Introduction and background
The Finance (No. 2) Bill completed its stages in the House of Commons on 2 February 2022. It was introduced in the House of Lords on 3 February 2022 and is due to have its second reading and all remaining stages on 22 February 2022.
The bill falls within the category known formally as “bills of aids and supplies”, in which “aids” refers to taxation and “supplies” refers to government expenditure. The House of Commons has a special role in such bills, known as ‘financial privilege’. This means, in practice, that only the Commons can initiate these bills and Lords consideration is limited. In particular, the House of Lords may not amend the bills. While the Lords will have a debate at second reading, later stages will go through formally, without debate. The House of Commons Library has published a briefing that explains in more detail the process of parliamentary scrutiny of the budget and the annual finance bill.
Although the budget deals with public spending as well as taxation, the procedure by which Parliament scrutinises and approves government expenditure is separate and is not discussed in this briefing.
October 2021 budget and parliamentary debates
The Chancellor of the Exchequer, Rishi Sunak, presented the autumn 2021 budget to the House of Commons on 27 October 2021. The subsequent debates on the budget took place over four days in the House of Commons and one day in the House of Lords. This briefing does not summarise the contents of the budget itself. These are covered in an earlier Lords Library briefing on the budget.
Consideration of the bill in the House of Commons
Following the autumn budget, the bill was introduced in the House of Commons on 2 November 2021 as the Finance (No. 2) Bill. The title reflects the fact that a previous Finance Bill, now the Finance Act 2021, has already been passed in the current session, giving effect to the tax measures contained in the spring 2021 budget.
The second reading debate in the House of Commons was held on 16 November 2021. Introducing the bill, the Financial Secretary to the Treasury, Lucy Frazer, highlighted measures including:
- Extending until March 2023 the temporary higher level of annual investment allowance on plant and machinery of £1m;
- Reducing the surcharge on bank profits from 8% to 3% from 1 April 2023 and increasing the threshold at which banks pay the surcharge. Ms Frazer said that, because of the increase in corporation tax taking effect on the same day, the overall corporation tax rate paid by banks will rise from 27% to 28%.
- Reforming the tonnage tax, a form of corporation tax paid by shipping companies.
- Extending tax relief on museum and gallery exhibitions until March 2024 and doubling the tax relief for theatres, orchestras, museums and galleries until April 2023.
- A new economic crime levy, payable by any entity regulated for anti-money laundering purposes, to help pay for government initiatives to tackle money laundering.
The opposition moved an amendment to decline to give the bill a second reading. This reflected the Labour Party’s opposition to the budget and its view that the bill does not deal with the rising costs of living or present an adequate plan for UK economic growth. The amendment was defeated by 310 votes to 238, a majority of 72. The second reading then passed by 314 votes to 233, a majority of 81.
Selected clauses from the bill were debated in a committee of the whole House on 1 December 2021. A public bill committee then considered the bill for a further five sittings between 14 December 2021 and 11 January 2022. This approach of considering what may be viewed as more important or controversial provisions in a committee of the whole House, followed by scrutiny of the remaining clauses in a public bill committee, is a standard approach to committee stage for finance bills in the Commons.
In the committee of the whole House, two amendments were moved by the Government and agreed without division. They were designed to ensure the correct functioning of existing ‘diverted profits’ tax legislation. This deals with companies that enter into “contrived arrangements” to divert profits out of the UK to avoid UK tax.
Labour and Scottish National Party amendments that were defeated on division included provisions to:
- Mandate a review of the new economic crime levy in 2027, and provide annual updates on progress towards establishing a register of overseas beneficial owners of UK property.
- Carry out a review of the measures in the bill that require HM Revenue and Customs (HMRC) to publish information on tax avoidance schemes. These are intended to help taxpayers avoid such schemes. The review would have been required to encompass HMRC’s approach to the loan charge scheme, which has been the subject of ongoing debate.
- Review the impact of the increased level of the annual investment allowance.
