Finance Bill (First sitting)

The Committee consisted of the following Members:

Chairs: † David Mundell, Valerie Vaz

† Ballinger, Alex (Halesowen) (Lab)

† Blake, Rachel (Cities of London and Westminster) (Lab/Co-op)

† Caliskan, Nesil (Barking) (Lab)

† Cross, Harriet (Gordon and Buchan) (Con)

† Davies, Gareth (Grantham and Bourne) (Con)

† Kohler, Mr Paul (Wimbledon) (LD)

† MacDonald, Mr Angus (Inverness, Skye and West Ross-shire) (LD)

† Murray, James (Exchequer Secretary to the Treasury)

† Osborne, Tristan (Chatham and Aylesford) (Lab)

† Poynton, Gregor (Livingston) (Lab)

Reynolds, Emma (Economic Secretary to the Treasury)

† Ryan, Oliver (Burnley) (Lab/Co-op)

† Stephenson, Blake (Mid Bedfordshire) (Con)

† Strathern, Alistair (Hitchin) (Lab)

† Wakeford, Christian (Bury South) (Lab)

† Wild, James (North West Norfolk) (Con)

† Yang, Yuan (Earley and Woodley) (Lab)

Lynn Gardner, Kevin Maddison, Committee Clerks

† attended the Committee

Public Bill Committee

[David Mundell in the Chair]

Finance Bill

(Except clauses 7 to 12, schedules 1 and 2, clauses 15 to 18, schedule 3, clauses 47 to 53 and any new clauses or new schedules relating to the subject matter of those clauses and schedules.)

09:25:00

Will everyone please ensure that all electronic devices are turned off or switched to silent mode? Tea and coffee are not allowed in the Public Bill Committee. We are here today for line-by-line consideration of the Finance Bill. The selection list for today’s sitting is available in the room and on the parliamentary website. It shows how the clauses, schedules and selected amendments have been grouped together for debate. A Member who has put their name to the lead amendment in a group is called first. In the case of a Government amendment or stand part debate, the Minister will be called to speak first. Other Members are then free to indicate that they wish to speak in the debate by bobbing. At the end of the debate on a group of amendments, new clauses and schedules, I shall call the Member who moved the lead amendment or new clause again. Before they sit down, they will need to indicate whether they wish to withdraw it or to seek a decision. If any Member wishes to press to a vote any other amendment in a group, including grouped new clauses and new schedules, they need to let me know. Ordered, That— 1. the Committee shall (in addition to its first meeting at 9.25 am on Tuesday 28 January) meet— (a) at 2.00 pm on Tuesday 28 January; (b) at 11:30 am and 2.00 pm on Thursday 30 January; (c) at 9.25 am and 2.00 pm on Tuesday 4 February; 2. the proceedings shall be taken in the following order: Clauses 1 to 6; Clauses 13 and 14; Clause 19; Schedule 4; Clauses 20 to 25; Schedule 5; Clauses 26 to 31; Schedule 6; Clauses 32 to 35; Schedule 7; Clauses 36 to 38; Schedule 8; Clauses 39 and 40; Schedule 9; Clause 41; Schedule 10; Clause 42; Schedule 11; Clause 43; Schedule 12; Clauses 44 to 46; Schedule 13; Clauses 54 to 86; any new Clauses or new Schedules relating to the subject matter of those Clauses or those Schedules; remaining proceedings on the Bill.—(James Murray.) Resolved, That, subject to the discretion of the Chair, any written evidence received by the Committee shall be reported to the House for publication.—(James Murray.)

Copies of the written evidence that the Committee receives will be made available in the Committee Room. I remind Members about the rules on declarations of interest as set out in the code of conduct. Does any Member wish to declare any interests? No. Then let us begin. Clause 1 Income tax charge for tax year 2025-26 Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following: Clauses 2 to 4 stand part. New clause 3.

It is a pleasure to serve on the Committee with you as the Chair, Mr Mundell. Clauses 1 to 3 impose a charge to and set the rates of income tax for 2025-26, and clause 4 maintains the starting rate for savings limit at its current level of £5,000 for the ’25-26 tax year. Income tax is the largest source of Government revenue and helps to fund the UK’s schools, hospitals and defence, and other public services that we all rely on. In ’25-26, it is expected to raise around £329 billion. The starting rate for savings applies to the taxable savings income of individuals with low earned incomes of less than £17,570, allowing them to benefit from up to £5,000 of income from savings interest before they pay tax. It specifically supports those taxpayers with low levels of earned income. As Committee members will be aware, both the income tax rates and the starting rate limits for savings must be legislated for each year. The Bill will not change the rates of income tax. We are confirming that they will remain the same, thereby meeting our manifesto commitment not to increase the basic, higher or additional rates of income tax. Clause 1 imposes a charge to income tax for the year ’25-26. Clause 2 sets the main rates of income tax, namely the basic rate of 20%, the higher rate of 40% and the additional rate of 45%. These will apply to non-savings, non-dividend income of taxpayers in England and Northern Ireland. Income rates in Scotland and Wales are set by their respective Parliaments. Clause 3 sets the default rates at the same levels as the main rates, namely 20%, 40% and 45%. These rates apply to the non-savings, non-dividend income of taxpayers who are not subject to the main rates of income tax, Welsh rates of income tax or Scottish rates of income tax. For example, they might apply to non-UK-resident individuals. The clause also sets the savings rates of income tax—again at 20%, 40% and 45%. Clause 4 will maintain the starting rate limit at its current level of £5,000 for the ’25-26 tax year. The limit is being held at this level to ensure fairness in the tax system while maintaining a generous tax relief. In addition to the starting rate for savings, whereby eligible individuals can earn up to £5,000 in savings income free of tax, savers are also supported by the personal savings allowance, which provides up to £1,000 of tax-free savings income for basic rate taxpayers. Savers can also continue to benefit from the annual individual savings account allowance of £20,000. Taken together, as a result of these generous measures, around 85% of savers will pay no tax on their savings income. Finally, I should mention the Government’s efforts to encourage those on the lowest incomes to save through the help to save scheme. We recently extended the scheme until 5 April 2027, and we have extended the eligibility to all universal credit claimants who are in work from 6 April 2025. I encourage Committee members to do what they can to promote the scheme to their constituents. New clause 3 would require a review of how many people who receive the new state pension at the full rate are liable to pay income tax this year and in the next four tax years, and specifically what the tax liability of their state pension income will be. The Government consider the new clause to be unnecessary, given the information that is already publicly available. His Majesty’s Revenue and Customs has published statistics for this tax year and past tax years that cover the number of income taxpayers, including breakdowns by marginal rate, tax, band and age, and the Department for Work and Pensions has published figures for pensioners’ average incomes. The Office for Budget Responsibility is the Government’s independent economic forecaster and most recently published projections of the number of income taxpayers for future years in its “Economic and fiscal outlook” at autumn Budget. Those projections include a breakdown by marginal rate. Income tax is a vital revenue stream for our public services and the clauses will ensure that that remains the case in 2025-26, while also retaining the starting rate of savings at its very generous existing value. I therefore commend clauses 1 to 4 to the Committee, and I urge the Committee to reject new clause 3.

It is a great pleasure to see you in the Chair, Mr Mundell. This is one of many Finance Bill Committees that I have participated in. The subjects have changed somewhat each time, but something has remained consistent: the presence of the hon. Member for Ealing North. It is a pleasure to see him in his place, and I hope that his experience as the Treasury Minister in a Finance Bill Committee is as unpleasurable as mine when I was facing him. As the Minister rightly set out, clause 1 imposes a charge to income tax for the year 2025-26, which is a formality. Clause 2 sets the main rates of income tax in England and Northern Ireland for 2025-26—the 20% basic rate, the 40% higher rate and the 45% additional rate—leaving them unchanged. Clause 3 sets the default rate and savings rate of income tax for the tax year 2025-26 for the whole of the United Kingdom. Clause 4 freezes the starting rate limit for savings at £5,000. Of course, the Government’s big announcement on income tax in the Budget was that they would not extend the freeze to income tax thresholds beyond April 2028. Committee members will be aware that that announcement does not need to be legislated for, as the income tax personal allowance and the basic rate limit are subject to consumer prices index indexation by default, unless Parliament overrides that via a Finance Bill, and Parliament has not overridden indexation beyond the 2027-28 tax year. As the current legislative framework did not allow the Government to enact their announcement on income tax thresholds at the Budget, we must take them at their word that they will keep their promise and not succumb to the temptation to override the thresholds in future. Given the possibility that rising borrowing costs have eliminated the Chancellor’s headroom under the Government’s own stability rule, I would be grateful if the Minister could reconfirm that they will allow CPI indexation to resume from 2028-29 and that they will not renege on that promise. On a point of clarity, I would be grateful if the Minister could confirm whether the unfreezing of income tax thresholds in 2028-29 will involve an increase to the fixed portion of the income tax higher limit, which he will be aware of. The limit is set at £100,000 plus twice the personal allowance, and that £100,000 is not indexed to CPI by default. Should we expect the additional rate to rise only in so far as the personal allowance rises, or will that £100,000 be unfrozen too? I would appreciate an explanation on that. I leave it to others to interpret what it says about this Labour Government and Budget that a non-binding commitment merely not to raise some tax thresholds in three years’ time is presented as a big win for the British taxpayer. On income tax, as with most of the Government’s more positive policy announcements, the benefits are prospective and entirely speculative. Meanwhile the pain, as we have seen with national insurance contributions and in other areas, is very much immediate and certain. Pensioners left out in the cold by the Government this winter will recognise that all too familiar pattern. A pensioner who receives the full rate of the new state pension without additional income—whose income from April is roughly £12,000—is now in most cases no longer receiving the winter fuel payment. The Government have defended that decision by referring to the triple lock. Will the Minister update the Committee on when the Government now project the full rate of the new state pension to exceed the income tax personal allowance, and how many pensioners they expect will be newly taken into income tax as a result of the development? If he cannot tell the Committee, perhaps he and his colleagues will vote in favour of new clause 3, which would require the Treasury to produce and publish forward projections for the number of people receiving the full rate of the new state pension who are liable to pay income tax, and specifically what the tax liability of their state pension income will be. Pensioners cannot easily alter their financial circumstances, yet they were given less than six months’ notice of the withdrawal of the winter fuel allowance. They must not be blindsided for a second time by the taxman—especially not those who are just about getting by without additional income beyond the state pension. I urge Members and the Minister to vote for new clause 3 to prevent that from happening.

I thank the shadow Minister for the comments at the beginning of his speech, if not for all the questions subsequently. First, on the question about whether the £100,000 threshold will be unfrozen in due course, that threshold does not move, and it sets the personal allowance taper beyond that level. The shadow Minister asked broader questions about the personal allowance and our decision to change the policy we inherited from the previous Government. In the many Finance Bill Committees that he and I served on before the general election, the personal allowance would routinely be frozen for more and more years into the future. That is what we have inherited: the personal allowance is frozen up until April 2028. We made clear that we would do things differently. As well as not increasing the basic higher and additional rates of income tax, as we set out, we did not freeze the personal allowance beyond April 2028, which means that it will continue to rise with inflation. The shadow Minister asked specific questions about how the change affects pensioners, and referred to new clause 3, which I addressed earlier. I will repeat what I said: new clause 3 is not necessary because the data the shadow Minister requests is already in the public domain. We need to ensure that as the personal allowance begins to rise from April 2028, that will benefit not just people in work but pensioners, because they will see the personal allowance that applies to their pension income rising as well. That is underlined by the fact that we are maintaining the triple lock, which will see generous increases in the state pension as the bedrock of state support for pensioners. Question put and agreed to. Clause 1 accordingly ordered to stand part of the Bill. Clauses 2 to 4 ordered to stand part of the Bill. Clause 5 Appropriate percentage for cars: tax year 2028-29 Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss clause 6 stand part.

