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KEY POINTS
- Impact of removing the requirement to buy an annuity.
- Annual allowance charge mitigation.
- Avoidance provision to prevent splitting of supplies.
- Encouraging investment in low carbon energy.
- Value of debate.
Tonnage tax and oil and gas tax fell under the Public Bill Committee’s scrutiny in its 12th sitting before it arrived at pensions, a hot topic in recent years, and one that has become increasingly complicated.
Clause 65 and Sch 16 ‘benefits under pension schemes’ amend part 5 of FA 2004 in relation to tax rules for pensions draw-down. They remove the requirement to buy an annuity by age 75 and repeal the alternatively secured pension rules.
Individuals will be able to leave their pension funds invested in a draw-down arrangement and make withdrawals throughout their retirement, subject to an annual cap.
The maximum withdrawal in most cases will be capped at 100% of the equivalent annuity that could have been bought with the fund value.
David Hanson (Labour) went on to explain that the maximum capped amount would ‘be determined at least every three years until the end of the year in which the individual reaches the age of 75’. Thereafter, reviews would be carried out annually.
However, pensioners who can show that they have a secure pension income for life of at least £20,000 a year would have unrestricted access.
He wanted to know how many pensioners have a guaranteed annual income of £20,000 and suggested that for pensioners with smaller benefits, they would be no better off than if they had had to buy an annuity.
Mr Hanson was also concerned that the proposal could be used to avoid inheritance tax.
Mark Hoban, Financial Secretary to the Treasury, said ‘removing the requirement to annuitise at the age of 75 will make the tax system simpler by avoiding unnecessarily restrictive and outdated rules’. It would also make the pensions tax regime fair and sustainable, and give pensioners flexibility.
Covering the inheritance tax aspect first, Mr Hoban said a single recovery charge on unused funds remaining on death of 55% would be imposed.
This would ensure that ‘there are no tax advantages for pension death benefits compared with other assets on which inheritance tax is payable’. In view of the recovery charge it seemed inappropriate to levy inheritance tax as well.
However, if the unused pension pot was used to provide a pension for a dependant, no recovery charge would be made.
With regard to take-up of the new measure, the government estimated that some 200,000 individuals currently in draw-down arrangements could benefit from not having to buy an annuity at age 75. Clause 65 and Sch 16 were agreed to.
More on pensions
The next issue was the annual allowance charge, clause 66 and Sch 17. These confirm that the charge is reduced from £255,000 a year to £50,000.
Mr Hanson asked how the government planned to address the ‘circumstances in which people in defined benefit schemes have a large deemed charge in a single year and are therefore hit by additional tax charges’.
He said people who had been in a defined benefit pension scheme for many years and had large salary increases would be particularly affected. Such individuals would ‘face complex choices about whether to accrue benefits and pay the tax, or not accrue benefits and face a much poorer retirement’. It was not only the wealthy who would be affected.
Mr Hoban said that the £50,000 limit ‘far exceeds average annual contributions’ and that the reduced allowance would only impact on those with ‘the highest levels of pension savings’.
He mentioned that the government had tabled five amendments which would make the legislation work as intended.
For example, the annual allowance charge operates by reference to pension savings made over a certain period and the bill had inadvertently provided for a period of 364 rather than 365 days. The amendment corrects that so that the period will be 12 months.
Other amendments related to taxpayers who have high annual allowance charges. Such charges can be met out of their pension savings, and if they choose to take this option, an offsetting adjustment is made by the scheme to reduce the individual’s pension savings to reflect the tax paid.
Under Sch 17 the amount of the adjustment is reflected in the valuation of the individual’s savings when determining their annual allowance charge in the year the adjustment is made. The amendments ‘address an imbalance in carrying out the adjustment between individuals in defined benefit or cash schemes and those in defined contribution schemes’.
As to the number of people likely to be affected by the reduced allowance, Mr Hoban expected individuals to ‘adapt their pensions saving behaviour’ to ensure their contributions stay under the allowance.
Mr Hanson was not fully satisfied by Mr Hoban’s reply and pressed for a vote, but this was negatived. The clause was ordered to stand part of the bill and the schedule was agreed to.
The committee moved on to clause 67 ‘lifetime allowance charge’. Mr Hanson brought up trivial commutation, saying this was possible under the old rules if a pension pot was less than 1% of the lifetime allowance.
