to transfer pricing. These unassessed transfer pricing profits will be taxed at a rate that is six percentage points higher than corporation tax. In simple terms, if a global business structures its arrangements to shift profits from the UK in a pricing manipulation, HMRC will be able to bring those diverted profits into UK tax at a higher, penalty-style rate.

In principle, we support that approach. Moving away from the stand-alone tax and bringing diverted profits under corporation tax provides better treaty access and clarity, and clearly the six percentage point charge works as a deterrent, as countries that play games with their transfer policies will risk paying more tax than if they had priced their UK dealings properly in the first place. However, I would welcome the Minister’s response to the concerns that the Chartered Institute of Taxation has raised about the drafting of the clause.

First, the new tax design condition is very broad: it captures transactions designed to reduce, eliminate or delay UK tax liability. There is a question as to whether legitimate commercial decisions made for regulatory compliance or capital requirements could be caught by the condition simply because they are deliberate and happen to reduce tax liability, even when tax planning is not the primary motive. I know that is not the intention behind the drafting, but that point has been raised, so I hope that the Minister will respond in order to avoid any uncertainty as to whether businesses that think they are operating within the law, without seeking to reduce, eliminate or delay tax liability, may be captured.

Will the existing arrangements be grandfathered? Can HMRC revisit settled positions under these broader rules? As the Chartered Institute of Taxation rightly says, it is unsatisfactory to pass legislation with a wide definition and simply hope that HMRC guidance and rules will narrow it down later. That is not how we in Parliament should legislate. We discussed the loan charge during this morning’s sitting; HMRC applied rules in a way that most MPs did not consider reasonable, and we have now had to make changes through this Bill to address that historical issue. The law should be made clear in the Bill, not left to administrative interpretation.

I would be grateful if the Minister confirmed how many multinational companies HMRC estimates are using pricing manipulation to avoid tax. Can she guarantee that legitimate business structures that have previously been accepted by HMRC under the DPT will not suddenly fall foul of the scope of the new rules? Will she also comment on the main purpose test, to provide clarity and certainty for businesses?

Lucy Rigby (Labour, Northampton North)

I hope that what I am about to say will provide a good deal of reassurance to the shadow Minister. The purpose of the reform was to simplify the legislation and bring the regime into the corporation tax framework. There is no intention at all to change the scope of the regime.

I appreciate that the question as to when the reforms will come into effect is of some importance. I can confirm that they will take effect for chargeable periods beginning on or after 1 January 2026. For prior periods, the diverted profits tax will continue to apply.

The shadow Minister asked how many companies would be affected. I am afraid that I do not have the statistics to hand, but I can investigate and confirm them to him in writing.

Clause 47 - Transfer pricing reform

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss the following:

Government amendment 20.

Schedule 6.

Lucy Rigby (Labour, Northampton North)

Clause 47 will simplify the UK’s transfer pricing rules, which protect our tax base by ensuring that transactions between UK companies and related parties are priced appropriately. The changes made by the clause include the general repeal of UK-to-UK transfer pricing where there is no risk of tax loss. This will provide a meaningful simplification for businesses. Alongside it, amendments have been made to the participation condition, intangibles, commissioners’ sanctions, interpretation in accordance with OECD principles, and financial transactions.

Government amendment 20 will ensure the consistent use of terminology with respect to financial transactions throughout the legislation.

The changes made by the clause will update UK law in line with international standards, will reduce compliance obligations and will address areas of potential legislative weakness. I commend clause 47, schedule 6 and Government amendment 20 to the Committee.

James Wild (Conservative, North West Norfolk)

Clause 47 and schedule 6 mark an evolution in the UK’s transfer pricing regime. The Opposition recognise the importance of getting this right: it goes to the heart of how multinational profits are attributed and taxed, and therefore how we ensure that companies pay the correct amount of tax in this country. The principle behind transfer pricing is simple, even if it is rarely simple in practice. I believe that these measures flow from a consultation process launched by the last Conservative Government, so they have a good origin. I hope that they will lead to greater certainty and reduce the burden that some companies may face.