Clauses 5 and 6 make changes to ensure long-term certainty on company car tax by setting the rates for 2028-29 and 2029-30. The increases in the appropriate percentages will help to ensure that the tax system contributes to supporting the sustainability of the public finances. The effect of the clauses is to gradually narrow the differential between zero emission and electric vehicles and their petrol and diesel counterparts, while ensuring that significant incentives to support the take-up of EVs remain in place. The provisions also increase rates for hybrid vehicles. Company car tax applies when a company car is made available to an employee or their family member for private use. Company car tax rates were confirmed by the previous Government up until 2027-28. In the 2024 autumn Budget, the Government set out the rates for 2028-29 and 2029-30, to provide certainty. The Government recognise that the company car tax regime continues to play an important role in the EV transition by supporting the take-up of EVs and their entry into the second-hand car market. Although it is important to maintain strong incentives to encourage the take-up of EVs, the Government need to balance that against the responsible management of the public finances by gradually withdrawing them over time, as EVs become more normalised. That is why we have committed to raising the company car tax rates—or appropriate percentages—for EVs, hybrids, and petrol and diesel vehicles in 2028-29 and 2029-30, gradually narrowing the differential between EVs and other vehicle types, and bringing the treatment of hybrids closer to that of petrol and diesel cars. The changes made by clauses 5 and 6 will set the company car tax appropriate percentages for the tax years 2028-29 and 2029-30. Appropriate percentages for EVs will rise by two percentage points per year, rising to 9% by 2029-30. Meanwhile, the appropriate percentages for cars with emissions of 51 grams of carbon dioxide per kilometre or over will rise by one percentage point per annum. By 2029-30, the appropriate percentages for petrol and diesel cars will rise to between 20% and 39%, depending on the car’s specific emissions. Together, the measures will gradually narrow the gap between EVs and their petrol and diesel counterparts, while maintaining a generous incentive for EVs. On the changes to the hybrid appropriate percentages, I draw the Committee’s attention to recent research from the European Commission that has shown that the real-world emissions of hybrid vehicles are in fact three and a half times higher than previously thought. Consequently, the Government have announced that they will align the treatment of hybrids more closely with that of petrol and diesel cars.

On aligning hybrid cars more closely with petrol and diesel cars, what assessment has been made of the impact on the hybrid car market and the take-up of hybrid cars, if we are ultimately looking to move away from petrol and diesel in the long term?

Over the coming years we need to make the transition to electric vehicles. Hybrid cars obviously play an important part in the car market and car manufacturing in the UK. The clauses are about a plan over the next five years or so regarding what will happen to the appropriate percentages. This is not an overnight change. Actually, one of the important principles of our setting out the appropriate percentages now for some years in advance is to give car manufacturers and everyone interested in the car industry certainty about what will happen. That is why, as I have been setting out, the appropriate percentages for EVs will rise, thereby narrowing the gap between them and petrol and diesel vehicles, but there will still be a generous incentive to help to shift people towards purchasing EVs. Hybrid vehicles obviously fit within the general scheme of appropriate percentages. However, as I was setting out, European Commission research shows that emissions from hybrid vehicles are in fact three and a half times higher than previously thought, so in setting the rates for 2028-29 and 2029-30, we have decided to reflect that fact in the appropriate percentages that we are legislating for. That means all cars with emissions between 1 gram and 50 grams of carbon dioxide per kilometre—those that largely fall in the hybrid category—will see their appropriate percentages rise to 18% in 2028-29 and to 19% in 2029-30. As I outlined to the hon. Member for Gordon and Buchan, by setting out the rates until 2029-30 we will give the industry and consumers certainty about the future rates. The company car tax system offers generous incentives to encourage EV take-up and makes an important contribution to the EV transition. The Government, however, must balance incentives against responsible management of the public finances. We are announcing the rates for 2028-29 and 2029-30 to start to narrow the differentials between EVs, hybrids, and petrol and diesel vehicles. I therefore commend clauses 5 and 6 to the Committee.

09:45:00

As the Minister set out, clauses 5 and 6 set the appropriate percentage used for calculating the taxable benefit for a company car for tax years 2028-29 and 2029-30. In those tax years, the appropriate percentage for EVs will increase by 2% to 7% in 2028-29 and 9% in 2029-30. For most other vehicles, the appropriate percentage will increase by a further 1% in each year, up to a maximum of 39%. Hybrid vehicles are the standout exception. The effect of these clauses for vehicles capable of operating on electric power while producing between 1 gram and 50 grams of CO₂ per kilometre is to introduce a steep increase in the appropriate percentage of as much as 13% in 2028-29 to reach 18%, before rising to 19% in 2029-30. Whereas previously the appropriate percentage for cars with emissions between 1 gram and 50 grams of CO₂ per kilometre would rise as the electric range reduced, from 2028-29 that system will be replaced with a single flat rate, regardless of the electric range. That means that hybrid cars with the greatest electric range, which are presumably the least polluting, will see the steepest tax rise. Any distinction between hybrid vehicles will be eliminated for the purposes of these provisions. Indeed, as the explanatory notes make very clear, rates for hybrid vehicles will align more closely with the rates for internal combustion engine vehicles, as the Minister just pointed out. It will not have escaped Members that these new rates take us to 2030. The Government have confirmed their intention to ban the sale of new petrol and diesel cars by that date. What has not yet been confirmed is the future of hybrid vehicles. The Department for Transport is consulting on which hybrid cars can be sold alongside zero emission models between 2030 and 2035. The Minister, naturally, will not pre-empt the outcome of that consultation, but these measures effectively do just that. While the Department for Transport parses the differences between plug-in hybrid electric vehicles and hybrid electric vehicles, the Treasury is eliminating that distinction altogether by 2028, let alone by 2030. Not only that, but the Treasury is effectively lumping all hybrid vehicles in with those powered by internal combustion engines. Treasury Ministers will be aware that the manufacturing of hybrid vehicles and engines supports thousands of British jobs, as my hon. Friend the Member for Gordon and Buchan alluded to, and car manufacturing firms operate on a multi-year investment cycle. The contradictions between the Bill and the Department for Transport’s consultation send a less than clear signal, which puts those jobs at risk. I would therefore be grateful if the Minister clarified the Government’s intention in making these changes, especially when the House of Lords Environment and Climate Change Committee has heard that these rates have been the single most effective intervention to date in changing consumer behaviour around different types of vehicles. I would also be grateful if the Minister outlined what steps the Treasury and HMRC are taking to make the general public aware of these changes. I grant they are quite technical, but they could impose a significant additional tax bill on certain taxpayers with plug-in hybrid vehicles. The Chartered Institute of Taxation raised that as a key area of concern, which could confront unsuspecting taxpayers—those seeking to do the right thing by purchasing a less-emitting vehicle— with a massive and steep tax rise. A higher rate taxpayer on £51,000 whose company car is a plug-in hybrid VW Golf could face an additional tax bill of as much as £1,600 in 2027-28. That strikes me as neither fair nor proportionate. It has been reported that this Labour Government ordered no fewer than 10 petrol hybrid Jaguars upon assuming office to supplement the existing departmental, chauffeur-driven pool cars. If the Minister is confident that the consequences of the changes have been communicated and fully understood, I am sure he will be able to inform the Committee of the extra tax liability in 2028-29 of someone on a salary similar to that of a Treasury Minister—£110,000—whose full-time work car is a plug-in hybrid Jaguar F-Pace valued at roughly £60,000 with an electric range of just under 40 miles. As the Committee can tell, we have serious reservations about the communication of the changes, the unfair overnight tax hikes they impose on taxpayers just trying to do the right thing, and the mixed messages they send to vehicle manufacturers by contradicting other areas of Government policy and consultation. The measures concern the ’28-29 and ’29-30 tax years, so the Government have time to think again and to bring back a better calibrated policy in a future Finance Bill. For the reasons that I have set out, we will vote against the clauses.

I listened to the shadow Minister’s comments, and he must have a different definition of “overnight” from me. Legislating now for changes that will come in in 2028 does not feel like overnight. Some Budget changes come in on the day of the Budget—had he called one of those overnight, I might have had some sympathy with the description, but not for legislating now for changes that will come in in 2028, toward the end of this decade. Part of the point of legislating now for changes that will happen some years down the line is precisely to give that signal to consumers and manufacturers, to ensure that the consumers are aware of what is to happen and manufacturers know what is planned.

People might be buying cars now—that is, overnight—that they still have in ’28-29, when the changes come in. They will be making decisions now that will be caught up in future changes.

The hon. Lady makes a similar point to that made by the hon. Member for Grantham and Bourne, which is that the changes will come in further down the line, but they are critical of the fact that we are pre-announcing the changes now so that we give greater certainty and stability. I cannot understand that criticism, because I thought that giving as much forecasting, certainty and stability as possible would be welcomed by the industry and consumers. People expect taxes to change over time, and the greater the forecasting and advance notice they have, the better for consumers and for manufacturers. Without making this too political, I know that the Opposition were not a great fan of certainty and stability when they were in office, but we are rather different. That is why we are setting out the changes now. The shadow Minister referred to the DFT consultation, and of course, he is right that I would not pre-empt its outcome. In combination, our giving information about what the appropriate percentages will be towards the end of the decade, thereby providing certainty and stability, will help us to work closely with other Departments to ensure that consumers are well informed about what is likely to happen towards the end of the decade and manufacturers have the certainty and stability that were so desperately lacking under the previous Administration. Question put, That the clause stand part of the Bill.

1|0|10|4|The Committee divided:|Question accordingly agreed to.||0|0

Clause 13

Charge and main rate for financial year 2026

Question proposed, That the clause stand part of the Bill.

With this it will be convenient to debate clause 14 stand part.

Clause 13 sets the charge for corporation tax for the financial year beginning April 2026, setting the main rate at 25%; and clause 14 sets the small profit rate at 19% for the same period. As Members know, the charge for corporation tax must be set every year, so it is important to legislate on the rate for 2026 now to provide certainty to large and very large companies, which will pay tax in advance on the basis of their estimated tax liabilities. That is also why we have committed to cap corporation tax at 25% for the duration of the Parliament, as set out in the corporate tax road map published at the autumn Budget. The changes made by clause 13 will establish the right of the Government to charge corporation tax from April 2026. The clauses maintain the current rates of 25% and the small profits rate of 19%. Tax certainty is of great importance to businesses, and clauses 13 and 14 ensure that they continue to benefit from stable and predictable tax rules. I commend both clauses to the Committee.

As the Minister set out, clauses 13 and 14 set the charge and rates of corporation tax for financial year 2026. The main rate remains unchanged at 25%, with the standard small profits rate at 19%, and the standard marginal relief fraction remains three 200ths. In Committee on the last Finance Bill, the Exchequer Secretary to the Treasury, who was then the shadow Financial Secretary to the Treasury—a great Opposition role—told the House that if Labour won the election, they would bring certainty back for businesses by capping the rate of corporation tax at 25% for the whole of the next Parliament. At that point, he spoke of capping corporation tax and publishing a business taxation road map as though they were two separate things. This year’s Budget makes clear that there is no cap outside the road map, and once again, as with income tax, we must take Labour at their word that they will stick to a non-binding commitment, which is not legislated for in this Finance Bill. It is unclear how much certainty or stability such a loose commitment will bring, especially when the Budget blindsided businesses with a £25 billion tax hike. Not only that, but the corporate tax road map itself says that, while the Government are committed to providing stability and predictability in the business tax system, they cannot rule out changes to the corporate tax regime over the course of this Parliament. Given the Government’s ongoing worries about headroom and the uncertainty and instability that has created, will the Minister reconfirm for the parliamentary record the Government’s commitment, first, not to raise the headline rate of corporation tax for the duration of this Parliament; secondly, not to raise the small profits rate or reduce the marginal relief currently available; and thirdly, to maintain full expensing and the annual investment allowance, as well as writing down allowances and the structures and buildings allowance without meaningfully altering their eligibility?

