Clause 18 - Deductions allowable at a fixed rate

Finance Bill – in a Public Bill Committee am 10:15 am ar 21 Mai 2013.

Danfonwch hysbysiad imi am ddadleuon fel hyn

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

Photo of David Crausby David Crausby Llafur, Bolton North East

With this it will be convenient to discuss that schedule 5 be the Fifth schedule to the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I would have thought that the Minister would have the good grace to introduce the provisions here; after all, they could affect hon. Members significantly if, for example, they make claims for mileage expenses with IPSA. Hon. Members will see in schedule 5 that the Minister made some interesting choices on their behalf—we should all declare an interest on those matters.

The schedule deals with deductions that are allowable for certain business expenses, predominantly in relation to using a vehicle for business journeys or a home office for business purposes. In paragraph 2, on page 185, the Minister elects that the appropriate mileage amount for vehicles used in business journeys is:

“45p for the first 10,000 miles” and 25p thereafter. For hon. Members who use motorcycles for that purpose, the rate is 24p per mile.

The Minister has also decided that he wants to set a rate for the use of a home for business purposes. The amount depends on how many hours are worked in that home office over a month, or part of a month. The table is a little confusing because it just lists an applicable amount, which I am assuming is deductible relief to be related to that particular month. Therefore, if 25 hours or more are worked, £10 is allowed; if 51 hours or more are worked, £18 is allowed and if 101 hours or more are worked, £26 is allowed. For other premises that are used both as a home and a business, I presume that, when a trade is actually taking place on those premises, the amounts would be more significant depending on the number of relevant occupants. It would be helpful if the Minister explained the figures in the table under schedule 5.

Simplicity is essential for small businesses, which is why it is important for there to be consistency in the rules set out under Budgets. We have had a few U-turns in recent years on certain provisions, but it is important to put some of the deduction systems on an even keel so that businesses can plan ahead. The Institute of Chartered Accountants in England and Wales asked a series of questions and expressed concern about schedule 5. It argues that the amount specified for deductions is too low and that the set rates need to be reviewed regularly to keep pace with inflation.

Government Members seem to be under the impression that, when most people fill up their tanks with petrol at petrol stations, they are all thanking the Chancellor for his decisions on fuel duty. However, in my experience, most people who fill up their tanks with petrol still think that it is a pretty expensive business and that running a vehicle is not a cheap endeavour, given that it is becoming quite expensive in not only fuel costs, but running and maintenance costs, and the other costs that are involved. The Minister needs to justify his 45p per mile relief and explain why that figure falls to 25p after 10,000 miles.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree

Given that the hon. Gentleman and all of us in Committee face enormous pressure from constituents on keeping the price of petrol low, can he congratulate the Government on ensuring that the price per litre is at least 10p lower than it would have been had Labour been in power?

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

As the Education Secretary knows, answering such hypothetical questions is probably impossible. I do not accept the premise of the hon. Gentleman’s claim that somehow such a position would have been the scenario today. In fact, he supported enthusiastically the increase in VAT to 20%, which resulted in an extra 3p on a litre of petrol or diesel, so he needs to be a little careful when he tells his constituents that they should be thanking him for the price of petrol, which is still considerable. It has risen a lot during the hon. Gentleman’s time in office.

Photo of Ben Gummer Ben Gummer Ceidwadwyr, Ipswich

The hon. Gentleman has clearly slept badly, given that he is being uncharacteristically churlish this morning, casting aspersions on the size of my hon. Friend the Minister’s grants and refusing at least to admit that the increase in the allowance for businesses is surely a good move. He abstained on the increase in VAT. He has also refused to admit that, at the previous election, he fought to re-enter Parliament on the basis of a fuel escalator, which would have left petrol prices 10p higher than they are now. I would have preferred a Conservative Member, but if there must be a Labour Member, I am glad that it is him, but at least he should admit that he got it wrong.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The hypothetical nature of the scenario that the hon. Gentleman paints is that there would have been no response to economic circumstances. Of course, under the previous Administration, there was a deferral or changes to the fuel duty arrangements. Government Members are not swivel-eyed this morning. That is such an insult—the Opposition would not dredge up that level of epithet against them; only their side would do that. However, they are out of touch with reality if they think that their constituents, while standing on the forecourt filling up, are thanking them, thinking, “Thank goodness the Chancellor is helping me with my fuel costs,” when those costs are as high as they have ever been.

Photo of Brooks Newmark Brooks Newmark Ceidwadwyr, Braintree 10:30, 21 Mai 2013

I have been enjoying this Finance Bill Committee enormously, but I have to make the observation that the hon. Gentleman’s 150% tax on bonuses, his uncosted VAT cut and his hypothetical cut in fuel duty show once again that Labour’s numbers do not add up.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I am hurt, actually. That is uncharacteristic of the hon. Gentleman. I do not accept his points. We have just seen the Minister spend £140 million of taxpayers’ money on the previous schedule. There might be justifications for that but it is interesting to see where revenues are being depleted. That was just in this morning’s sitting. The hon. Gentleman just voted against having a proper assessment of the effect on the taxpayer of some  of the proposals. It is the Opposition who are looking after taxpayers’ money—[ Laughter. ]—and Government Members do not like to hear it.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

They are in denial; they are certainly somewhere.