Lucy Rigby (Labour, Northampton North)

I confirm that the shadow Minister is right about the origin of the proposals and the date of the consultation. It is entirely right that we are bringing UK transfer pricing legislation up to date; it was last materially updated in 2004, so it is high time that these rules were updated.

Schedule 6 - Transfer pricing

Carolyn Harris (Labour, Neath and Swansea East)

This is an opportune moment for a five-minute comfort break.

Clause 48 - International controlled transactions

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss new clause 4—Report on the impact of section 48 (international controlled transactions)—

“(1) The Chancellor of the Exchequer must, within 6 months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 48 on—

(a) cross-border trade, and

(b) administrative burdens on businesses.

(2) The report under subsection (1) must in particular set out the steps the Government intends to take to consult affected businesses and stakeholders on the operation of section 48.”

This new clause would require the Chancellor of the Exchequer to report to the House on the impact of section 48 on cross-border trade and business administrative burdens, and to set out how affected businesses and stakeholders will be consulted.

Lucy Rigby (Labour, Northampton North)

Clause 48 will create a power for the commissioners of HMRC to issue regulations requiring certain taxpayers to file an international controlled transactions schedule. This measure is expected to have an impact on approximately 75,000 businesses within the scope of the UK’s transfer pricing and related rules. Most of these businesses are part of large multinational groups.

New clause 4 would include a requirement for the Chancellor to lay a report before the House of Commons, within six months of the Act being passed, on the impact of the implementation of clause 48 on cross-border trade and administrative burdens on business. It asks that the report focus on Government steps to consult affected businesses.

Most major economies have similar requirements, and we do not expect the international controlled transactions schedule to have a significant impact on cross-border trade. Rather, this measure is expected to improve fairness, ensuring that multinational enterprises pay tax on profits generated from economic activity in the UK. It is also expected to increase efficiency, meaning that HMRC compliance activity can be more effectively targeted, benefiting compliant taxpayers. I urge the Committee to reject new clause 4.

James Wild (Conservative, North West Norfolk)

New clause 4 stands in my name and that of my hon. Friend the Member for Wyre Forest. As the Minister says, clause 48 introduces a power for HMRC to implement a new reporting obligation: the ICTS, which will come into force in 2027.

This new power would require businesses engaged in significant cross-border transactions to disclose specified information about their dealings. Rightly, the intention is to give HMRC better tools to identify transfer pricing and international tax risks that could affect the tax take, and to allow it to conduct more efficient and better-targeted compliance activity. I recognise that objective and support it in principle. I agree that the ICTS could help HMRC to identify risk earlier and to avoid wasting the time of the Department and businesses. Chasing down questions and embarking on inquiries can often lead nowhere and can cost businesses time that could be spent on growing their business.

However, it is also important that the Government explain how the system will work in practice and how it will be seen to work. Our new clause 4 would therefore require a report on the impact of these changes on cross-border trade and the administrative burden on businesses.

During the consultation last year, the Treasury acknowledged that more needed to be said about how the data collected through the ICTS system would be used and how it would fit alongside existing obligations such as master and local files. That remains a crucial point of detail that the industry and advisers will be looking for as this measure is implemented. Can the Minister shed some light on those concerns today?

As the Minister rightly says, most major economies already have some equivalent form of reporting, but it should be pointed out that the differences between them are significant. Australia, for example, operates a single transaction-driven disclosure process through its international dealings schedule; the United States of America relies on a more fragmented, relationship-based approach spread across multiple forms. Each system clearly has its benefits and disadvantages. What matters is that each country has a clear, consistent model to which businesses can understand and readily adapt.

What the Government seem to be proposing is a hybrid. That might mean that we have the best of both worlds—let us all hope so—but it might also lead to an approach that is inconsistent with the systems that some multinationals already have.

The Treasury has said that it will consult on detailed regulations in the spring of this year. We welcome that commitment. Can the Minister give an assurance that she will make sure that businesses and representative bodies will be closely involved in shaping how the system is put into practice? With the planned 2027 start date, there is not a lot of time to get the rules in place or for companies to build or modify systems to provide the new data. Can that be done without causing undue cost and disruption to businesses?