10:00:00

Less than a year ago, when he was still in opposition, the Exchequer Secretary, tabled an amendment to the last Finance Bill that would have required the Chancellor to assess how the current main rate of corporation tax affects investment decisions taken by businesses and businesses’ certain about future fiscal and market conditions. The amendment would also have required a further assessment of how maintaining the main rate across this Parliament would affect those two factors. Now that the hon. Gentleman is in government, I am sure that he has conducted such an assessment and would be glad to share his findings with the Committee.

The Minister cannot point to the OBR’s forecast, because it makes no comment on the impact of corporation tax on stability and certainty, and the corporation tax road map makes no serious assessment either. The OBR does, though, clearly state that the net impact of budget policies lowers business investment. On that score, even the current rate of corporation tax could be counted as a positive. It is clearly far outweighed by the burden placed on businesses by Labour through other measures, none of which are covered by the corporation tax road map, for it all is worth. As the OBR demonstrates, any distinction between corporation taxes and business taxes is a false one. Its report makes clear that corporate profits—a key driver of corporation tax forecasts—are lower than in our March forecast because the rise in employer NICs raises costs for firms across the country.

We are already seeing the forecasts come to fruition. Following its quarterly survey of chief financial officers, the chief economist at Deloitte said that

“in the wake of the Budget, CFOs have trimmed expectations for corporate investment, discretionary spending and hiring in the next 12 months.”

The Bill lays bare Labour’s rhetoric. On corporation tax, the best offer the Government can make to British businesses is to do nothing, while harming them in lots of other places. All the indications are that they will be back for more, so for the sake of stability and clarity, which have already been so badly shaken in such a short period of time, I hope the Minister will unequivocally rule out any future increases in rates and any reductions in thresholds or allowances.

I was expecting a series of amendments from the Opposition; I was not expecting the shadow Minister to quote back at me an amendment I tabled several years ago. It is a new, although interesting, approach to opposition to rely on what I tabled in opposition and quote that back at me. I am sure it was an excellent amendment, although I cannot remember its exact detail. On the hon. Gentleman’s questions about corporation tax rates, I am sure he will remember from his time in the Treasury that it is standard practice to legislate the charge to corporation tax on an annual basis, even when the rates remain unchanged. That is a long-standing convention that applies to income tax as well. However, because we were so determined to give businesses stability and certainty, we published the corporate tax road map alongside the Budget. In that road map, we made clear our commitment to maintaining the main rate—or, indeed, to capping it—at 25% for the duration of the Parliament. The small profits rate and marginal relief will also be maintained at their current rates and thresholds. Full expensing and the annual investment allowance are also guaranteed for this Parliament. When it comes to corporation tax, full expensing and the annual investment allowance, the various Finance Bills in this Parliament will be quite a different experience compared with those in the previous Parliament.

Although we of course welcome a road map as a way to give businesses confidence on corporation tax, we should not get mixed up in the smoke and mirrors of what business taxes are. Because of the Budget, businesses now face many taxes and the uncertainty that they bring. Will we also see road maps for things such as the national insurance rises, the increase in business rates, minimum wage increases and measures in the Employment Rights Bill, all of which have an impact on business?

The hon. Lady mentions business rates. I do not know whether she has read the discussion paper “Transforming Business Rates”.

I am glad the hon. Lady has read it, because it sets out our approach to business rates in the coming year, from April 2026, and what we want to do over this Parliament. Businesses want stability and certainty from Government; they recognise that, over a five-year period, things will happen that cannot be predicted on day one, but they want that certainty and predictability. That is why, in the corporate tax road map, we give certainty on capping the main rate and on the small profits rate, marginal relief, full expensing and the annual investment allowance—everything on which we can give full certainty. However, where there are areas that we seek to explore or consult on, we are also clear about that. We developed that approach in partnership with business to make sure that we give as much certainty up front as we can, while also signposting those areas that we want to discuss.

Let us be clear: it is good when a Government set out a tax rate over a multi-year period; we accept that that is a good thing. However, does the Minister accept—to the point raised by my hon. Friend the Member for Gordon and Buchan—that although a road map has been set out on corporation tax, the Labour party has created uncertainty by saying, before the election, that it would not increase national insurance contributions and then, immediately after the election, hitting businesses with a £25 billion tax rise, including not only a rate change but a threshold change that brings many new businesses into the tax regime? Does the Minister accept that the problem is about more than corporation tax? It is about the entire business tax ecosystem. On that basis, the charge is very clear: his Government have caused great uncertainty and great damage to British businesses.

Although I am mindful that the clauses are on corporation tax, Mr Mundell, let me briefly respond to the shadow Minister’s comments. This Government were elected to bring an end to the instability that had become endemic under the previous Government. I like the hon. Gentleman a lot, but for him to imply that the previous Government had stability from day to day is for the birds. I was in the House of Commons Chamber so many times for debates on Finance Bills. I think we went through the entire introduction and repeal of the health and social care levy in the space of a few months. There was no stability under the previous Government, and that was a large part of what led people to vote for change at the last general election. They wanted us to sort out the public finances, get public services back on their feet and restore the economic stability that is the bedrock on which investment can rise and on which we can get the economy growing as we know it can, supporting British businesses, entrepreneurs and wealth creators to do what they do best. To bring us back to the clauses, publishing the corporate tax road map shows our commitment to not just campaigning on the prospect of bringing stability but delivering it in our very first Budget. The corporate tax road map clearly sets out our approach to corporation tax, related allowances and other areas we will look at. I may have discerned support for it in the shadow Minister’s comments; it was bound up in other comments but, reading between the lines, I think he supports the publication of the corporate tax road map. He is welcome to intervene if he disagrees.

I will intervene anyway. As I said, any certainty that can be provided to businesses regarding the tax system is a good thing. The point I am trying to make—I will try again—is that corporation tax is just one tax paid by businesses. They also pay national insurance contributions. They also use reliefs such as the business rates relief the Minister talked about—by the way, the Government have cut that from 70% to 40%, although I am not sure that it was clear before the election that they would do that. The uncertainty has been caused by all the things that the British public were told would not happen, but that then did happen. We are talking about corporation tax today, and I can see that you are, quite rightly, about to bring us back in scope, Mr Mundell. I will leave it here by saying that British businesses pay more than just corporation tax, and what they need is certainty across the board. We have a corporation tax road map, but why do we not have a holistic, comprehensive business tax road map that includes national insurance, business rates and other taxes borne by businesses? That is my point.

With your indulgence, Mr Mundell, I would like to briefly address—

As long as it is contextual.

Yes. In the context of this discussion on corporation tax, I will address the comments about other taxes. The shadow Minister again mentioned business rates and business rates relief, but he might want to recall the situation we inherited on business rates relief. This year it is operating at a 75% discount for retail, hospitality and leisure properties, up to a cap of £110,000, and it was due to expire entirely in April 2025. What we inherited was not just instability, but a cliff edge—it was going to go entirely in April this year. I notice that that part of the story is conveniently erased from the shadow Minister’s account of history. Business rates relief was going to expire entirely in April 2025, so we were keen to ensure that we continued it, while being mindful of the public finances. Our decision to continue it for a further year at 40% was the right thing to do while we ensure that we are ready from April 2026 to have permanently lower tax rates for retail, hospitality and leisure businesses with a rateable value of below £500,000. That is the stability that businesses so badly need. Frankly, the shadow Minister, who is talking about business rates in the context of corporation tax, overlooked that fact entirely. Under the previous Government, the reliefs were extended one year at a time, with the rates going up and down, which provided no stability for businesses trying to make investment decisions. From April 2026, with our permanently lower rates, we want to provide exactly that stability. To return to corporation tax, which is the subject of these two clauses, one of the conversations that I had many a time with businesses while in opposition was about their desire for certainty on corporation tax and the system of allowances. I recall challenging the shadow Minister, when he was a Treasury Minister himself, about the number of changes there had been to full expensing, the annual investment allowance and indeed to the super-deduction, which came and went entirely within one Parliament. That instability is what prompted our desire to provide stability for businesses, and publishing the corporation tax road map and these clauses begins to implement the commitments we made. Question put and agreed to. Clause 13 accordingly ordered to stand part of the Bill. Clause 14 ordered to stand part of the Bill. Clause 19 Pillar Two Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss the following: Government amendments 1 to 3, 21 to 23, 4 to 11, 24 to 29, 12 and 13, 30, 14, and 31 to 37. Schedule 4.

Clause 19 and schedule 4 introduce the undertaxed profits rule—the third and final part of the internationally agreed global minimum tax known as pillar two. They also amend the existing legislation on multinational top-up tax and domestic top-up tax to incorporate the latest international agreements and stakeholder feedback. It is essential that multinationals pay their fair share of tax in the UK. Pillar two protects the UK tax base from large multinationals shifting their profits overseas to low-tax jurisdictions, by requiring multinationals that generate annual revenues of more than €750 million to pay an effective tax rate of 15% on their profits in every jurisdiction in which they operate. Where their effective tax rate falls below that, they will pay a top-up tax.

10:15:00

More than 135 members of the OECD inclusive framework have signed up to pillar two and agreed that it will achieve that objective through three rules respectively: a domestic minimum tax, the income inclusion rule and the undertaxed profits rule. First, the domestic minimum tax ensures that multinational enterprises operating in the UK will pay at least an effective rate of 15% to the UK and will not be charged pillar two taxes by a foreign jurisdiction.

Secondly, the income inclusion rule, which is known as the multinational top-up tax in the UK, means that groups headquartered in the UK but operating in other jurisdictions that do not apply domestic minimum tax, will pay top-up tax here in the UK. Thirdly, the undertaxed profits rule, or the UTPR, is a backstop, which means that any top-up tax not collected under the first two rules will still be collected. For instance, if a multinational is headquartered in a jurisdiction that has not introduced pillar two, the UTPR-implementing countries in which the multinational group operates will share the top-up tax between them.

Those three rules together ensure that a group will be subject to pillar two taxes on worldwide activities, as long as it has a presence in at least one implementing country. The OECD expects that to apply to 90% of multinationals in 2025. The UK has already introduced the first two rules and is legislating for the UTPR in the Bill. The staggered introduction is in line with OECD recommendations, and consequently on the same timeline as in many other jurisdictions, and it is intended to help businesses transition into the new regime.

The Government are also legislating for amendments to the UK’s adoption of the income inclusion rule and the domestic minimum tax, which took effect in the UK from 31 December 2023, as they did in a host of countries around the world. Multinational enterprises are preparing to submit their first tax returns and to pay any top-up tax due in mid-2026. In their preparations ahead of that, groups have identified elements of the rules that require additional clarification or adjustment—essentially, software updates to the rules. These points are discussed in an international forum, with the UK and more than 135 members of the inclusive framework agreeing solutions. The OECD then publishes guidance that implementing countries may add to their domestic legislation. The Bill incorporates many of those updates that have been agreed multilaterally in the past year and includes clarifications to the existing legislation, in addition to implementing the UTPR.

I will now turn to the changes made by clause 19. The clause details the calculation that groups must use to determine how much top-up tax the UK will collect through the new UTPR, which is in proportion to the UK’s share of the assets and employees of the group. Special rules are set out for groups with a joint venture group ringfenced from the ordinary members of the group.