Schedule 5 has prompted concerns at the Institute of Chartered Accountants. There are anxieties that there should be only one rate for using a private car for business. For example, it thinks that the 45p level would be better if it were sustained and could be more easily aligned with universal credit rules, which are based on a monthly rather than annual usage. I would be grateful if the Minister explained how universal credit will be affected by the different arrangements for declaring those sums, given that we have universal credit systems based on a different time frame.

The ICAEW has also warned that minicab drivers, driving instructors and others whose businesses require extensive use of a car will be unfairly disadvantaged. Ministers have in some cases dispensed with their own in-house ministerial cars and are now using private hire vehicles on a regular basis. I would encourage private hire drivers who spend a lot of time with the Exchequer Secretary, for example, to bend his ear about this matter. When they are driving him from Gauke Towers in south-west Hertfordshire to the House, they will have about an hour to talk to him about that 45p per mile deduction that he is allowing. No doubt, he will explain at great length why the reduction to 25p after 10,000 miles is justified. Those private hire drivers will certainly want to raise that with him. This is one of the few Budget measures that could affect Ministers in that way.

I have some specific questions for the Minister on the schedule. New section 94H(4) of the Income Tax (Trading and Other Income) Act 2005, in paragraph 2 of the schedule, contains a table setting out the relevant number of hours worked from home by a person; but what of those persons working from home the nature of whose work requires them either to leave their home temporarily or to travel elsewhere during the work day? Will the Minister also explain whether the Government have considered the additional administrative burden on businesses of keeping track of how many hours people work from home or how many miles they travel? I know that there are existing arrangements for those under the current tax rules, but I do not know whether an assessment has ever been made of the administrative costs involved in keeping track of those things. Really, I am looking for justification for why the figures in the schedule have been chosen, and I would be grateful if the Minister could elaborate.

Photo of David Gauke David Gauke The Exchequer Secretary

As always, it is worth hearing the hon. Gentleman ask his questions first, giving him the opportunity to set out the contents of the clause and schedule. Clause 18 and schedule 5 make changes to introduce optional simplified expenses for all unincorporated businesses. As I outlined on clause 17 and schedule 4, in 2011, the Chancellor asked the Office of Tax Simplification to identify areas of the tax system that caused the most day-to-day complexity and uncertainty for small businesses. The Office of Tax Simplification  published its recommendations in February 2012. Its report indicated that many businesses do not understand what they are allowed to claim as a deduction against income when calculating their taxable profits, and fear that in areas where an element of judgment is needed HMRC may challenge them and charge extra tax and penalties. The report confirmed that business owners are trying to get their tax right, but certain types of expense claim seem to give more problems than others, for example, use of home for work and use of vehicles.

Businesses also suggested that the effort of keeping receipts and records for large numbers of small items of expenditure outweighed the potential tax saving. In response, the Government proposed in Budget 2012 the introduction of simplified expenses from April 2013, to reduce the administrative burden on businesses. Those proposals were consulted on last summer and again following the publication of draft legislation in December 2012. HMRC has also been undertaking user testing with small businesses to inform both the design and the implementation of the new rules.

Schedule 5 sets out that all unincorporated businesses and partnerships can use simplified expenses on an entirely optional basis. There are no receipt or turnover restrictions. The schedule introduces simplified rules for motoring expenses, for the costs of business use of a home and for personal use of business premises as a home. Those are areas where business and personal expenses can be most closely intertwined, making the calculation of actual business expenses particularly difficult and uncertain for businesses.

Schedule 5 sets out that businesses have the option of using a mileage rate to calculate expenses for vehicles used in the business. That covers all forms of motoring expense, including the purchase of a vehicle, maintenance and repairs, and daily running costs. Within the cash basis, the alternative is to claim a deduction for the full cost of purchasing a commercial vehicle, or capital allowances for a car, and to claim actual expenses when paid. Outside the cash basis, the alternative is to claim capital allowances on actual expenses when incurred. If a business has previously claimed capital allowances on a vehicle, the mileage rate cannot be used for that vehicle.

The schedule provides that businesses can have a deduction for using homes for business purposes, based on the number of hours spent working at home.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

I have a specific question—a genuine question—on what the Minister said about an individual who had claimed against a vehicle under the old regime not being able to claim under the new scheme for the same vehicle. I think he is saying that the arrangements would not be available until somebody bought a new vehicle. Is that right?

Photo of David Gauke David Gauke The Exchequer Secretary

I was going to deal with the various points raised by the hon. Gentleman at the end, but given that he has intervened on this particular point, it may be helpful if I explain why there are different rates for cars, because giving an answer may bring greater understanding of the policy behind that.