Finally, I want to make a slighter broader point on the clause. We clearly understand the importance of robust compliance and the need to protect the UK tax base on behalf of our constituents so that we can deliver public services. However, each new requirement—whether it is the ICTS, pillar two returns or transfer pricing documentation—adds to the cumulative impact on businesses.

We need to see these obligations in the round, not as each one being reasonable on its own terms. What is the overall picture of what we are imposing on companies? If that load becomes too great, the UK will be seen as a less attractive place to invest, which is certainly not what we want. Although we support the principle of better risk assessment, we continue to press Ministers to ensure that we have proportionate and workable solutions that add value for HMRC, businesses and our constituents. New clause 4 would simply require a report setting out those impacts.

I would add that, according to the Budget costings, the reporting duty would raise around £25 million in 2026-27, growing to £350 million a year, helping HMRC to tackle artificial profit shifting. That is welcome, but we should also consider the one-off and ongoing costs for businesses that have to re-engineer their systems. I would be grateful for the Minister’s response to my points about implementation and whether the hybrid model will actually be the best of both worlds.

Lucy Rigby (Labour, Northampton North)

The ICTS will help HMRC to focus compliance resources, as has been discussed, on the most meaningful transfer pricing risks. We think that it will also lead to greater efficiencies by encouraging up-front compliance and reducing the length of transfer pricing inquiries. Those outcomes will benefit the compliance of taxpayers and HMRC.

Clause 48 gives the commissioners of HMRC the power to issue regulations that will determine the detailed design of the ICTS, including the information to be provided, the format of the schedule and the commencement date of the filing obligation. A consultation was held in 2025, and we will carry out a technical consultation on the draft regulations in spring 2026. The obligation is expected to take effect for accounting periods beginning on or after 1 January 2027, which is designed to allow time for businesses to adapt to what they need to do.

The shadow Minister suggested that the proposal will lead to an administrative burden; actually, it is intended to mitigate additional administrative burdens by requiring the reporting of readily available objective information. We will continue to be guided by these principles as we move into the detailed design phase, working—as one would expect—with affected businesses.

Clause 49 - Permanent establishments

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss schedule 7.

Lucy Rigby (Labour, Northampton North)

Clause 49 modernises and simplifies the UK’s law on permanent establishments, which governs how the UK taxes non-residents who are carrying out business here. Specifically, the changes made by clause 49 reduce uncertainty over how profit should be attributed to permanent establishments under UK law. The greater clarity provided by these changes, in the same way as the previous clause, will assist taxpayers and HMRC by offering greater clarity. I commend clause 49 and schedule 7 to the Committee.

James Wild (Conservative, North West Norfolk)

Clause 49 and schedule 7 make changes to the rules that decide, where a company has a permanent establishment in the UK, how its profits are then taxed and when they apply. The Minister talked about modernising and simplifying the rules to bring them into line with international best practice.

To clarify, in November 2025 the OECD published new guidance on the definition of a “permanent establishment”. Can the Minister confirm whether the UK’s current approach reflects that updated guidance, as I have been advised that it does not? Some expert bodies have pointed out that the OECD changes are generally helpful and would bring more consistency across countries, so does the Minister agree that it would make sense for the UK to broadly adopt them? Is that the Government’s approach, or have they deliberately decided to have a set of UK rules? If so, what is the purpose of that, considering that we might be dealing with multinational companies operating in multiple jurisdictions that would have to follow separate rules when the OECD has brought together a coherent package?

Lucy Rigby (Labour, Northampton North)

It important to recognise that, as I perhaps should have explained at the outset, the legislation in this area is 20 years old. The purpose of making the changes that we are making is to update it and to account for the fact that there have been considerable developments in the international tax landscape since it was first drafted, most notably in relation to the attribution of profits to permanent establishments.

The shadow Minister mentioned the OECD. This legislation is interpreted in accordance with the OECD model tax convention and commentary, so it will always be interpreted using the most recently available model and commentary. The OECD council approved a 2025 update in November 2025, which can be found online. The full update will be published in 2026, if it has not been already. I hope that gives the shadow Minister some assurance.

Clause 50 - Pillar two

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss the following:

Government amendments 21 to 24.

Schedule 8.