Two further sets of government amendments were agreed by the public bill committee, again without division. The first set were described as technical amendments to the new tax regime for qualifying asset-holding companies contained in the bill.
The second set related to the bill’s provisions that would require large businesses to notify HMRC if they adopt an “uncertain” tax treatment in their accounts. These amendments were designed to ensure the ‘trigger’ for notifying HMRC operates as intended, particularly in relationship to partnerships.
No other amendments were made at committee stage.
Report stage and third reading
At report stage on 2 February 2022, the Government put forward several further sets of amendments. The full list, with descriptions of each, can be found on the Government’s website.
Again, the Government described some of these amendments as technical; for example, to correct wording in the bill or to ensure the provisions reflect the policy intention.
The remaining groups of amendments are summarised below. The first link in each bullet point is to the Government’s explanatory notes.
- Introducing a new ‘public interest business protection tax’. This is designed to prevent energy company shareholders cashing out profitable energy contracts in a way that causes the company to collapse and leaves the Government and/or taxpayers with a loss. The new tax was announced on 28 January 2022; it did not feature in the autumn 2021 budget.
- Providing the Government with powers, via regulations, to vary the circumstances in which certain tax reliefs are available to businesses located in freeports.
- Ensuring that the new residential property developer tax introduced by the bill applies to those with a ‘build licence’, as well as to developers with a leasehold or freehold interest. (The ‘Residential Property Developer Tax’ page on the Government website contains further details on the tax.)
- Measures to address the shortage of HGV drivers. Specifically, to allow the Government, by regulations, to extend the period for which international HGV drivers can make additional deliveries within the UK (known as ‘cabotage’: see the Government website for further details).
- Changes to the transitional arrangements for traders in moving their tax calculation from accounting years to tax years, known as ‘basis period reform’. The Government states the changes will ensure traders can claim all reliefs due during the transitional period. The concept of basis period reform has been controversial in itself; see the below commentary on the bill by the House of Lords Economic Affairs Finance Bill Sub-Committee.
The Government also provided additional information and impact notes for the following areas:
- Public interest business protection tax: impact assessment and technical note.
- Freeport tax site reliefs.
- Power to introduce further temporary extension to road haulage cabotage.
All the Government amendments were agreed without division. Opposition amendments defeated on division included:
- a requirement to publish a review of the new economic crime levy;
- removing the part of the bill that would reduce the corporation tax surcharge on bank profits; and
- a requirement to assess the impact of the legislation on climate change and the UK’s plan to reach net zero by 2050.
Third reading in the Commons also took place on 2 February 2022. The bill was approved by 302 votes to 226, a majority of 76.
Parliamentary committee scrutiny
House of Lords Economic Affairs Finance Bill Sub-Committee
The House of Lords Economic Affairs Finance Bill Sub-Committee investigated two areas of the bill when it was in draft form: basis period reform; and the requirement for large businesses to notify HMRC if they adopt an uncertain tax treatment in their accounts. The committee published its report on 15 December 2021. The Government’s response was published on 1 February 2022.
On basis period reform, the committee concluded that, while it did not find a compelling case for the policy, it should not be “abandoned” now. It welcomed the Government undertaking further work to examine the impact on businesses that could be adversely affected by the change. It called for a further assessment of compliance costs and for additional support and guidance for affected businesses.
The committee also questioned whether basis period reform and parallel reforms in the Government’s Making Tax Digital (MTD) programme should be introduced together, and while businesses were still recovering from the pandemic. It called for MTD to be deferred until at least 2025/26 for businesses most affected by basis period reform; that is, those which do not have an accounting year that coincides with the tax year.
The Government’s response stated that the basis period reforms had already been amended in response to stakeholder feedback. It agreed to consider further the costs of the changes to business following additional engagement in 2022. It also said that it recognised the importance of communications with businesses and that the Government was currently considering the timing and format of these. However, it did not accept the recommendation to defer MTD until 2025/26 for businesses whose accounting year does not coincide with the tax year. The Government said it had already delayed basis period reform by a year and also delayed the introduction of various aspects of MTD. It also stated that only a “small population” of taxpayers was affected by basis period reform. It argued that delaying reform, as called for by the committee, would create unfairness between businesses with different accounting dates and could give rise to an unintended incentive to change those dates.
