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House of Commons Hansard
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General Committees
09 May 2018

Delegated Legislation Committee

Draft East Suffolk (Local GOvernment Changes) Order 2018 Draft East Suffolk (Modification of Boundary Change ENactments) Regulations 2018

The Committee consisted of the following Members:

Chair: Geraint Davies

† Burghart, Alex (Brentwood and Ongar) (Con)

† Clarke, Mr Simon (Middlesbrough South and East Cleveland) (Con)

† Elmore, Chris (Ogmore) (Lab)

Fitzpatrick, Jim (Poplar and Limehouse) (Lab)

Flint, Caroline (Don Valley) (Lab)

† Gwynne, Andrew (Denton and Reddish) (Lab)

† Morgan, Stephen (Portsmouth South) (Lab)

† Pearce, Teresa (Erith and Thamesmead) (Lab)

† Percy, Andrew (Brigg and Goole) (Con)

Phillips, Jess (Birmingham, Yardley) (Lab)

† Philp, Chris (Croydon South) (Con)

† Shelbrooke, Alec (Elmet and Rothwell) (Con)

† Skidmore, Chris (Kingswood) (Con)

† Sunak, Rishi (Parliamentary Under-Secretary of State for Housing, Communities and Local Government)

† Swire, Sir Hugo (East Devon) (Con)

† Tolhurst, Kelly (Rochester and Strood) (Con)

† Williams, Dr Paul (Stockton South) (Lab)

Jack Dent, Committee Clerk

† attended the Committee

The following also attended, pursuant to Standing Order No. 118(2):

Chope, Sir Christopher (Christchurch) (Con)

Fourth Delegated Legislation Committee

Wednesday 9 May 2018

[Geraint Davies in the Chair]

Draft East Suffolk (Local Government Changes) Order 2018

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I note that the hon. Member for Elmet and Rothwell has started to take his clothes off. If anyone else wishes to take their jacket off and so on, within reason I am very happy for you to do so.

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I beg to move,

That the Committee has considered the draft East Suffolk (Local Government Changes) Order 2018.

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With this it will be convenient to consider the draft East Suffolk (Modification of Boundary Change Enactments) Regulations 2018.

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It is a pleasure to serve under your chairmanship, Mr Davies.

The draft statutory instruments were laid before the House on 19 March. If approved and made, they will provide for the abolition on 1 April 2019 of Suffolk Coastal and Waveney districts, together with their councils. They will provide for the new East Suffolk district to cover the same geographic area and for a new council for that district.

The Government are committed to support local authorities that wish to combine to serve their communities better. We shall consider any locally led proposals for district mergers that are put forward by the councils concerned, and that improve local government and service delivery, create structures with a credible geography and command a good deal of local support.

I shall describe briefly the area that we are considering. East Suffolk is the home of a multi-million pound industry and household names including EDF Energy and BT’s information and communications technology global research and development centre. East Suffolk sits on the major trade route of the A14, linked to the port of Felixstowe. It also has a diverse and beautiful environment, with 49 miles of coastline. Lowestoft sits on the northernmost part of the Suffolk coast and is famous for being the most easterly town and the first place to see the sunrise in the United Kingdom. Home to two piers, an award-winning theme park, museums and a theatre that is home to the Royal Philharmonic Orchestra, the town is a firm favourite with visitors. Suffolk Coastal and Waveney District Councils cover the entire Suffolk coastline and share transport infrastructure that includes rail links, the A12, ports, market towns and beach resorts. Within the existing Suffolk Coastal district, Felixstowe is the largest and busiest container port in Britain.

The proposal that we are now considering re-creates the local government area of East Suffolk, which was originally created in 1888. Re-creating that area reflects the long shared history of its different parts. In local government terms, the two existing district councils have a history of shared service partnership, creating ongoing savings in excess of £20 million since 2010. Those savings will be safeguarded by implementing the merger proposal.

