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Farmers Markets

Volume 576: debated on Wednesday 5 March 2014

Motion made, and Question proposed, That this House do now adjourn.—(Amber Rudd.)

I am very grateful to have the opportunity to bring the issue of tax arrangements for farmers markets that act in the community interest to the attention of the House, and, perhaps more important, to that of the Treasury. I welcome the Minister to his place.

Farmers markets are important not only in the country but in urban communities such as my constituency of Birmingham Northfield, too. They enable local people to offer local produce directly, create new opportunities for farmers and small businesses, and help our town and suburban centres to thrive. I understand that there are approximately 750 farmers markets in the UK. Some, not many, are registered as community interest companies, and two of those are located in Birmingham. Kings Norton farmers market is in my constituency. Moseley farmers market is in the constituency of my hon. Friend the Member for Birmingham, Hall Green (Mr Godsiff), who had hoped to be here today. Unfortunately, he is unable to attend, but he feels as seriously about this issue as I do.

The local Kings Norton farmers market in my constituency is a really important part of our local community. It hosts more than 25 producers from within 40 miles of the city, provides sustainable and fresh food directly, and brings local people together every month. Furthermore, the local residents who founded the market wanted to make a difference and to give any profits accrued to good causes and charitable projects in our area. For example, the farmers market has been supporting local and national charities, as well as donating to local parks, schools and nature reserves in the past few years.

As community interest companies, these farmers markets are liable to corporation tax like many other companies. However, until October last year both farmers markets had, in practice, been exempt from it. Kings Norton was regarded as “dormant”, meaning it had not had to file an annual return since 2009, and Moseley was given an exemption under extra statutory concession C4. In 2013, however, under the jurisdiction of a new tax office—it moved from Glasgow to Norwich—both exemptions were removed. That has resulted in considerable concern and anxiety about the market, as well as a significant amount of bureaucracy for local residents who are running the company out of charitable good will.

I am perfectly aware that we cannot simply exempt community interest companies from the tax system altogether. During my attempts to support my local farmers market, a number of solutions have been proposed to me by Her Majesty’s Revenue and Customs and others, but unfortunately none of them has proved suitable. Let me briefly explain the reasons for that to the Minister, in the hope that we can consider some further solutions.

One suggestion is that the farmers market could seek charitable status itself. That is obviously true, but such a move would make a small and voluntary operation—involving the hosting of a market only once a month—fairly complex. The market would struggle to manage the additional responsibilities and scrutiny that rightly accompany such status. Another suggestion is that, given the farmers market’s commitment to donating its profits to charitable causes, it could file its annual return including the contributions made, and receive a full deduction. That is the good news; however, not all money spent in the interests of the community will qualify for charitable deduction on a tax return. Furthermore, large community projects require significant sums of money.

Kings Norton farmers market has been accruing multiple surpluses over a number of financial years, and has had in mind projects on which to spend them. For instance, it thought of donating £5,000 to the cost of the provision of a disabled persons’ access ramp at St Nicolas’ Church, which is next to the site of the market on Kings Norton Green. However, those surpluses are now subject to annual corporation tax, and in order to avoid their accrual and a subsequent loss for the community, the market has decided only to fund projects requiring smaller donations.

I think it important for the Minister to recognise the practical impact of the loss of that exemption. Larger-scale projects such as the disabled persons’ access ramp that I mentioned—or a proposed new bandstand for one of our local parks—are no longer financially viable, and it is our community that is poorer as a result. At a time when institutions such as local government are so strapped for cash, initiatives such as farmers markets, and charitable and other donations in support of local communities, are more important than ever.

Let me now ask the Minister some questions. First, given the impact that the removal of the exemption from corporation tax is having on the market and on my community, I should like to know what triggered it. In practice, the exemption had existed since 2009, but it was suddenly withdrawn in October 2013. At that time, we heard the Minister say that the Government had invested

“nearly 1 billion in additional compliance initiatives”

during the current Parliament, and that HMRC was “on track” to deliver higher tax revenues as a result. Was there a link? Was clamping down on small community interest companies, which accrue surpluses of or below £5,000 a year, part of the attempt to address non-compliance? Is that really HMRC’s idea of seriously tackling tax avoidance?

I do not dispute the fact that clamping down on aggressive tax avoidance must be a priority for HMRC, which estimates that the annual amount of tax lost through non-payment and avoidance stood at an eye-watering £35 billion in 2012, up £1 billion from 2011. What I do dispute is the approach that is being taken.