Lucy Rigby (Labour, Northampton North)

Just to warn anyone who is not aware, clause 50 and schedule 8 are not the shortest. The changes they make are technical, but very important. Paragraphs 20 to 22 of schedule 8 prevent multinationals from trying to reduce their pillar two liability by entering into favourable tax arrangements to create pre-regime deferred tax assets or liabilities. Paragraphs 24, 25 and 34 ensure that the profits and losses relating to a UK real estate investment trust are excluded from the charge to domestic top-up tax to avoid double taxation. Paragraph 32 allows the UK to recognise the qualifying undertaxed profit rules of other jurisdictions before the OECD inclusive framework has completed a formal peer review.

Paragraphs 36 and 37 provide for a payment for group relief to be treated as a covered tax amount for domestic top-up tax purposes. Paragraph 39 reduces compliance burdens for smaller or non-material entities within a multinational group. Finally, paragraphs 2, 3, 6 to 12 and 16 to 19 update the rules on flow-through entities, permanent establishments, intragroup amounts and cross-border allocations of deferred tax so that the regime operates more smoothly in practice.

Taxpayers can elect for most amendments to apply retrospectively from the introduction of pillar two on 31 December 2023. However, taxpayers cannot select individual amendments to apply retrospectively; one election covers the whole package to prevent cherry-picking of favourable amendments. I should remind Members that, in line with the written ministerial statement of 7 January 2026, the clause does not include any amendments connected with the publication of the side-by-side agreement by the OECD/G20 inclusive framework earlier this month. The Government will introduce legislation to do that in the next Finance Bill following a technical consultation.

Government amendment 23 ensures that the legislation works as intended by making a small correction to legislative references used. Government amendments 21, 22 and 24 temporarily extend the deadline for making elections to give taxpayers more time to bed in the new IT systems needed to meet their filing obligations.

New clause 5 would require the Chancellor to review those technical amendments to the pillar two rules every six months and report on the international implementation of pillar two, among other things. We have already committed to the implementation of pillar two, which, as hon. Members will know, aims to ensure that large multinationals pay their fair share of tax. As a matter of course, the Government keep all areas of tax policy under review, so I reject the new clause.

Taken together, these changes implement internationally agreed changes, respond to taxpayer consultation, and ensure that the pillar two rules continue to be effective and administrable in the UK. I therefore commend clause 50 and schedule 8, together with Government amendments 21 to 24, to the Committee.

James Wild (Conservative, North West Norfolk)

I rise to speak to clause 50 and to new clause 5, which is in my name. Clause 50 will amend parts of the Finance (No. 2) Act 2023 and implement the multinational top-up tax and domestic top-up tax. As I set out in the last Finance Bill Committee, in October 2021 more than 135 countries signed up to the G20/OECD agreement on reforming international transactions and taxation, which the clause refers to—a major achievement that aims to ensure that multinational groups pay a fair share of tax where they generate profits. Pillar two delivers a minimum global effective tax rate of 15% for large multinational groups in every country they operate in, and the UK has been one of the first jurisdictions to legislate for the changes.

New clause 5 would require the Chancellor to review the changes on a six-monthly basis and lay before Parliament a report assessing three key issues: whether other major economies are implementing pillar two on comparable timelines and with comparable scope, whether any competitive disadvantage is arising for UK-based multinationals, and the impact of differentiated treatment for the United States. Crucially, if that review identified a material competitive disadvantage to the UK and UK businesses, the Treasury would be obliged to provide remedial measures within three months.

In rejecting new clause 5—another new clause that asks for a review—the Minister says that the Treasury is always conducting regular reviews of measures. If it is conducting this work anyway, why not share it with Parliament, and accept that it is a proportionate step to ensure ongoing parliamentary scrutiny in a very important area—a level playing field for British firms? The Minister referred to the length of the schedule. The sheer volume of amendments, coming less than two years after pillar two was first introduced, highlights the extreme technical complexity of the global minimum tax and the challenges for businesses that have to comply with it to keep up to date.

The Government’s aim is to ensure that UK rules remain consistent with the OECD model legislation, and schedule 8 is therefore aligned with the guidance and technical fixes. Those are sensible to maintain international consistency, but throughout last year there was growing international uncertainty about pillar two, the subject of the clause, as political divergence emerged over how it should operate, particularly regarding the treatment of US-parented companies.