On notification of uncertain tax treatment, the committee argued that the case for this reform had “not been made”. It said that applying the policy to all large businesses was “unnecessary”, “counter-productive” and “not proportionate”. However, as the Government intended to proceed, the committee made a number of recommendations that it believed would improve the policy. These included:
- all affected businesses should have a contact in HMRC with whom to discuss uncertainties as they arise;
- HMRC must update its published guidance on an ongoing basis; and
- if, in future, HMRC wishes to add an additional notification trigger, it should first carry out a full review of the measure and if it is not then found to be delivering the expected benefits it should be repealed in its entirety.
The Government’s response committed to monitoring the effectiveness of the policy. The Government said it would consult over the coming months on introducing a third trigger. It also set out a range of ways it was providing support to affected businesses. These included ensuring businesses have access to either a customer compliance manager or an “equivalent” level of support through HMRC’s mid-sized business customer support team.
The committee also raised some issues with HMRC operations that it said were common to both measures. For example, it said the Government had not followed the recommended approach to consultation processes, leading to a “start—stop” approach to policymaking. It recommended that consultations on future policy changes that involve significant reform to the tax rules should set out the policy objectives and ask for feedback on options for achieving them. In addition, the committee said that HMRC did not appear fully to understand the impact of its proposals on companies, particularly small businesses.
Finally, the committee said it was “troubled” by reports of current service levels within HMRC. It called for an independent report into HMRC customer service levels. It said this should also cover HMRC’s capacity to implement changes, such as those resulting from the policies discussed above.
On these broader recommendations, the Government did not accept that all significant tax reforms should begin with a consultation on possible options for achieving a given policy objective. It said consultation formats could differ depending on the reason for the policy response. The Government also rejected the call for an independent inquiry into HMRC service levels, saying this was not required. It stated that HMRC already publishes its strategic plan and a set of metrics to measure success.
House of Commons Treasury Committee
On 27 January 2022, the House of Commons Treasury Committee published a report on the autumn 2021 budget and spending review. The committee discussed aspects of the budget such as: overall economic conditions, the spending review and the overall burden of tax; reforms to social care and universal credit; and the budget process. Apart from the new health and social care levy, it did not consider taxation measures in detail.
On the levy, the committee criticised the Government for announcing this outside a ‘fiscal event’ (a budget or spring statement). It said this meant Parliament was required to vote on the principles of the package of social care reforms, including the levy, without important information that would normally accompany tax or spending proposals. For example, the committee said there was no independent official estimate of the cost to government from the Office for Budget Responsibility and no distributional analysis.
The Government has not yet responded to the committee’s report.
- Explanatory Notes to the Finance (No. 2) Bill 2021–22
- House of Commons Library, ‘Autumn budget 2021 and Finance (No. 2) Bill 2021–22’, 3 February 2022; The Budget and the Annual Finance Bill, 27 January 2022; and Autumn 2021 Budget: Basis Period Reform, 5 January 2022
- House of Lords Library, ‘New powers for HMRC’, 28 May 2021
Press and commentary
- Chartered Institute of Taxation, ‘Finance Bill 2021–22 committee stage preview’, 30 November 2021
- Tanya Velling, ‘The new public interest business protection tax’, Tax Journal, 2 February 2022
- Jillian Ambrose, ‘New “super tax” to deter energy firm owners from gas profiteering’, Guardian, 1 February 2022
- Emily Gosden, ‘BP set for payout from its failed energy firm Pure Planet’, Times (£), 8 February 2022
This article was updated on 21 February 2022 following feedback from the House of Lords Economic Affairs Committee’s Finance Bill Sub-Committee.