The legislation also includes a simplification known as the UTPR safe harbour, which applies until December 2026. Groups are excluded from the UTPR in the headquarter jurisdiction if the headline tax rate there is at least 20%. In many cases, a group will be subject to the UTPR only in the headquarter jurisdiction, and those jurisdictions may implement a domestic minimum tax by December 2026, in which case the UTPR will no longer apply. The safe harbour prevents groups from having to undertake detailed compliance obligations in relation to the UTPR in the intervening period.

Another simplification measure helps multinational enterprises that are in the earliest phase of their international expansion. It excludes groups from the UTPR for five years if they have a presence in six or fewer territories, with tangible fixed assets of €50 million or less, outside of their primary country.

I will now turn to our amendments to clause 19, which are technical in nature. The most significant are as follows. First, we are introducing an anti-arbitrage rule—announced in a ministerial statement last year—that prevents multinationals from entering into avoidance transactions to exploit a temporary simplification in the rules known as the country-by-country reporting safe harbour. Secondly, we are making an improvement to the domestic minimum tax-charging mechanism to ensure that members of a group are allocated the right amount of a group’s top-up tax. Thirdly, there are updates to rules on flow-through entities, blended controlled foreign company regimes, cross-border allocations of tax and the country-by-country reporting safe harbour, in accordance with the latest OECD guidance. Fourthly, we are enabling HMRC to specify qualifying pillar two taxes by regulation when they have passed the peer review process. The legislation provides that, prior to the completion of the peer review process, groups can assess whether a tax is likely to be qualified, allowing them to prepare their accounts on that basis. Fifthly, there are technical amendments that will take effect for accounting periods beginning after 31 December 2024, except for the anti-arbitrage rule, which applies from the date it was announced via written ministerial statement, in March 2024.

Taxpayers can make an election so that a certain group of amendments will apply retrospectively from the introduction of the pillar two taxes on 31 December 2023. The amendments contain some measures that are likely to be helpful to most taxpayers, and others that may not be helpful to all. No taxpayer is forced to accept the retrospective application of a potentially detrimental measure, but taxpayers wishing to secure a retrospective application of measures helpful to them will also have to accept the retrospective application of measures that may not be. If no election is made, the amendments will apply only on a prospective basis. Certain other amendments cannot be detrimental to taxpayers in any circumstances. These are not part of the election and will automatically have retrospective effect from 31 December 2023.

Amendments 1 to 14 and 21 to 23 ensure that the legislation works as intended, by making small corrections to it, as well as two additions to align with the latest internationally agreed advice. The two additions clarify when and how groups need to override values in financial statements when calculating their liabilities and how a group recalculates its pillar two liability in respect of a previous accounting period, meaning that additional tax is due. Amendments 31 to 37 reflect comments received from stakeholders since the publication of the Bill. Collectively, they deliver a less onerous administrative process for groups wishing to elect for certain changes in the Bill to apply retrospectively to them.

In conclusion, clause 19 and schedule 4 introduce the important undertaxed profits rule backstop to pillar two and make technical amendments to existing legislation. I therefore commend them, and Government amendments 1 to 14 and 21 to 37, to the Committee.

It is a great pleasure to serve on the Committee under your chairmanship, Mr Mundell. As we heard from the Minister, clause 19 and schedule 4 amend the parts and schedules of the Finance (No. 2) Act 2023 that implement the multinational top-up tax and domestic top-up tax. Part 2 of schedule 4 introduces the undertaxed profits rule into UK legislation, and part 3 makes amendments to the multinational top-up tax and domestic top-up tax. These taxes represent the UK’s adoption of the OECD pillar two global minimum tax rules, and we are supportive of the measures before us. In October 2021, under an OECD inclusive framework, more than 130 countries agreed to enact a two-pillar solution to address the challenges arising from the digitalisation of the economy. Pillar one involves a partial reallocation of taxing rights over the profits of multinationals to the jurisdictions where consumers are located. The detailed rules that will deliver pillar one are still under development by the inclusive framework. As the Minister said, pillar two introduces a global effective tax rate, whereby multinational groups with revenue of more than €750 million are subject to a minimum effective rate of 15% on income arising in low-tax jurisdictions. The multinational and domestic tax top-ups were introduced in the Finance Act 2023, as the first tranche of the UK’s implementation of the agreed pillar two framework. Measures in the Bill extend the top-up taxes to give effect to the undertaxed profits rule. That brings a share of top-up taxes that are not paid under another jurisdiction’s income inclusion rule or domestic top-up tax rule into charge in the UK. The undertaxed profits rule will be effective for accounting periods beginning on or after 31 December 2024. Following discussions with the Chartered Institute of Taxation, I have a number of points to raise with the Minister. First, as the institute points out, there is an open point around the application of the transitional safe-harbour anti-arbitrage rules. The OECD’s anti-arbitrage rules for the transitional safe harbours are drafted very broadly, and may therefore go further than originally anticipated. Will the Minister clarify HMRC’s view of the scope of those rules? There are also questions about taxpayers’ ability to qualify for the transitional safe harbours. A transitional safe harbour is a temporary measure that reduces the compliance burden for multinationals and tax authorities. There has been some uncertainty as to whether a single error in a country-by-country report could disqualify all jurisdictions from applying the transitional safe harbours. HMRC has recently indicated that it would be open to permitting re-filings of country-by-country reports where errors are spotted. Can the Minister provide further clarity on HMRC’s proposed approach? The UK’s legislation will need to be updated regularly to stay in line with the OECD’s evolving guidance. What steps is the Minister taking to ensure that clear guidance is provided in a timely manner? The new top-up taxes and undertaxed profits rule are complicated. Schedule 4 runs to over 40 pages and includes an eight-step method to determine the proportion of an untaxed amount to be allocated to the UK. It is important that the Government minimise the cost of implementation and compliance. How will the Minister ensure that it is kept to a minimum? While I welcome the work the UK is doing at a global level, there are still significant issues. I was interested, as I am sure the Minister was, to see that one of the first actions of President Trump, just hours after he took office, was to issue a presidential memorandum stating: “This memorandum recaptures our nation’s sovereignty and economic competitiveness by clarifying that the global tax deal has no force or effect in the United States.” It states in clear and unambiguous terms: “The Secretary of the Treasury and the Permanent Representative of the United States to the OECD shall notify the OECD that any commitments made by the prior administration on behalf of the United States with respect to the global tax deal have no force or effect within the United States absent an act by the Congress adopting the relevant provisions of the global tax deal.” The OBR estimates that pillar two is expected to generate £2.8 billion by the end of this Parliament. What impact could the US position have on the future operation of pillar two and the UK’s ability to levy top-up taxes on multinationals as planned? The same memorandum issued by President Trump notes that “a list of options for protective measures” will be drawn up within 60 days. What action are the Government taking to engage with the US Treasury and to prepare for such actions? Has the Chancellor raised this with her opposite number? The Minister referred to the more than 30 Government amendments that have been tabled to schedule 4, which correct errors in the calculation of the multinational top-up tax payable under the UTPR provisions that would have resulted in an excessive liability; secure that eligible payroll costs and eligible asset amounts are allocated from flow-through entities in a manner that is consistent with pillar two model rules; and ensure that multinational top-up tax and domestic top-up tax apply properly in cases involving joint ventures. They are all perfectly sensible, but the number of amendments tabled underlines the complexity of the issue. As I mentioned, this is a two-pillar system. The corporate tax road map confirmed the Government’s support for the international agreement on a multilateral solution under pillar one and the intention to repeal the UK’s digital sales tax when that solution is in place. The digital sales tax raised £380 million in 2021-22, £567 million in 2022-23 and £678 million in 2023-24. I would welcome an update from the Minister on pillar one and the future of the digital sales tax. The Opposition will not be opposing the clause, but I look forward to the Minister’s response to the specific points I have raised, including those on developments under the new Trump Administration and on implementation.

I thank the shadow Minister for his support for the provisions before us and our general approach. First, it is the case that we are amending the Bill in Committee, but that is because, as his colleagues may remember from their time in government, these are complex rules and it is important that pillar two rules work as intended. This is a complex international agreement and it represents one of the most significant reforms of international taxation for a century. It is to a degree inevitable that revisions would be needed as countries and businesses introduce pillar two and set it in progress. It is complex, but we should not forget that pillar two applies only to large multinational businesses, and the reason it is being introduced is to stop those businesses shifting their profits to low-tax jurisdictions and not paying their fair share here in the UK. The rules need to respond to that, and we need to make sure that they work for all sectors and all types of businesses.

10:30:00

The shadow Minister is right that, although we are talking about pillar two, there is of course a pillar one as part of this package. The Government are committed to implementing both pillars. In pillar one, there is amount A and amount B. Amount A reallocates taxing rights over part of the residual profits of the largest and most profitable multinationals. That has been substantively agreed. A small number of jurisdictions have issues with amount B, which looks to simplify aspects of transfer pricing for baseline distribution. The Government are hopeful that those issues can be quickly resolved to allow the pillar one package to be delivered. He will know that the Government maintain the commitment to cease the digital services tax once pillar one comes into play.

The shadow Minister asked about safe-harbour anti-arbitrage rule. We acknowledge that the rule is imperfect and applies in cases where we would prefer it did not. It reflects an internationally agreed position and any failure to implement it faithfully could have prejudiced recognition of the UK’s taxes as qualified, with serious detrimental effects. That having been said, the rule is not a taxing provision. It limits the availability of an administrative easement, the safe harbour, rather than charging tax. It was introduced to combat structures that would have allowed groups to qualify for safe-harbour status in jurisdictions with very low tax rates, which would have been a material threat to the integrity of the pillar two project. In that context, we do not think it was unreasonable for the drafting to err on the side of breadth. If the opportunity arises, though, it is our intention to seek agreement to improve the rule in the light of the extensive stakeholder comment that it has drawn.

The shadow Minister also asked about errors with country reporting. I reassure him that we are committed to simplifying the rules. HMRC will seek to apply the rules in accordance with the information given out through the OECD model rules and proportionately, wherever possible within the law.

Finally, the shadow Minister asked about the international context. I will not give a running commentary, but it is worth saying that pillar two is—I am sure he would agree—a historic and important initiative in countering multinational base erosion and profit shifting, and it helps to ensure a fair approach to how countries compete for cross-border investment. It has been agreed by 140 countries and has been implemented or is in the process of being implemented by the UK, the EU member states, Canada, Australia, Japan, New Zealand, South Korea and more. The UK will, of course, be open to discussing concerns and ways to alleviate them that uphold the policy aims of pillar two and can be supported by all members of the inclusive framework.

Schedule 4

Pillar two

Amendments made: 1, in schedule 4, page 125, line 28, leave out “untaxed amount” and insert “UK proportion”.

Amendment 2, in schedule 4, page 125, line 30, leave out “untaxed amount” and insert “UK proportion”.

Amendment 3, in schedule 4, page 133, line 20, at end insert—

11A (1) After section 137 insert—

(1) Where any provision of this Part requires the substitution of a value recorded in the underlying profits accounts of a member of a multinational group for an accounting period, the substituted value—

(a) is to be used for all purposes of this Part instead of the value recorded in the accounts (for example, where the carrying value of an asset has been substituted and the value of that asset is relevant to the member’s deferred tax expense, that substituted value is to be used in connection with determining that expense), and

(b) is to be updated (for example, in making adjustments for depreciation for subsequent accounting periods),

in each case, in accordance with the accounting standard used in determining the underlying profits of the member.

(2) But where the value in question is the value of an asset, no adjustments for impairment are to be made to it.