The Minister referred to the side-by-side agreement made between G7 Governments last summer—and formalised, I think, this month—allowing certain UK and US multinationals to be exempt from parts of the rules while retaining access to the newly defined safe harbours. The agreement might bring some short-term stability, but it raises questions, and clearly we will be scrutinising it when, as the Minister said, it comes forward in future legislation. The US Treasury Secretary has described the side-by-side deal as

“a historic victory in preserving US sovereignty and protecting American workers and businesses from extraterritorial overreach.”

Will the Minister comment on what pillar two means in that context and on the UK’s position?

The impacts that might flow from that are precisely why new clause 5 is needed. The Government say that the UK is aligned with international developments, but the international landscape is shifting. Other major economies have delayed implementation or have adopted narrower regimes; meanwhile, the US has its own agreement and has not legislated for this framework at all. Without scrutiny, the risk is that UK-headquartered multinationals will find themselves complying with complex and burdensome rules, while their competitors operating elsewhere face a lighter regime. I simply note that the Chartered Institute of Taxation pointed out that it thinks the burdens of pillar two

“continue to appear disproportionate to the amount of tax that will be raised”.

If the Government truly believe that the regime provides a balanced and proportionate approach to a level playing field and that we can be assured that the competitive advantage does not go to other countries, let us have that report, see it set out to Parliament and have the matter resolved. To conclude, international co-operation on tax is essential, but we need to ensure not only that the UK is honouring its commitments, but that other countries are meeting theirs, so that UK companies are not losing out as a result.

Lucy Rigby (Labour, Northampton North)

I am grateful to the shadow Minister for his comments. International co-operation on such matters, as he said, is extremely important. The side-by-side agreement, as I have made clear, will be the subject of future legislation, which will be the opportunity for scrutiny. However, as I also made clear, that agreement ensures that all large multinationals will pay their fair share of tax through the application of pillar two and pre-existing minimum tax rules, while offering welcome simplification and stability to UK businesses.

We have to be clear that US multinationals, like every other multinational company, are still subject to the UK’s 25% corporation tax on the profits that they make in the UK. They are also still subject to the UK’s domestic minimum tax rate of 15%. We recognise that a degree of complexity is inherent in pillar two, but we must not forget that it applies only to large multinational businesses and that it is needed to stop businesses shifting their profits to low-tax jurisdictions and not paying their fair share of tax in the UK. I think the shadow Minister acknowledges that that is exactly why we need it.

That being said, in relation to the complexity, the UK continues to be a strong proponent of work to develop simplification of the system, including the recently agreed permanent safe harbour. As stated in our “Corporate Tax Roadmap”, the Government will also consider

“opportunities for simplification or rationalisation of the UK’s rules for taxing cross-border activities”

following the introduction of pillar two.

Schedule 8 - Pillar Two

Clause 51 - Controlled foreign companies: interest on reversal of state aid recovery

Lucy Rigby (Labour, Northampton North)

The clause makes changes to ensure sufficient repayment interest is paid to affected companies following a successful challenge of a European Commission decision. It provides that interest is also paid on the amounts of late-payment interest that were recovered and are now repayable. It will affect a small number of UK companies that had amounts collected and later repaid following the successful challenge of the Commission decision. The changes are expected to have a negligible impact on the Exchequer.

James Wild (Conservative, North West Norfolk)

As the Minister said, this is a fairly straightforward measure allowing HMRC to pay interest to companies that have had to hand over money under a now overturned EU state aid ruling relating to the controlled foreign company rules. The 2019 ruling was subsequently annulled. My only question for the Minister is: does the clause mark the final chapter in the UK’s compliance with the EU state aid rules relating to the controlled foreign companies regime, or could other outstanding matters give rise to further issues or payments?

Lucy Rigby (Labour, Northampton North)

The shadow Minister will appreciate that it is a requirement of UK domestic legislation to put companies in the position that they would have been in had the recovery legislation not been introduced, and it is that principle on which the clause is based.