The United Kingdom’s tax authority is clearly failing to crack down on tax avoidance where it matters. I am sure that the Minister is well aware of the concerns that surround its approach to targeting. HMRC has failed to challenge the aggressive tax avoidance of many multinational companies which receive all the benefits of operating in the UK, but do not necessarily pay back their fair share. We all know that multinational companies such as Google and Amazon are paying little or no corporation tax in our country, despite running very expensive and extensive operations here. Starbucks has reported taxable profit in the UK just once in 15 years, and Vodafone has recently revealed that it paid “little to no” corporation tax in the UK, and its direct tax payments dropped by nearly 20% from 2012-13.

Motion lapsed (Standing Order No. 9(3)).

Motion made, and Question proposed, That this House do no adjourn.—(Amber Rudd.)

As my right hon. Friend the Member for Barking (Margaret Hodge) has repeatedly argued, Her Majesty’s Revenue and Customs is not tackling this problem seriously enough and

“pursues tax owed by the smaller businesses but seems to lose its nerve when it comes to mounting prosecutions against multinational corporations.”

Further, at the same time as the farmers markets had their exemption removed, the Government decided to reduce the level of corporation tax on profits from overseas financing inside multinational companies to just 5%, which could actually be making tax avoidance easier for such firms. Is this not just yet another example of the Government’s skewed priorities when it comes to tackling tax evasion? It is important to address tax avoidance, but is it really the priority to address the issue of the tax of community interest companies that accrue small surpluses and want to invest them back in the local community? I hope that, in the light of these concerns and a rapidly increasing tax gap, the Government are actively looking at HMRC’s priorities and methods.

I also want to suggest how the Government could act in the interests of the small CICs that provide precisely the kind of local services and community support that the Prime Minister seemingly wanted to encourage when he was talking about the big society vision not so many years ago. Will the Minister consider the following options? Will he consider reviewing what is eligible for tax relief for community interest companies? Might he introduce some flexibility for small community interest companies, in terms of the surpluses they can accrue before having to pay corporation tax? Will he look into enabling CICs to accrue profits over more than a single financial year, as that might help? Might he also consider extending the corporation tax cut that the Government have given for overseas financing to multinationals to small community interest companies?

I hope the Minister will look into this issue seriously. Tax is always a complicated issue. I look forward to hearing his response because it is clear that it is not only tax avoidance and evasion which are the problem; the way in which tax collection and administration are managed and targeted needs to change. I hope the Government, who seem able to reform corporation tax to meet the needs of big business, will also consider what changes are needed to support small community interest companies that are providing vital local support.

The donations made by the farmers market I have been talking about are increasingly important in the context of unprecedented and devastating cuts to local government and services. Only yesterday Birmingham set its budget for the coming year. It has already had to save £375 million, and in the next financial year that will go up to £461 million. If the Prime Minister was serious when he said just a few years ago that he wanted to give people

“more power and control to improve their lives and communities”,

is it not right that he should be giving some practical support to CICs such as Kings Norton farmers market, which do precisely that?

In the light of the concerns I have raised, I hope that the Treasury will think seriously about how it uses fiscal policy to empower companies such as my local farmers market to act in the community interest.

The hon. Gentleman has outlined the case for local farmers markets and the benefits that accrue to the community through funding and assisting projects. That is an example of how farmers markets support the big society, which, as he said, the Government have decided to promote. Does he agree the Minister should look at these benefits for the community?

The hon. Gentleman makes an excellent point. We are dealing with a decision about priorities. This is not about the principle of whether or not people should pay tax—of course they should. It is not about whether tax avoidance should be clamped down on—of course it should. It is about priorities, and something is going radically wrong if the priority for HMRC is to mess up the surpluses accrued by institutions such as Kings Norton farmers market, which benefit the local community, while, apparently, finding it much easier to aid tax cuts for much bigger institutions. The priorities are wrong. I am sure the Minister understands what I am saying and I look forward to his response.

I congratulate the hon. Member for Birmingham, Northfield (Richard Burden) on securing this debate and putting his case so eloquently. I am sure he will appreciate that it is difficult for me to comment on the tax affairs of any specific community interest company, but I will do my best to provide answers on some of the general points that he has made.

It seems likely that the dormant status of the particular farmers markets in which the hon. Gentleman has expressed an interest has simply been subject to the usual periodic review that HMRC undertakes for all dormant companies. There has been no recent change of Government policy in respect of the taxation of CICs. As hon. Members may be aware, CICs were specifically designed to provide a legal framework and a brand identity for social enterprises that operate for the benefit of their community. As such, they provide an alternative to setting up a charity. Indeed, the major attraction of such companies is that they can be set up and operated in a manner significantly less regulated and more commercially focused than charities. The use of a CIC also ensures that the assets of the company are locked away for a public benefit purpose. Indeed, he touched on the differences between the regulation of charities and of CICs.