(3) Where the impaired value of an asset recorded in the underlying profits accounts for any accounting period is less than the substituted value of the asset for that period, use the value from the underlying profits accounts instead for that period and all subsequent periods (and subsection (2) does not apply in relation to that value).”

(2) In section 197 (eligible tangible asset amount), in subsection (3)—

(a) after “means” insert “values”, and

(b) after “parent” insert “(and not values as substituted as a result of any other provision of this Part)”.”.

Amendment 21, in schedule 4, page 135, line 27, leave out “entities”.

Amendment 22, in schedule 4, page 145, line 28, leave out from beginning to end of line 28 on page 146 and insert—

(1) A member of a multinational group that is a flow-through entity has a flow-through payroll amount for a territory for an accounting period if the member has costs that would be eligible payroll costs if the member were located in that territory and were not a flow-through entity and—

(a) there is at least one other member of the group—

(i) that is not a flow-through entity,

(ii) that is located in that territory, and

(iii) to whom a proportion of the underlying profits of the flow-through entity for the accounting period are allocated under section 168 (underlying profits of transparent entities) or, where the underlying profits of the entity are nil or less, would be so allocated if the flow-through entity had underlying profits of 100 euros, or

(b) the entity—

(i) is a flow-through entity to some extent for that period as a result of section 169 (certain non tax resident entities to be treated as flow-through entities),

(ii) is not a flow-through entity to some extent for that period, and

(iii) was created in that territory.

(2) Section 196 applies for the purposes of determining a flow-through payroll amount of a flow-through entity for a territory as it applies for the purposes of determining eligible payroll costs but as if—

(a) any reference in that section to the territory of the member were to the territory to which the flow-through payroll amount relates, and

(b) subsection (7) of that section were omitted.

(3) Where a member of a multinational group that is a flow-through entity has a flow-through payroll amount for a territory for an accounting period, the eligible payroll costs of each member of the group falling within subsection (1)(a) for that period (which may be nil) are to be increased by the amount given by multiplying the flow-through payroll amount by the relevant proportion in relation to that member for that period.

(4) The relevant proportion in relation to a member for an accounting period is the proportion of the underlying profits of the flow-through entity for that period—

(a) in a case where the flow-through entity has underlying profits that exceed nil for that period, that is allocated to that member under section 168, or

(b) in a case where the underlying profits of the flow-through entity for that period are nil or less, that would be allocated to that member if the flow-through entity had underlying profits of 100 euros.

(5) Where a flow-through entity—

(a) is a flow-through entity to some extent for an accounting period as a result of section 169,

(b) is not a flow-through entity to some extent for that period, and

(c) was created in a territory for which it has a flow-through payroll amount for that period,

the eligible payroll costs of that entity for that period (which may be nil) are to be increased by the amount given by multiplying that flow-through payroll amount by the relevant proportion in relation to that entity for that period.

(6) The relevant proportion in relation to that entity for an accounting period is the proportion of the underlying profits of the entity for that period—

(a) in a case where the entity has underlying profits that exceed nil for that period, that are not allocated to any other entity under section 168, or

(b) in a case where the underlying profits of the entity for that period are nil or less, that would not be allocated to any other entity under that section if the entity had profits of 100 euros.

(7) For the purposes of applying this section in relation to a multinational group whose ultimate parent is a flow-through entity, the ultimate parent is to be treated as not being a flow-through entity.

(1) A member of a multinational group that is a flow-through entity that is not the ultimate parent has a flow-through tangible asset amount for a territory for an accounting period if the member holds one or more assets in that territory and—

(a) there is at least one other member of the group—

(i) that is not a flow-through entity,

(ii) that is located in that territory, and

(iii) to whom a proportion of the underlying profits of the flow-through entity for the accounting period are allocated under section 168 (underlying profits of transparent entities) or, where the underlying profits of the entity are nil or less, would be so allocated if the flow-through entity had underlying profits of 100 euros, or

(b) the entity—

(i) is a flow-through entity to some extent for that period as a result of section 169 (certain non tax resident entities to be treated as flow-through entities),

(ii) is not a flow-through entity to some extent for that period, and

(iii) was created in that territory.

(2) Sections 197 and 197A apply for the purposes of determining a flow-through tangible asset amount of a flow-through entity for a territory as they apply for the purposes of determining an eligible tangible asset amount but as if—

(a) any reference in those sections to the territory of the member were to the territory to which the flow-through tangible asset amount relates, and

(b) subsection (10) of section 197 were omitted.

(3) Where a member of a multinational group that is a flow-through entity has a flow-through tangible asset amount for a territory for an accounting period, the eligible tangible asset amount of each member of the group falling within subsection (1)(a) for that period (which may be nil) is to be increased by the amount given by multiplying the flow-through tangible asset amount by the relevant proportion in relation to that member for that period.

(4) The relevant proportion in relation to a member for an accounting period is the proportion of the underlying profits of the flow-through entity for that period—

(a) in a case where the flow-through entity has underlying profits that exceed nil for that period, that is allocated to that member under section 168, or

(b) in a case where the underlying profits of the flow-through entity for that period are nil or less, that would be allocated to that member if the flow-through entity had underlying profits of 100 euros.

(5) Where a flow-through entity—

(a) is a flow-through entity to some extent for an accounting period as a result of section 169,

(b) is not a flow-through entity to some extent for that period, and

(c) was created in a territory for which it has a flow-through tangible asset amount for that period,

the eligible tangible asset amount of that entity for that period (which may be nil) is to be increased by the amount given by multiplying that flow-through tangible asset amount by the relevant proportion in relation to that entity for that period.

(6) The relevant proportion in relation to that entity for an accounting period is the proportion of the underlying profits of the entity for that period—

(a) in a case where the entity has underlying profits that exceed nil for that period, that are not allocated to any other entity under section 168, or

(b) in a case where the underlying profits of the entity for that period are nil or less, that would not be allocated to any other entity under that section if the entity had profits of 100 euros.

(7) For the purposes of applying this section in relation to a multinational group whose ultimate parent is a flow-through entity, the ultimate parent is to be treated as not being a flow-through entity.

(1) In determining for an accounting period the eligible payroll costs or eligible tangible asset amount of a flow-through entity that is the ultimate parent of a multinational group, the amount given by section 196 or 197 is to be reduced by the section 170 proportion.

(2) In subsection (1), “the section 170 proportion” means the proportion of the adjusted profits of the flow-through entity for the accounting period that—

(a) in a case where subsection (1) of 170 (adjustments for ultimate parent that is a flow-through entity) applies, is excluded under that subsection, or

(b) in a case where that subsection does not apply as a result of the entity having not made a profit for that period, would be excluded under that subsection if the entity had adjusted profits of 100 euros.

(3) In subsection (2), “the adjusted profits” means the adjusted profits before the application of section 170.”.

Amendment 23, in schedule 4, page 146, line 28, at end insert—

“32A In section 196 (eligible payroll costs), after subsection (6) insert—

“(7) A member of a multinational group that is a flow-through entity that is a responsible member of the group but which is not the ultimate parent is to be regarded as having nil eligible payroll costs (subject to the application of section 198ZA).”

32B In section 197 (eligible tangible asset amount), after subsection (9) insert—

“(10) A member of a multinational group that is a flow-through entity that is a responsible member of the group but which is not the ultimate parent is to be regarded as having an eligible tangible asset amount of nil (subject to the application of section 198ZB).””.

Amendment 4, in schedule 4, page 146, line 34, at end insert—

33A In section 203 (additional top-up amounts where covered taxes less than expected), in subsections (4)(b), (5)(b), (6)(b) and (7)(b), for “reduction by relevant QDT credit” substitute “any reduction”.

33B (1) Section 206 (additional top-up amounts where recalculations required) is amended as follows.

(2) In subsection (1)—

(a) in the words before paragraph (a), after “members” insert “(“the current members”)”, and

(b) in paragraph (b), before “members” insert “current”.

(3) In subsection (2)—

(a) in paragraph (a), for “those members would have for a prior period” substitute “the standard members of the group in the territory in a prior period would have for that period”, and

(b) in the words after paragraph (b), before “members” insert “current”.

(4) In subsection (3)—

(a) in Step 1, for “those members would have had for the prior period” substitute “the standard members of the group in the territory for the prior period would have had for that period”,

(b) in Step 3, after “nil” insert “(and if there are no such results, the result of this step is nil)”, and

(c) in Step 4—

(i) before “members” insert “current””, and

(ii) for “Step 2“ substitute “Step 3”.

(5) In subsection (4)—

(a) for “those members” substitute “the current members”, and

(b) for “in accordance with subsections (5) to (8)” substitute “as follows”.

(6) In subsection (5)—

(a) in paragraph (a)—

(i) for “standard” substitute “current”, and

(ii) before “period” insert “current”,

(b) in paragraph (b), for “members for the members’ territory” substitute “current members”, and

(c) in paragraph (c), for “reduction by relevant QDT credit” substitute “any reduction”.

(7) In subsection (6)—

(a) in paragraph (a)—

(i) for “standard” substitute “current”, and

(ii) before “period” insert “current”,

(b) in paragraph (b), for “standard members in the territory” substitute “current members”, and

(c) in paragraph (c), for “reduction by relevant QDT credit” substitute “any reduction”.

(8) In subsection (7)—

(a) in paragraph (a)—

(i) for “standard” substitute “current”,

(ii) before “period”, in the first place it occurs, insert “current”, and

(iii) for “members for the members’ territory” substitute “the current members”, and

(b) in paragraph (b)—

(i) for “reduction by relevant QDT credit” substitute “any reduction”, and

(ii) for “members for the member’s territory” substitute “current members”.

(9) In subsection (8)—

(a) in paragraph (a)—

(i) for “standard” substitute “current”, and

(ii) for “members for the members’ territory” substitute “the current members”,

(b) in paragraph (b)—

(i) for “reduction by relevant QDT credit” substitute “any reduction”, and

(ii) for “members for the member’s territory” substitute “current members”, and

(c) in the words after paragraph (b) for the words from “amount”, in the second place it occurs, to the end substitute “relevant amount.”

(10) After subsection (8) insert—

“(9) The relevant amount is the amount given by multiplying—

(a) the sum of the amounts of qualifying domestic top-up tax accrued by the current members in the current period, by

(b) the amount given by dividing—

(i) the collective additional amount under this section, by

(ii) the sum of that collective additional amount, any collective additional amount under section 203 and the total top-up amount for the current period.””.

Amendment 5, in schedule 4, page 147, line 6, at end insert—

“(e) in paragraph (f), for “of which the entity is a member” substitute “referred to in paragraph (a)”.”.

Amendment 6, in schedule 4, page 147, line 12, at end insert—

“(ia) after “Part”, in the second place it occurs, insert “, this Chapter other than this section and section 226”, and”.

Amendment 7, in schedule 4, page 147, line 33, leave out “where” and insert “if”.

Amendment 8, in schedule 4, page 147, line 35, leave out “of the group has” and insert

“meets Condition A and Condition B for that period”.

Amendment 9, in schedule 4, page 147, line 37, after “group” insert “(the “relevant group”)”.

Amendment 10, in schedule 4, page 147, line 39, leave out “of the group have,” and insert

“meet Condition C for that period and—

(i) all of those members are located in the United Kingdom, or

(ii) the relevant group is a multinational group (see section 126 in Part 3), and at least one of the members is located in a Pillar Two territory.”.

Amendment 11, in schedule 4, page 147, leave out lines 40 and 41.

Amendment 24, in schedule 4, page 151, line 19, leave out “(e)” and insert “(d)”.

Amendment 25, in schedule 4, page 153, line 12, after “establishment” insert

“and that is incurred in the territory of the permanent establishment”.