Clause 52 - Legacies to charities to be within scope of tax

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss new clause 6—Report on legacies to charities—

“The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 52 on—

(a) charitable giving through estates, and

(b) charity sector income.”

Lucy Rigby (Labour, Northampton North)

Clause 52, in combination with the other clauses in the Bill, will support the Government’s aims of closing the tax gap by strengthening compliance powers to challenge abusive arrangements by which donors or trustees of charities can enrich themselves. The clauses also simplify the tax rules by equalising the tax treatment of investment types and tax reliefs used by charities. The changes made in clause 52 will bring legacies into the definition of “attributable income”.

New clause 6 would require the Government to report on the impact of clause 52 on charitable giving through estates and on the income of the charity sector. The changes are aimed at those charities and donors who seek to make a financial gain. They will not penalise charities when legitimate donations are received and investments are made. The Government have published a tax information and impact note that sets out the impact of the changes, and it showed that the measures will have a negligible impact on businesses and civil society organisations such as charities. Once the measures have been implemented, HMRC will assess the impact by monitoring tax reliefs claimed by UK charities, so a formal evaluation is not required. I therefore propose that clause 52 should stand part of the Bill, and that new clause 6 should be rejected.

James Wild (Conservative, North West Norfolk)

Charities are a very important topic. We need to ensure that we give it appropriate scrutiny, given the importance of charities in our society and communities. Clause 52 and new clause 6—which I will speak to—relate to extending the definition of attributable income to include legacies left to charities. In practice, that means that when a charity receives a gift left in a person’s will, it could face a tax charge if that money is not spent on its charitable activities.

How charities use their funds is a topical subject in the context of the Church of England, which is planning to spend £100 million on its fund for healing, repair and justice—effectively a reparation fund for slavery, which many consider not to be an appropriate use of the funds, or what people gave funds to the Church for.

I now turn to the clause. The change will apply to gifts made on or after 6 April this year. New clause 6, in my name—it bears repetition—would require the Chancellor, within six months of the Act becoming law, to publish a report on the impact of the measure on charitable giving through estates and on the wider impact on the charity sector.

Concerns have been raised that expanding rules to cover legacies could have unwelcome implications if charities do not apply inherited funds quickly enough to their charitable purposes, leading to them being taxed. The Institute of Chartered Accountants in England and Wales warns that that uncertainty, particularly around the timing, may discourage potential donors from including charities in their wills. Clearly, none of us would wish to see that.

HMRC has said that it will not set a deadline for how soon money must be used, although that ambiguity creates issues in itself. If the rules are unclear, HMRC could later decide that a gift has not been applied appropriately and withdraw the tax relief, undermining confidence that legacy gifts to charities will remain tax-free. Perhaps the Minister could give the Committee some clarity on that point, and on how HMRC will determine what counts as timely or appropriate application of funds.

There is also a concern about the administrative burden it may place, particularly on smaller charities, which will have to prove that each legacy received has been properly applied to charitable purposes, even when the money is placed in long-term endowments or reserves. The Charity Finance Group warns that the changes could mean more record keeping, compliance checks and bureaucracy, taking money away from frontline charitable activities and towards administration. I do not think that anyone would wish to see that. I do not know whether the Minister has anything more to add on that complexity.

Adding complexity could also make life harder for executors and delay the administration of estates, which could affect the timing of cash flows to charities at a time when finances in the sector are under considerable pressure, and income is critical for them to do their job. There is also a risk that wealthier donors might think twice about leaving legacies to smaller charities, if they think that the charity might struggle to comply with HMRC rules.

I am really asking for the Minister’s assurance that HMRC will take a sensible and proportionate approach, particularly with smaller charities that are seeking to do the right thing in applying these rules. We all want to avoid the potential risk that this measure could deter charitable giving, when that is clearly not the intention. It is important that the concerns raised by the sector are aired in the Committee, and it is our role to do so.

Lucy Rigby (Labour, Northampton North)

I will start with the principle that, because legacies have received tax relief, it is important that they are spent on charitable purposes, otherwise they will be subject to a tax charge. More broadly, the Government are very much committed to supporting charities and their donors through tax relief, which was worth over £6.7 billion in 2024.