The rates of 45p for the first 10,000 miles and 25p thereafter are aligned to the rates for employees, so that there is consistency with what is happening elsewhere in the tax system. The two rates reflect the decreasing proportional capital costs included in motoring expenses as mileage increases. The mileage rate is an equivalent to running costs and capital expenditure. If a business has previously claimed capital allowances on a vehicle, it has already received tax relief for all of the appropriate part of the capital cost. It is that same principle that explains why there are different rates. I hope that clarifies that point.

The schedule provides that businesses can have a deduction for using a home for business purposes based on the number of hours spent working at home. Alternatively, businesses can continue to have a deduction based on the business-related proportion of actual expenses. The schedule also provides a simple method for calculating the private-use element of costs when a business premises is also used as a home, which is calculated according to the number of people living on the premises. Alternatively, a business can continue to calculate a proportional adjustment based on actual costs.

HMRC has consulted extensively on the proposals and the legislation and subsequently made some changes to the design of simplified expenses. There were two main areas of concern. First, the respondents argued that simplified expenses should be completely optional and distinct from the cash basis. That approach is introduced by clause 17 and schedule 4. Secondly, respondents also argued that the rates proposed were too low. The Government have considered the comments carefully and, for reasons of fairness, decided that the rates should continue to align with those for employees.

Whether they are appropriate will clearly vary according to circumstance, but many businesses will prefer the simplicity of claiming at an average rate rather than on actual cost. Now that the simplified expenses are optional, those businesses that want to base their calculations on actual costs are free to do so.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury)

The Minister makes an interesting point about the actual cost, but can he help the Committee by saying what would be the effect on HMRC if, for example, the rate were set at 50p? I am not suggesting that it should be, but I want to get a sense of the effect. Is there a ready reckoner or a sliding scale that shows what would happen were the Minister to set the rate at 46p, 47p or 48p a mile? Is there a cost per 1p of allowance? What is the method of adjusting for inflation? Does the Minister envisage a process for reviewing and updating the rate depending on the actual costs?

Photo of David Gauke David Gauke The Exchequer Secretary

I will perhaps return to the issue of costings in a moment, but on the rates that were the main thrust of the hon. Gentleman’s questions, the Government will review them at the same time as it reviews the rates for employees. Such matters are reviewed from time to time.

How have the amounts for private use of business premises been arrived at and how have the Government assured themselves that the amounts are fair? We based our figures on the most recent living costs and food survey, produced by the Economic and Social Data Service and published by the Office for National Statistics.  He asked whether the rates for business use of homes reflect the true costs; the rates are aligned to those in place for employees, and therefore reflect the average current additional costs. If a business operates in a way that might incur significantly increased costs for the business use of a home, it can always use actual expenditure instead of the simplified expenses regime.

As to the concern over whether it is more time-consuming and complex to keep a record of hours spent using a home for business purposes, I can tell the Committee that the research HMRC undertook indicates that the burden will not be unduly onerous. In addition, businesses might have records, such as appointment books or work diaries, that provide a ready source of the information required. It is worth stressing that the regime is optional and that all unincorporated businesses can use any or all of the simplified expenses. The purpose of the measure is to make life easier for businesses, so that they do not have to spend a great deal of time dealing with tax administration.

Universal credit has adopted the same mileage rates as those in schedule 5, but apportioned for the period for which a universal credit is made. I hope that provides clarification on the interaction with universal credit. The hon. Gentleman asked about a ready reckoner to show what would happen if the rate was 50p rather than 45p and so on. I do not have the numbers to hand, but I shall see what information I can provide. If there is anything I can shed light on, I will write to him. I hope that those answers provide clarification on the purpose behind clause 18, which I hope will stand part of the Bill.

Photo of Chris Leslie Chris Leslie Shadow Minister (Treasury) 10:45, 21 Mai 2013

I am glad that the Minister was able to elaborate on some of the points about schedule 5. He said that there will be reviews from time to time; I assume that that is an annual process as part of Finance Bill legislation. I think the public would like to know that the effects are being kept under review. A lot of people, small firms and others will be watching closely the amounts set for both mileage and the use of a home as an office, because they affect their livelihood and income. It is important that we, as a Committee, send the message that we are aware of the increased costs of living and of maintaining a home, particularly if an individual is juggling a business or is reliant on their car or business vehicle for their day-to-day work and business activities. It is important that Ministers recognise that costs are high and are getting higher and that the Treasury finds a way to support such individuals more effectively.

We need to find out the effect on the Exchequer of changes to the reliefs, so that we can assess properly whether it is possible to do more in certain circumstances to help affected individuals. I do not have any particular evidence to hand to contradict the sums that the Minister has elected to bring to the Committee. I am concerned that there is no device to reflect the actual costs of living with inflationary pressures; ideally, there would be and officials ought to look at that. In general, I think that simplifying the expenses arrangement is a good thing. Making things clearer removes some of the burdens  involved in collecting receipts and the arrangement of papers, so I do not wish to contest schedule 5 at this stage.

Question put and agreed to.

Clause 18 accordingly ordered to stand part of the Bill.

Schedule 5 agreed to.