Amendment 26, in schedule 4, page 154, line 36, leave out “(2)(a)(i)” and insert “(2)(a)(ii)”.

Amendment 27, in schedule 4, page 159, line 42, leave out “territory” and insert “tax”.

Amendment 28, in schedule 4, page 160, line 28, after second “return” insert “notification”.

Amendment 29, in schedule 4, page 160, line 29, after “return” insert “or notification”.

Amendment 12, in schedule 4, page 161, line 32, at end insert—

“54A In section 211 (transfer of assets or liabilities to a member of a multinational group)—

(a) in subsection (2)—

(i) omit the “and” after paragraph (b), and

(ii) after that paragraph insert—

“(ba) the transferor and the transferee are not members of the same type located in the same territory, and”, and

(b) after subsection (4) insert—

“(5) For the purposes of subsection (2) two members of a multinational group are of the same type if—

(a) they are both standard members of the group,

(b) they are both investment entities, or

(c) they are both members of the same minority subgroup (see section 228).””.

Amendment 13, in schedule 4, page 162, line 7, at end insert—

“58A In section 217(8), for paragraph (a) substitute—

“(a) the aggregate covered tax balance of the standard members of the group in the territory of the member for the prior period is not reduced by 1 million euros or more, and”.

58B In section 220 (top-up amount of investment entity)—

(a) in subsection (1)—

(i) in Step 8, after “entity” insert “, unless the entity has a positive undistributed income amount (see sections 214 and 215) for the period (in which case proceed to Step 9), and

(ii) after that Step insert—

“Step 9

Where this Step applies, the top-up amount for the entity is the sum of—

(a) the result of Step 8, and

(b) the positive undistributed income amount for the entity for the period multiplied by 15%.”, and

(b) omit subsection (2).”.

Amendment 30, in schedule 4, page 162, line 16, at end insert—

“62A In Schedule 16A (multinational top-up tax: safe harbours), in paragraph 4(1)(b) omit “members of the group that are”.”.

Amendment 14, in schedule 4, page 162, line 24, at end insert—

“(f) paragraph 58B (top-up amount of investment entity).”.

Amendment 31, in schedule 4, page 162, line 34, leave out “by the filing member”.

Amendment 32, in schedule 4, page 162, line 35, leave out “group or qualifying entity” and insert

“a group, or a qualifying entity that is not a member of a group”.

Amendment 33, in schedule 4, page 162, line 40, at end insert—

“(za) is to be made—

(i) in the case of a multinational group or group, by the filing member, or

(ii) in the case of a qualifying entity that is not a member of a group, by that entity,”.

Amendment 34, in schedule 4, page 163, line 6, after “member” insert “, or former member,”.

Amendment 35, in schedule 4, page 163, line 8, after “tax” insert

“that has top-up amounts or additional top-up amounts for any accounting period commencing before 31 December 2024 as a result of the person’s membership of the multinational group or group”.

Amendment 36, in schedule 4, page 163, line 9, after “entity” insert

“that has top-up amounts or additional top-up amounts for any accounting period commencing before 31 December 2024 as a result of the entity’s membership of the multinational group or group”.

Amendment 37, in schedule 4, page 163, line 22, at end insert—

“(9A) Sub-paragraph (9B) applies where—

(a) the filing member of a multinational group or group has made a retrospection election,

(b) at the time the election was made it was reasonable for the filing member to consider that the consent of a person was not required,

(c) that consent was not given,

(d) the filing member becomes aware that the consent of that person was, or may have been, required, and

(e) the written consent of that person is given within the period of 60 days beginning with the day on which the condition in paragraph (d) is first met.

(9B) The consent of that person is to be treated as having been given before the election was made.”.—(James Murray.)

Clause 20

Offshore receipts in respect of intangible property

Question proposed, That the clause stand part of the Bill.

The clause repeals the offshore receipts in respect of intangible property legislation, known as ORIP, which was aimed at disincentivising large multinational enterprises from holding intangible property in a low-tax jurisdiction if the intangible property was used to generate income in the UK. Such enterprises could thereby gain an unfair competitive advantage over those that held intangible property in the UK. The policy is no longer required, because pillar two—the global minimum tax—will more comprehensively discourage the multinational tax planning arrangements that ORIP sought to counter. As set out in the corporate tax road map, which we debated earlier, the Government are committed to simplification of the UK’s rules for taxing cross-border activities in the light of pillar two. Repeal will take place alongside the introduction of pillar two’s undertaxed profit rules in the UK from 31 December 2024, which we debated with clause 19. Clause 20 simply repeals chapter 2A of part 5 of the Income Tax (Trading and Other Income) Act 2005, and I commend it to the Committee.

As we heard from the Minister, clause 20 repeals the ORIP rules, which are about ensuring that profits derived from UK consumers are taxed fairly and consistently, regardless of where the underlying intangible property is held. The previous Government announced in the 2023 autumn statement that they would abolish ORIP, so we support the clause. The ORIP rules were a short-term, unilateral measure introduced in the Finance Act 2019 to disincentivise large multinational enterprises from holding intangible property—assets such as patents, trademarks and copyrights—in low-tax jurisdictions if it was used to generate income in the UK. Such multinationals could thereby gain an unfair competitive advantage over others that hold intangible property in the UK, as well as eroding the UK tax base. However, the legislation is no longer required, because the OECD/G20 inclusive framework pillar two global minimum tax rules will comprehensively discourage the multinational tax planning arrangements that ORIP sought to counter. As the Minister said, the repeal will happen alongside the introduction of the pillar two undertaxed profits rule from 31 December 2024. Has he assessed how successful the ORIP rules have been since their introduction? HMRC’s tax information and impact notes state that this measure will have a negligible impact on around 30 large multinational groups and a negative impact on the Exchequer, peaking at £40 million in 2026-27. Can the Minister clarify why the repeal of the ORIP rules is having a negative impact on revenues to the Exchequer? I note that the Chartered Institute of Taxation has welcomed the measure and specifically said that “any reduction in the legislative code to minimise overlap and unnecessary measures is welcome.” We say amen to that. As I have set out, we will not oppose the clause, but I look forward to the Minister’s response to my specific points about ORIP.

I thank the shadow Minister for his support for the clause. I think his question was about the impact of repealing ORIP. A fundamental point here is that pillar two, which we debated previously, will now tax the profits that were the target of ORIP. Pillar two is expected to raise more than £15 billion over the next six years, so ORIP is simply no longer needed. The Government believe that simplifying and rationalising the UK’s rules for taxing cross-border activities is important, and as such it is right that we use this opportunity to repeal ORIP. Question put and agreed to. Clause 20 accordingly ordered to stand part of the Bill. Clause 21 Application of PAYE in relation to internationally mobile employees etc.

I beg to move amendment 15, in clause 21, page 11, line 21, after “is” insert “or has been”. This amendment makes it clear that new section 690 applies if an employee has been internationally mobile in a tax year, even if the employee is no longer internationally mobile.

With this it will be convenient to discuss the following: Government amendments 16 to 19. Clause stand part.

I will briefly address clause 21 before explaining what the amendment seeks to achieve. The clause makes changes to simplify the process for operating pay-as-you-earn where an employee is eligible for overseas workday relief. It relates to some of the reforms we are making around non-UK domiciled individuals, which we will return to later in Committee, because those clauses are in a different part of the Bill. More broadly, the context of this measure is that the Government are removing the outdated concept of domicile status from the tax system, and replacing it with a new, internationally competitive, residence-based regime from 6 April 2025. Currently, where an employer makes an application to treat only a portion of the income that they pay to an employee as PAYE income, they are required to wait for HMRC to approve an application, which can result in delays. The changes made by clause 21 will mean that from 6 April 2025, an employer will be able to operate PAYE only on income relating to work done in the UK once they have received an acknowledgment from HMRC of their completed application, rather than having to wait for HMRC to approve it. That approach will simplify the operation of overseas workday relief for employers, while still allowing HMRC to direct employers to amend the proportion of income on which PAYE is operated, should it be necessary to do so. Amendments 15 to 19 are needed in order to ensure that the legislation regarding the correct operation of PAYE works as intended. The Government are committed to making the tax system fairer so that everyone who is a long-term resident in the UK pays their taxes here. The new regime ensures this, while also being more attractive than the current approach, as individuals will be able to bring income and gains into the UK without attracting an additional tax charge. That will encourage them to spend and invest those funds in the UK.

As we have heard from the Minister, clause 21 amends the process by which employers can operate PAYE on a proportion of payments of employment income made to an employee during the tax year. It is a welcome change. We will be supporting the clause and the simplification that it introduces. By way of background, the clause amends section 690 of the Income Tax (Earnings and Pensions) Act 2003. Section 690 provides a mechanism for an individual or employer to seek a decision from HMRC regarding the tax treatment of certain earnings. The resulting determination under section 690 is an agreement between HMRC and a UK employer on the estimated percentage of duties that an internationally mobile employee expects to carry out in a tax year. Once that determination is provided, the employer can operate PAYE on only that percentage of the employee’s salary. Unfortunately, that is easier said than done. According to the Institute of Chartered Accountants in England and Wales, historically HMRC has missed its four-month target to agree employers’ applications, and in some cases it has taken up to a year to obtain HMRC’s approval. This is just one example of the difficulty that taxpayers have in engaging with HMRC. I welcome the comments that the Minister made at Treasury questions last week about the work that he is doing—he chairs the board of HMRC, I believe—to ensure that HMRC delivers a better service for customers. We all wish him well on that. Perhaps this is an opportune time to remind the 3.4 million people who have to submit self-assessment tax returns to do so before the 31 January deadline. Colleagues may wish to ensure that they have submitted theirs. In the absence of an agreement, PAYE must be operated on the whole salary, meaning that the employee would be overtaxed and must claim relief after the year end. That is not a satisfactory outcome for anyone. These changes will allow employers to immediately operate PAYE on only the proportion of earnings that they believe relates to UK duties, rather than having to wait for HMRC to approve the application. This new process is a welcome step forward in dealing with an issue that HMRC has had in meeting its legal obligations under the current tax system.

10:45:00

The Chartered Institute of Taxation and the ICAEW have raised concerns that the reforms to section 690 make no reference to treaty non-resident cases. Will the Minister clarify whether there will be another process for treaty non-resident cases?

The ICAEW also considers that the Bill overlooks scenarios in which a section 690 determination will be required—for instance, where all the UK tax on foreign employment income is covered by foreign tax credits. Has the Minister considered amending the new section 690 so that the definition of an internationally mobile employee includes that scenario?

On the scope of the measures, I would be grateful if the Minister can confirm how many people the change is likely to impact, and to what extent it is expected to improve the timeliness of a determination. I would also be grateful if he can confirm what risks, if any, the change poses to tax compliance.

As I have set out, we support this change, but I would appreciate the Minister’s comments on how the amended process will work for certain groups. I recognise that this is a detailed issue, so he may wish to write to the Committee on the points I have raised.