The changes in the clause are aimed at those charities and donors that seek to make financial gain. They will not penalise charities where legitimate donations are received and investments are made. The measures are intended to protect the integrity of the charitable sector by ensuring that donations, investments and charity expenditure are deployed for charitable purposes, not the avoidance of tax.

The shadow Minister fairly referred to any burden that may fall on smaller charities. The Government of course recognise that many small charities are run by unpaid volunteers, and for that reason we have sought to design the new rules in a fair and proportionate way. HMRC will help the sector to understand and prepare for the changes by providing clear communications and guidance.

I also want to be clear, in response to the shadow Minister, that the changes to the attributable income rules mean that legacies received by a charity will become chargeable to tax if they are not spent charitably. The changes reflect the fact that this income may have already received considerable tax relief. We have no plans to stop charities accumulating donations, so there will be no deadline for the spending of legacy funds.

Clause 53 - Approved charitable investments: purpose test

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss new clause 7—Report on charitable investments purpose test—

“The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 53 on charity investment strategies.”

This new clause would require the Chancellor of the Exchequer to report on the impact of section 53 on charity investment strategies.

Lucy Rigby (Labour, Northampton North)

Clause 53 changes the definition of “approved charitable investments”. The Government recognise 12 types of investments for charitable tax relief, but presently only one type of investment is required to be for the benefit of the charity and not the avoidance of tax. The Government are extending this rule to all 12 types of investment, making the rules both simpler and tighter.

New clause 7 would once again require the Government to report on the impact of clause 53 on charity investment strategies. As with clause 52, these changes are aimed at those charities and donors that seek to make financial gain. They will not penalise charities where legitimate donations are received and investments are made. As the shadow Minister may expect, we have published a TIIN setting out the impact of these changes, which showed that these measures will have a negligible impact on businesses and civil society organisations such as charities. I commend clause 53 to the Committee, and I ask that new clause 7 be rejected.

James Wild (Conservative, North West Norfolk)

I rise to speak clause 53 and new clause 7, which was tabled in my name. My comments will reflect submissions from people involved in the charitable sector and my discussions with them. The clause extends the allowable purpose to all categories of recognisable charitable investment—at present, it applies to only one, but it will cover all 12. The Institute of Chartered Accountants in England and Wales has raised a suggestion that the test be reframed from

“for the sole purpose of”

to “wholly or mainly” to the benefit of the charity. The concern is that there could be increased obligations for compliance on trustees who have to demonstrate that their every investment in, for example, their portfolio was made for the benefit of the charity rather than an ancillary purpose therein. Was that more flexible approach something that the Government have considered, and if so why did they chose to reject it?

Joshua Reynolds (Liberal Democrat, Maidenhead)

As the Minister has outlined, clause 53 extends the purpose test from one category to all 12 categories. What guidance will HMRC provide for charity trustees to determine where the line is to be drawn between a legitimate investment strategy and those that are seen as having an ulterior purpose, because anti-avoidance should not penalise prudent charitable investment strategies?

Can the Minister also confirm exactly which charity sector bodies were consulted on these provisions and how they responded to that consultation, because many charity trustees are volunteers and this seems to place a significantly larger burden on those charity trustee volunteers to determine where to draw the line? It would be interesting to see what the consultation came back with as to where they would see that line and how they would attribute it.

Lucy Rigby (Labour, Northampton North)

In answer to the comments of the Liberal Democrat spokesperson, the hon. Member for Maidenhead, as in relation to the previous clauses, I can confirm that HMRC will be coming forward with guidance that will make clear the exact scope of the changes and what needs to happen on behalf of charities in order to ensure compliance. The compliance changes apply equally to all charities regardless of size.

I come back to the statement that I recognise I have made repeatedly: these changes, along with those in the previous clause, are designed to protect the integrity of charitable tax reliefs. Although some smaller charities may need to review processes, the measures are proportionate and targeted at preventing abuse—not burdening charities, which in the main do incredibly good work.

The shadow Minister, the hon. Member for North West Norfolk, questioned whether some specific wording had been considered as part of the Bill. I am afraid I cannot confirm that now, and will have to get back to him in writing.