It is important to note that, unlike charities, CICs are not not-for-profit organisations. They do aim to make a profit, which can be distributed to the company’s owners or shareholders, or may be used to benefit the community. For that reason CICs are liable to corporation tax in the normal way. That is entirely consistent with the Government’s long-standing level playing field policy, whereby profits that arise from trading activity are subject to corporation tax, regardless of the nature of the entity undertaking the activity.

The thrust of what has been put forward for consideration relates to the difference between the taxes paid by a company and those paid by organisations such as the one that has been mentioned, which plough money back into the local community. Does the Minister not feel, as the hon. Member for Birmingham, Northfield (Richard Burden) and I do, that their situation is different? If the community is being regenerated, with opportunity and confidence created, is that not sufficient reason for doing away with the corporation tax because of the benefits that come to the community, which may lead to more jobs and other people paying tax?

Let me just elaborate on the point I was making and the reason we have a level playing field approach in this area. For example, a farmers market could operate in competition with other local businesses, and should not be given a competitive advantage over those other businesses purely by reason of being a CIC. A different regime is in place for charities, although one must bear in mind what applies in terms of trading there. CICs are under a different regulatory regime. They are, and have always been, chargeable to corporation tax on any trading profits, investment income or capital gains, but they are also able to take advantage of any corporation tax reliefs that are available.

HMRC treats some entities as dormant for corporation tax purposes when they are in fact active, but they must meet specific criteria to do so—for example, where a particular type of organisation has a corporation tax liability of £100 or lower. Rather than that being an exemption from the tax, this is an administrative issue based on a consideration of the costs that would be incurred through processing returns and collecting payments for such small amounts of tax.

As a general rule, a community interest company is unlikely to meet the specific criteria to be deemed to be dormant, but if the criteria were met, as appears to have been the case in the example given by the hon. Member for Birmingham, Northfield, HMRC would then review the matter periodically and decide whether to continue to treat the company as dormant or whether the company should start submitting tax returns. It should also be noted that the company itself is obliged to tell HMRC if its situation changes such that it is no longer within the criteria to be treated as dormant.

HMRC’s administrative discretion to depart from the strict statutory position is extremely limited. What we are talking about here, as far as I can tell, is essentially that a periodic review having been undertaken, an assessment was made that the farmers markets in question were liable to corporation tax. Although I accept the point that the great bulk of the tax gap that HMRC seeks to address will not be found from dealing with dormant companies or CICs, none the less it is appropriate that HMRC properly enforces the law, which we in Parliament have made, and ensures that companies or CICs are not treated as dormant when in fact they are not.

I am following what the Minister is saying. Clearly, the badge of “dormant” should not just be seen as a flag of convenience to be used at any time. If I am reading him right, is he saying that there could be some flexibility in the definition of what is dormant? The judgment about what is and is not dormant is an administrative matter rather than something that is laid down by regulation or statute. Therefore, HMRC would have the potential to exercise some discretion.

Where a company or a CIC is active, there are very limited circumstances in which HMRC would treat that entity as dormant. Specific criteria must apply, and as I say, it is unlikely that a CIC would meet those criteria. HMRC’s administrative discretion to depart from the strict statutory position is extremely limited. It is not within HMRC’s powers to treat all CICs as exempt from tax, as the law is quite clear that CICs are chargeable to corporation tax.

I should make a broader point. The hon. Gentleman asks whether this is a question of priorities, what the position would be with large companies and so on. We could have a much lengthier debate on that subject alone. However, during this Parliament, HMRC has collected £23 billion from larger businesses as a consequence of its compliance activity. That is significantly up on the record of previous years and demonstrates a determination by HMRC to address compliance by large companies. I do not want to be over-deflected to this, but many larger company issues relate to how international tax laws work. The UK continues to lead the way in encouraging the OECD and the G7, the G8 and the G20 to focus on that work internationally.

To return to CICs, I should like to take this opportunity to reaffirm that the Government are committed to encouraging social enterprise. A social investment road map was published at the beginning of the year and set out the Government’s plans to encourage people to invest in social enterprises, including CICs, particularly with the introduction of a social investment tax relief.

I assume that the farmers markets to which the hon. Gentleman refers will benefit from the employment allowance if they have employees. If they do not have employees but pay business rates, they will benefit from the policies announced in the autumn statement in that respect.

I am sorry if I have not provided the hon. Gentleman with the answers that he hoped for, but I hope that I have provided him with a little more clarity on the issue. Although it is difficult to talk about individual cases given taxpayer confidentiality, I hope that I have clearly set out the position in respect of CICs.

Question put and agreed to.

House adjourned.