I thank the shadow Minister for his support for the clause and the amendments. He rightly recognises that this is a simplification to make things happen quicker in the tax system, and we can all agree on that. He raised some specific points, and I will write to him on the detail of the operation of the clause so that he has a record of that. I endorse his call for anyone who has not already submitted their self-assessment tax return to be mindful of the deadline of the end of the month. Amendment 15 agreed to. Amendments made: 16, in clause 21, page 12, line 4, after “being” insert “or having been”. This amendment is consequential on Amendment 15. Amendment 17, in clause 21, page 12, line 22, after “is” insert “or has been”. This amendment makes it clear that a notice under new section 690A can be given during the mobile tax year if the employee has been internationally mobile during that year, even if the employee is no longer internationally mobile. Amendment 18, in clause 21, page 13, line 22, leave out “public notice given” and insert “general direction made”. This amendment means that the requirements of notices under new section 690A will be specified in a general direction made by HMRC rather than a public notice. Amendment 19, in clause 21, page 15, line 38, at end insert— “(3) Any direction given by an officer of Revenue and Customs under section 690 of ITEPA 2003 (employee non-resident etc) has no effect in relation to tax year 2025-2026 or any subsequent tax year.” —(James Murray.) This amendment means that any direction given under the old section 690 will cease to have effect in relation to future tax years. Clause 21, as amended, agreed to. Clause 22 Advance pricing agreements: indirect participation in financing cases Question proposed, That the clause stand part of the Bill.

Clause 22 introduces technical amendments to provide certainty that advance pricing agreements are available for all financing arrangements covered by the transfer pricing rules, in line with the existing HMRC guidance. The transfer pricing rules ensure that transactions between related parties, such as companies in the same multinational group, are priced as though they were between independent entities, in line with the arm’s length principle. This makes sure that each related party pays the appropriate amount of tax in the country in which it operates. That ensures a fair distribution of tax revenues across different jurisdictions and prevents companies from manipulating intra-group prices to shift profits to lower tax jurisdictions. The UK’s advance pricing agreement legislation provides for agreements to be entered into between HMRC and businesses in scope of the transfer pricing rules, which determine the transfer pricing method that businesses should use to determine the arm’s length price. An advance pricing agreement is not special treatment for that taxpayer; rather, it provides improved certainty to taxpayers in areas where the correct application of the transfer pricing rules may be in doubt. HMRC has recently become aware of a technical gap in the legislation that was contrary to its long-established statement of practice. The said statement of practice allows for an advance pricing agreement to be entered into where the parties are acting together in relation to financing arrangements. The changes made by this clause fix that gap and will ensure that HMRC can provide businesses with tax certainty in relation to the application of the transfer pricing legislation to all in-scope financing arrangements, in line with HMRC’s statement of practice. The intention of this clause is to fix a technical gap in existing legislation and to ensure that HMRC can provide certainty in line with its existing published guidance.

As we heard from the Minister, clause 22 makes amendments to parts 4 and 5 of the Taxation (International and Other Provisions) Act 2010 concerning the meaning of indirect participation in relation to advance pricing agreements. Once again, we welcome these changes. An APA is a procedural agreement between one or more taxpayers or one or more tax authorities on the future application of transfer pricing policies. Advance pricing agreements can help to provide certainty and avoid transfer pricing disputes. HMRC recently became aware that there is a technical gap in the circumstances in which an advance pricing agreement may be entered into. Clause 22 aims to rectify that gap and provide clarity on what constitutes indirect participation in the context of APAs. The clause amends both the transfer pricing and APA legislation to ensure the validity of advance pricing agreements in cases where the parties to the provision are connected only by virtue of acting together in relation to the financing arrangements. The clause will ensure the validity of advance pricing agreements with businesses in such circumstances and is intended to ensure that HMRC can provide businesses with tax certainty in relation to the application of transfer pricing legislation. We have spoken a lot during this Committee about the importance of certainty for business, so that is a welcome step. By providing clarification on what indirect participation means, the Government are confirming the scope of advance pricing agreements, which should improve certainty and dispute resolution. The Chartered Institute of Taxation notes that “this measure will be helpful for taxpayers that have applied to or want to apply to HMRC for APAs in relation to financing arrangements (such as Advance Thin Capitalisation Agreements) in circumstances where the UK’s transfer pricing rules are only in scope due to persons acting together in relation to those financing arrangements.” The clause will likely improve the process both for businesses and HMRC. It is, however, a little hard to understand the real-world impact from the tax information and impact notes. Now that indirect participation has been defined and the scope of advance pricing agreements effectively broadened, will there be any extra enforcement cost? I would be grateful if the Minister could confirm how many businesses the change is likely to impact. It would also be useful to know whether the Government have calculated the economic benefits of advance pricing agreements and, subsequently, how the change will impact the Exchequer. As I have set out, we welcome this technical change, but I would welcome the Minister’s comments on the issues I have raised.

I thank the hon. Gentleman for his support for the clause. We are on a roll of him supporting clause after clause—may this continue throughout the rest of the Bill. The hon. Gentleman rightly recognises that this is a simplification measure on which all Members can agree. As it is a simplification measure, it is non-scoring, so it does not have an Exchequer impact—it simply provides certainty on how the rules as intended will apply. It does not change how the rules apply or make a policy change to the Government’s approach; it makes sure that there is total certainty and clarity about how they will apply. Only a limited number of taxpayers will be affected, and we expect them to welcome the change because of this certainty. I welcome the Opposition’s support for this clause, because I think we can all agree on giving as much certainty to taxpayers and businesses as possible. Question put and agreed to. Clause 22 accordingly ordered to stand part of the Bill. Clause 23 Expenditure on zero-emission cars Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss clause 24 stand part.

Clauses 23 and 24 make changes to extend the 100% first-year allowances for qualifying expenditure on zero emission cars and plant or machinery for electric vehicle charge points by a further year to April 2026. The first-year allowance for cars was originally introduced for expenditure incurred from 17 April 2002 for low CO₂-emission cars, including electric vehicles, and eligibility was later restricted to cars with zero CO₂ emissions from April 2021. The first-year allowance for electric vehicle charge points was originally introduced for expenditure incurred from 23 November 2016. These first-year allowances were introduced to support the UK’s transition to cleaner vehicles and were due to expire in April 2025. The changes made by clauses 23 and 24 will extend the availability of the capital allowances for a further year to 31 March 2026 for corporation tax purposes and 5 April 2026 for income tax purposes. This ensures that investments in zero emission cars and charge point infrastructure continue to receive the most generous capital allowance treatment. By extending the first-year allowances for zero emission cars and charge point infrastructure, the measure will provide continued support for the transition to electric vehicles.

As the Minister set out, clauses 23 and 24 extend the availability of the 100% first-year allowance for business expenditure on zero emission cars and for expenditure on plant or machinery for an electric vehicle charging point. Both allowances are extended for a single year from April 2025. In their current forms, both allowances were introduced by Conservative Governments. Although we will not oppose the clauses, there are a few questions that I would like the Minister to address. The first relates to a point that has been highlighted by the Association of Taxation Technicians concerning clause 24. The ATT has queried why the specific allowance for charging points is being extended when this expenditure has been covered by both the annual investment allowance and full expensing since the Conservative Government made those reliefs permanent in 2023. That means that the allowance is really relevant only to unincorporated business—for example, a partnership or sole trader— that has already used its annual investment allowance in full, which is a scenario that the ATT considers to be quite rare. According to the ATT, we should be able to tell how rare this is from the number of claims made for this specific allowance on tax returns. Will the Minister provide any information that he has to hand on that? HMRC has said it expects 6,000 unincorporated businesses to be impacted by clauses 23 and 24. Does the Minister have a figure for clause 24 alone and for specific unincorporated businesses that have exhausted their annual investment allowance? At the very least, I would be grateful if the Minister explained to the Committee the rationale behind that specific extension, given the context that the ATT has so clearly set out. The cost to HMRC of implementing the clauses is a cool £1.2 million—a relatively high figure for the extension of a pre-existing allowance for a single year. If clause 24 is largely redundant, this hardly seems good value for money on HMRC’s part. I therefore ask the Minister to provide a clause-by-clause breakdown of the £1.2 million of taxpayers’ money that HMRC will spend to be able to execute the relief. Turning back to clause 23, electric vehicles, unlike charging points, are not in scope of the annual investment allowance or full expensing, so I will not question the extension of that specific allowance, which we welcome. However, given the Government’s ambition to accelerate our transition to electric vehicles, I cannot help but wonder why they are putting a brake on the allowance after just a single year. The Red Book states that the allowance will “help drive the transition to electric vehicles”, yet from April 2026, a business investing in these cars will receive relief only through annual writing-down allowances of either 18% or 6%, depending on the car’s emissions—those incentives are less generous and less immediate. At Budget 2020, we extended the EV allowance by four years to provide the support and certainty to businesses that the Minister says he so desperately wants. This Labour Government have declined to do the same, creating what some—not me—may call a cliff edge. As Labour increases the pace and the burden of the transition to net zero, they are also shifting the burden away from His Majesty’s Government and on to British businesses and British consumers. Once again, it is they who will pay the price for the Government’s obsession with decarbonising our grid and imposing net zero policies on the British public.

11:00:00

I thank the shadow Minister for his questions and his support for the clause. He mentioned a question that the ATT raised about the interaction between the extension of the 100% first-year allowance we are proposing, particularly for charge points, and the context of full expensing in the annual investment allowance. For businesses that are investing over the annual investment allowance limit, there may be circumstances where, if the first year allowance were not extended as it is by these clauses, some investment in EV charge point equipment would qualify for only a 50% first-year allowance rather than 100% full expensing. The Government want to support investment in EV charge point infrastructure by providing full relief for investment in equipment for EV charge points. That is why we have introduced this measure. The shadow Minister asked for a specific figure. I do not have that to hand, but I am happy to look into what information is available and get back to him. More broadly, the 100% first-year allowance was due to expire in April 2025. This conversation has echoes of an earlier discussion we had around retail, hospitality and leisure business rates relief, and reliefs or allowances that we inherited and which are due to expire in April 2025. We have decided to extend this, and the reason why is to help support businesses and individuals who are buying or making electric vehicles and associated infrastructure. We see this as one of a series of measures to support the EV transition. It has come up in relation to a number of clauses, so I think it is clear to the Committee that the Government are pursuing a range of different interventions and policies to carefully calibrate the right level of Government support.

In the interest of providing certainty, would the Minister explain why the Government did not choose a multi-year allowance on this, rather than going for an extension of only one year?

As I was saying, we are seeking to calibrate the incentives carefully for the transition to EVs to support manufacturers and consumers and to give as much certainty as possible, while making sure that we have the right support in different parts of the tax system to provide value for money and support the transition in the right way. It is not a question of a single measure being responsible for supporting the transition. This relies on manufacturers and consumers playing their part, but the Government need to play their role, too, which is why this measure sits alongside others we have debated, including those that are not part of the Finance Bill but are part of the Government’s broader agenda. Collectively, they will support this transition. Question put and agreed to. Clause 23 accordingly ordered to stand part of the Bill. Clause 24 ordered to stand part of the Bill. Clause 25 Commercial letting of furnished holiday accommodation Question proposed, That the clause stand part of the Bill.

With this it will be convenient to discuss schedule 5.

The clause and the schedule abolish the furnished holiday lettings tax regime from April 2025, removing the tax advantages that landlords who offer short-term holiday lets have over those who provide standard residential properties. Furnished holiday let owners benefit from a more generous tax regime than landlords of other property types, such as standard residential properties. The advantages of that tax regime include capital gains tax reliefs: FHLs can qualify for gains to be charged at 10%, unlike buy-to-let properties and second homes. FHLs also benefit from unrestricted income tax relief on their mortgage interest, rather than the 20% restriction on relief for standard lettings, and from capital allowance on furniture and furnishings. FHL profits are also counted as earned income for pension purposes. The previous Government announced at the spring Budget 2024 that they would abolish the FHL tax regime to level the playing field with landlords of standard residential properties. We are now legislating for that measure and abolishing the FHL tax regime from April 2025, which will raise around £190 million a year by 2029-30 and thereby support the vital public services we all rely on. The changes made by clause 25 and schedule 5 mean that FHL landlords will be treated the same as other residential landlords for the purposes of income tax, corporation tax and capital gains tax.