Clause 54 - Tainted charity donations: replacement of purpose test with outcome test

Carolyn Harris (Labour, Neath and Swansea East)

With this it will be convenient to discuss the following:

Schedule 9.

Lucy Rigby (Labour, Northampton North)

Clause 54 and schedule 9 will support the Government’s aims of closing the tax gap by strengthening compliance powers to challenge abusive arrangements by which donors or trustees of charities can enrich themselves. The changes made in clause 54 tighten the rules on tainted donations.

New clauses 8 and 9 would require the Government to report on the impact of clause 54 and schedule 9 on legitimate charitable giving and the prevention of tax avoidance, to review the implementation of the outcome test in clause 54, and to assess whether it is clearer and more effective that the existing purpose test.

I come back to the same justification as for the previous clauses: these changes are aimed at those charities and donors who seek to make financial gain; they will not penalise charities when legitimate donations are received and investments are made. The TIIN, which was published alongside these changes, showed that these measures would have a negligible impact on businesses and civil society organisations. I therefore commend clause 54 and schedule 9 to the Committee, and urge it to reject new clauses 8 and 9.

James Wild (Conservative, North West Norfolk)

I rise to speak to clause 54 and to new clauses 8 and 9 tabled in my name. The clause makes significant changes to how tainted donations are treated. At present the donation is considered tainted only if it was made with an improper purpose. This clause replaces the motive-based test with an outcome test. If someone connected to the donor under the new regime receives financial assistance from a charity, such as a grant, guarantee or loan, the donation will be deemed tainted regardless of the donor’s intent. I have tabled new clause 8 to require the Government to publish a report on how the change affects legitimate charitable giving, or genuinely tackles tax abuse.

New clause 9 would require a review of the implementation of the new outcome test after two years and would assess whether it proves to be clearer than the existing purpose test. The Minister and the Government said that this measure is about tightening anti-avoidance rules and the challenge of proving intent. But I have been approached by the Charity Finance Group, which represents over 1,400 organisations and manages one third of the sector’s £20 billion annual income, and it has raised concerns around the change. It warned that the outcome test could unfairly penalise both donors and charities for results outwith their control.

For example, a donor could make a genuine good faith contribution only for a charity months later to make a routine investment or financial arrangement that inadvertently benefits a linked person. That donor could then find themselves caught by the anti-avoidance rules without ever having done anything wrong. That could cause uncertainty and raise concerns about people leaving legacy gifts that the charity sector relies on.

It is not just the charity and that one body. The Institute of Chartered Accountants in England and Wales has warned that donors may have limited influence over the outcome once the donation has been made. It, too, questions the fairness and practicality of shifting from a motive to an outcome test. Indeed, it proposes that the existing rules are not altered for that precise reason. We tabled the two new clauses to introduce proper scrutiny of the measures and ensure Parliament understands the effect on the charitable sector and whether donations continue to be given.

Does the Minister consider there is a risk that shifting to such an approach could have the effect that the charitable sector has set out? If so, will she commit to perhaps providing some practical guidance, with examples that charities and their compliance teams could look at so that they can see that charitable giving is not undermined? None of us on this Committee would want to do anything that would undermine the ability of charities to raise money and disincentivise anyone from giving money for fear that they might be caught inadvertently by rules when they have done nothing wrong.

Lucy Rigby (Labour, Northampton North)

It is important to recognise that the tainted donations rules ensure that the usual tax reliefs are not available where someone gives money to a charity with the intention to benefit financially from it. Previously, HMRC was only permitted to consider the intention of a donation and whether a donor had received a financial advantage from a donation, but now, with these changes, it will also be able to consider the outcome of the donation and whether a donor had received financial assistance. In that respect, considering the outcome of a tainted donation is a positive step towards challenging abusive arrangements. As I have said in relation to previous clauses, HMRC will come forward with clear guidance on the application of the clauses, and, to the shadow Minister’s point, that guidance might well contain examples.

We are taking a range of steps to ensure that the charity sector and the wider public are aware of the changes, which I hope reassures the shadow Minister. A detailed summary of consultation responses has been published. As I said, HMRC will provide clear and practical guidance in advance of implementation.

Written evidence reported to the House