The amount has been changed to £18,000, in light of the reduction in the lifetime allowance, but would not take effect until 2012/13 by which time inflation would have eroded its value. He suggested that, to take account of this, the amount be increased to £21,500.
Mr Hoban felt this was unnecessary given the relatively small amounts held in some individuals’ pension pots. However, the government would keep the lifetime trivial commutation limit under review. Mr Hanson pressed his amendment to a division, but it was negatived. The clause and Sch 18 were agreed.
Bank levy antics
Once again, the bank levy (Sch 19) fell to the attention of the committee and, once again, the opposition stated it was inadequate, although they supported it in principle.
However, as Mr Hoban said ‘mercifully’, this was not the occasion for a long discussion.
In the end, he proposed a series of amendments which would ensure ‘that the provisions will operate as intended and that the various transactions are within the netting provisions’.
The schedule was agreed to and the committee adjourned.
Other matters
The 13th sitting of the committee began with a look at some of the VAT provisions. With regard to clause 74 ‘zero rating: splitting of supplies’, Mr Hanson raised concerns concerning the EU and the impact on companies to which David Gauke, Exchequer Secretary to the Treasury, responded.
The clause closes a VAT avoidance scheme by removing zero rating from the supply of printed matter when it is supplied in connection with services and in circumstances in which the printed matter would not have been zero rated, had both been supplied by a single provider.
Mr Gauke said that only those engaged in artificial tax avoidance would be affected by the measure, and confirmed that no derogation needed to be agreed by the EU Commission.
He admitted that the rules relating to what constitutes a single supply can be complicated, but said the ‘underlying principle… is simple’. Two supplies would only be treated as a single supply if they were so closely linked as to form effectively a single economic supply that could only be split artificially.
Clause 74 was ordered to stand part of the bill.
Moving on to clause 78 ‘imported goods of low value’, Mr Hanson asked why the exemption had been set at £15 rather than £9. Mr Gauke noted that £9 was the lowest level available under EU law, but felt that setting it at £15 got the balance right.
The clause was ordered to stand part of the bill.
A lengthy debate ensued on clause 77 ‘supplies of commodities to be used in producing electricity’. This continued into the 14th and final debate.
In essence, members voiced concerns over the impact the measure would have on different industries and on people’s behaviour.
Justine Greening, Economic Secretary to the Treasury, explained that the measure was being introduced to encourage investment in low-carbon energy. From April 2013, businesses that make the final supply of fossil fuels to a generator that burns them to produce electricity would have to pay the relevant carbon price support rate. The rates would be set two years in advance to give certainty.
The clause was ordered to stand part of the bill.
The committee covered several more provisions, effectively rubber stamping them, until it reached new clause 3 ‘review of the bank levy’ tabled by Stella Creasey (Labour/Co-op).
At this point my heart sank, as I prepared to read through pages of more political point scoring, as indeed turned out to be the case. The inevitable consequence was that the clause was withdrawn.
The end
Next came the usual self-congratulatory, and singularly undeserved, comments on everyone’s contributions, with thanks to the various committee chairmen, officials from HMRC, the Treasury and other departments, the police and doorkeepers, as well as those serving on the committee .
So ended the Public Bill Committee’s debate of the Finance Bill, and thank goodness for that. Those of us hoping that the standard of debate might have been higher than it has been in recent years will have been sorely disappointed.
This year, the debates seem to have sunk to new lows, with participants frequently straying off the point (what were the various committee chairmen doing allowing that to happen?) and reverting to simple party politics.
This occurred most noticeably in two areas: whenever the bank levy or childcare were mentioned. As I noted in my first committee debate report, the bank levy merited some five hours of discussion, none of which covered new ground or really debated the bank levy at all.
It was all about the bankers, and the previous government’s tax on bankers’ bonuses, which Labour members conveniently seemed to have forgotten had been introduced by Alistair Darling as a one-off measure.
With regard to childcare, whenever this cropped up, even in relation to disguised remuneration, the debate turned to the loss of child benefit and child trust funds.
It could be said that as so much of the Finance Bill was pre-announced in December 2010, a lot of the necessary changes had been discussed and made before the bill reached the committee.
This was done with the blessing of many interested parties, including the relevant professional bodies, as it would provide more time to create legislation that is fit for purpose.
Whether this can be said of the disguised remuneration provisions, which were pointed out as being very complicated, is open to debate. However, in principle, more time for consultation is a good thing.
If that is the case, though, one wonders, what perhaps is the purpose of the Public Bill Committee debating the Finance Bill at all?