Does the Minister recognise the difference between properties with a use clause compelling them to be used for holiday let accommodation and houses that do not, and that can therefore be used as residential properties? Those two things do not necessarily line up in terms of what the owner can use the property for.

If I understand the hon. Member’s question correctly, it might relate to clauses in the lease of the property, but I am not quite sure what her point was. I will come back to this if I have misunderstood her question, but clause 5 relates specifically to the tax treatment of these properties. It is about how FHLs, which can still operate in the same way as they have previously in terms of lettings, will be treated by the tax system to bring them in line with standard residential property tax treatment. This is about equalising the tax treatment of FHL landlords and standard landlords, rather than seeking broader changes, which may be what she was alluding to, but I am happy to return to it later in the debate if I have misunderstood her question. This measure does not penalise the provision of FHLs; it simply brings their tax treatment more in line with long-term lets. It does that to remove the tax advantages that FHL landlords have received over other property businesses in four key areas. First, finance cost relief will apply in the same way as for long-term lettings, with income tax relief on their mortgage interest restricted to the basic rate. Secondly, it will remove the capital allowances rule for new expenditure and allow replacement of domestic items relief. Thirdly, it will withdraw access to reliefs from taxes on chargeable gains for trading business assets. Fourthly, FHL income will no longer count as earned income for pension purposes. After repeal, former FHL properties will form part of a person’s UK or overseas property business and be subject to the same rules as non-furnished holiday let property businesses. However, the Bill does not equalise tax treatment entirely. Holiday lets, whether they qualify as FHLs or not, are subject to VAT, whereas longer-term, private rented sector accommodation is not. Withdrawal of finance cost relief will mainly affect higher rate and additional rate taxpayers, with basic rate payers largely unaffected. The Government have also introduced transitional arrangements. FHL properties will become part of a person’s overall property business and past FHL losses can be relieved against profits of that business in future years. Existing capital allowance claims can be continued, but new capital expenditure will be dealt with under the rules for standard residential let properties. The legislation also confirms that where a business has ceased prior to April 2025, business asset disposal relief may continue to apply to a disposal that occurs within the normal three-year period following cessation, which is in line with current rules.

Did the Minister consider the different legislation in Scotland, where we have short-term letting licences, visitor tax and a whole load of extra legislation coming in, which is making it difficult and reducing the amount of holiday letting available? How relevant is the proposal for Scotland?

The hon. Gentleman’s question goes slightly beyond the ambit of the tax measures we are discussing. As I understand, he is talking about the wider regulation and the approach to lettings in Scotland. To echo my response to the hon. Member for Gordon and Buchan, the measures really relate to the tax treatment of FHLs in comparison to standard property lettings, making them more equal. It does not make them entirely equal—VAT remains a point of difference—but it is about levelling the playing field between FHL landlords and the landlords of standard lettings in the tax system.

My point was really about the cumulative effect of many different taxes and restrictions making it more and more difficult for people in the letting business, which is crucial to the economy of tourist areas.

We know that in any local area there needs to be a balance between visitor accommodation and long-term accommodation. I am sure that the hon. Member and others recognise the tension inherent in getting that balance right. We need to ensure not only that we are supporting our visitor economy, but that the tax system supports long-term accommodation for people who live in those areas—not least because those who work in the tourism sector need somewhere to live near their place of work. It is about the balance between supporting visitor economies and long-term residential lets. We agree with the previous Government, who introduced the reform, on this point. The tax treatment of FHL landlords is better if brought more in line with standard residential lets. I will briefly mention the anti-forestalling rule, which is also introduced as part of the Bill. It will prevent the obtaining of a tax advantage through the use of conditional contracts to receive capital gains relief under the current FHL rules. That rule applies from 6 March 2024. In summary, the changes made by the provisions will make the tax system fairer by eliminating tax advantages for landlords who let out their properties as short-term furnished holiday lets compared with those who let out properties for longer periods. FHL landlords will now be treated the same as other residential landlords for the purposes of income tax, corporation tax and capital gains tax. We are grateful to all the stakeholders who have already fed in following the publication of the draft legislation and supporting documents.

As the Minister set out, clause 25 and schedule 5 repeal special tax rules relating to the commercial letting of furnished holiday accommodation. The changes were first announced in our Government’s Budget in March 2024, and we will not oppose them. However, it is important to view the measures in the context of the wider changes to the circumstances of the hospitality sector as a result of Labour’s Budget—most notably the hike in national insurance contributions.

Might it not be more appropriate to view the measure in the context of the housing crisis that our country is currently in, and the record proportion of under-35s living at home with their parents rather than being able to live in their own accommodation? Does the hon. Member agree that there should be no tax incentives for accommodation to be turned into short-term furnished lets as opposed to long-term living places?

Order. Can we keep the discussion within the context of the clause and the schedule?

Thank you, Mr Mundell. I am grateful for the hon. Member’s intervention; we all want to see people able to get on the housing ladder, particularly younger people. There is much work to be done on that. However, I would say two things. First, I question how much of an impact the measures will have on that, but I am happy to see evidence and data from the Treasury to prove her point. Secondly, we cannot deny that the hospitality sector is in different circumstances to when the previous Government announced the measures in March 2024. As I will discuss, the measures will have an impact on the sector. I think the hon. Member would agree that it is important to support our hospitality sector, hear their concerns and for me, as the official Opposition spokesperson, to make remarks on their behalf. As I was saying, this is not just about national insurance contributions, but the reduction in the secondary threshold for that tax, as well as the reduction in business rates relief, which has gone down from 70% to 40%. Each of those measures creates significant new costs for the hospitality sector, which is crucial to rural and coastal economies across the country. It is those same rural and coastal economies that will be disproportionately affected by the provisions of clause 25 and schedule 5.

11:15:00

The Professional Association of Self Caterers UK points out that traditional holiday lets businesses provide critical bedstock in visitor economies, and estimates that the holiday lets that will be impacted contribute some £9.3 billion in economic activity and support 230,000 jobs. Even Labour’s Environment Secretary has recognised the economic value of holiday lets. In his speech to the Oxford farming conference this year, he spoke about supporting farmers to “innovate and diversify” their businesses by making it easier to convert large barns into holiday lets.

Does my hon. Friend think that, by suggesting that farmers should diversify into holiday lets, the Environment Secretary intends that farmers should pay even more tax to the Treasury?

It is clear that the Government have launched an attack on farmers across rural communities in our country. The family farm tax is a disgrace. Farmers have protested and tried to make their voices heard, but still cannot get a meeting with the Chancellor of the Exchequer. I urge the Minister, who is very open to meetings, to have a word with his Chancellor, who is consistently in hiding and running out of the country when things get difficult as a result of her decisions. Perhaps it is true that the Environment Secretary wants farmers to pay even more tax. Why else would he say to farmers in Oxford, “Convert your barns into holiday lets,” while over the road the Treasury is taking away these reliefs and making it more tax inefficient for them to do so? This is yet another area where the Labour Government seem intent on cancelling out genuinely pro-growth deregulation, which we welcome, with anti-growth taxation.

Will the hon. Gentleman give way?

Does the Labour Member who is about to intervene on me support holiday lets?

I am glad that we have returned to this topic, because I was about to ask the hon. Gentleman whether he might clarify the relationship between his remarks and the commercial letting of furnished holiday accommodation—[Interruption.] But of course I support the equalisation of tax measures provided for by the clause.

I am sorry, but there was a very loud cough when the hon. Lady intervened. Would she repeat her intervention?

I was simply hoping to get us back on to the topic of the commercial letting of furnished holiday accommodation.

Oh, so it was more of a heckle than an intervention, but that is very welcome too; it makes it a bit more lively for the very large audience we have today. I would be grateful if the Minister could set out the policy of this Labour Government. Do they support holiday lets? The Environment Secretary clearly supports them and wants farmers to diversify into them, while at the same time the Treasury—yes, we announced the policy in March—clearly wants to tighten up the rules on taxation. It would be great to hear the Minister clarify that, but it seems that the answer depends on which Minister one talks to on any given day. Let us see what the answer is in this Committee, from this Minister, today. Clause 25 also touches on a long-standing issue of whether letting constitutes a trading activity or a property business. The FHL regime created a clear distinction by deeming a letting business to be considered a trade for certain purposes. Some organisations, such as the excellent Chartered Institute of Taxation, are concerned that removing the regime removes this distinction and could open up a whole can of worms, leading to costly disputes for both the taxpayer and HMRC. Can the Minister clarify what defines a letting as a trading activity in the absence of the FHL regime, or at least commit to the publication of updated, clearer guidance for the industry on that subject? The Chartered Institute of Taxation is also seeking confirmation on the following points—

I am confused as to why a party that brought in the proposals is now arguing so vehemently against them—perhaps it is still attached to its chaotic approach to government. What I am not following in the hon. Gentleman’s remarks is the argument that the equalisation of the taxation could have negative consequences. Has the hon. Gentleman interrogated the evidence that has been brought forward by those people who are letting out their holiday lets, and does he really think that there would not be an economic benefit to supporting a change in use of those homes?

These sittings are long, but I did say at the beginning of my speech that we announced in March 2024 that we would bring in this same measure and that we will support it today. I am not saying that we are against it, but I am saying two things. First, as I was saying at the beginning of my speech, the context in which the measure is being introduced is very different from the context in March 2024. The context today is that hospitality businesses across the country, but particularly in rural communities, are being hit by a series of taxes that they did not ask for, did not vote for and were told would not happen. That is the context in which we find ourselves. Secondly, His Majesty’s official Opposition have a duty to communicate the concerns of the British public and the sectors that will be directly impacted by this measure. It is vital that His Majesty’s Opposition scrutinise whatever policies are put in front of us, with a forward look at how that will economically damage or benefit communities. As you can tell, Mr Mundell, and as the hon. Member for Cities of London and Westminster can tell, I take a constructive tone. When we do support measures, we will say so, and when we do not, or we feel that additional scrutiny is needed, Members better believe that I will be there. That is what I am doing today. I hope that addresses the intervention from the hon. Member for Cities of London and Westminster. In the interests of scrutiny on behalf of the many thousands of people that will be impacted by the measure and in a context of a wider hammering through the tax system by this Labour Government, let me continue my questions on behalf of the Chartered Institute of Taxation. First of all, I seek confirmation from the Minister that an FHL disposal must be made before 6 April 2025 in order for a qualifying replacement asset to be eligible for roll-over relief, even though the replacement asset itself can be purchased up to three years after FHL disposal. Secondly, I seek confirmation that lettings must cease altogether before 6 April 2025—not just furnished holiday lettings, but even unfurnished long-term rentals—for an FHL disposal to qualify for business asset disposal relief. Thirdly, I seek confirmation that married couples or civil partners who jointly own an FHL must make an election if they are to continue to split the income unequally, rather than reverting to the normal 50:50 rule, and make a declaration to HMRC before 6 April 2025 if this is to have effect in the 2025-26 tax year. I ask those questions constructively, on behalf of the Chartered Institute of Taxation, and if the Exchequer Secretary is not able to answer them, of course I will take a written answer by way of letter following this sitting. In addition to the confirmation on those three points, I would be grateful if the Minister could provide reassurance that HMRC guidance has been specifically and sufficiently clear on these points, so that those affected are aware of the implications of the changes. It is important to remember that when the Government make changes and when we made changes, we were very conscious—I am sure he is too—that the public are aware. He should take all measures possible to ensure that people are aware of these changes, but I appreciate his guidance on what measures are being taken. Finally, on the case of joint ownership—

It is finally, because we are at 25 minutes past 11, and the Committee will now adjourn.

11:25:00