In proposing the merger, the two councils have undertaken an extensive engagement programme, actively engaging with residents and stakeholders from September to December last year. The programme included an independent and proportionally representative phone poll; a media campaign with press releases and promotional social media; information packs for town and parish councils; an open consultation via a dedicated webpage and an online survey to collect comments on the proposal; formal communications to all major stakeholders; presentations and talks at resident and business forums and public events; and finally a frequently asked questions document updated with commonly raised questions or concerns.

The independent phone poll commissioned to find out local residents’ views suggested that 72% of residents were in favour of the proposal to form a new single district council, once provided with further information on what the proposal would do. All the local institutional stakeholders such as the NHS, the county council, major business groups in Suffolk and all their neighbouring authorities were also in favour.

The councils submitted their joint proposal to merge their respective authorities to the Secretary of State for Communities and Local Government on 3 February 2017. The proposal set out that implementation of the merger would lead to a new district of East Suffolk with a population of almost 240,000 and would yield further savings of £2.2 million per year on top of the £20 million saved as a result of joint working since 2010.

On 7 November last year, the Secretary of State told the House that he was

“‘minded’ to implement the…proposal I received from Suffolk Coastal and Waveney district councils”.—[Official Report, 7 November 2017; Vol. 630, c. 48WS.]

There then followed a period for representations, until 8 January. The Secretary of State received a number of representations; in total, there were 20 in favour, one neutral and four against. None of the representations against the proposal raised points that had not been raised in the consultation undertaken by the local authorities.

I will add that those representations include five further representations beyond the 20 received during the representation period and referred to in the explanatory memorandum. I will arrange for the explanatory memorandum to be updated if Parliament approves the order and the order is made.

On the basis of the proposal, the representations and all other relevant information available, the Secretary of State was satisfied that the previously announced merger criteria had been met. Therefore, on 8 February this year, he announced his intention to lay before Parliament the necessary secondary legislation to implement the proposal.

Finally, Members might find it helpful if I touch briefly on the statutory framework. The draft East Suffolk (Modification of Boundary Change Enactments) Regulations 2018 vary the Local Government and Public Involvement in Health Act 2007 in its application to Suffolk Coastal and Waveney during the period from when the regulations come into force until 31 March 2020. The regulations are made under section 15 of the Cities and Local Government Devolution Act 2016 and provide that the Secretary of State may, by regulations subject to the affirmative resolution procedure, make provision about the structural and boundary arrangements in relation to local authorities, under part 1 of the 2007 Act.

I turn to the draft East Suffolk (Local Government Changes) Order 2018. If approved, it would be made under section 10 of the 2007 Act and would make provision for a series of things: abolishing the existing local government areas for Suffolk Coastal and Waveney; establishing a new district coterminous with the previous areas of Suffolk Coastal and Waveney, named East Suffolk; winding up and dissolving the district councils of Suffolk Coastal and Waveney and establishing a new council of East Suffolk; providing appropriate transitional arrangements, such as a shadow authority and shadow executive; and, finally, establishing in agreement with the councils any necessary electoral arrangements. The Boundary Commission sees no difficulty with the approach that we are taking, and it is expected to undertake a full electoral review to re-ward both new areas before the elections in May 2019.

In conclusion, in considering the two draft instruments, we are assessing the merits of merging Suffolk Coastal and Waveney District Councils to create East Suffolk District Council. In this instance, it is very clear that the two councils in East Suffolk have come together to work on a locally led proposal, which, if implemented, would improve local government service delivery in the area, command a good deal of local support, and ensure that the council area represents a credible geography.

The proposed new council of East Suffolk is widely supported, and both district councils have consented to the making of these instruments. I have full confidence in the local area to implement the district council merger by next April, to allow the good people of East Suffolk to elect their new council in May next year. On that basis, I commend the regulations and the order to the Committee.

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It is a pleasure to serve under your chairmanship, Mr Davies.

I start by thanking the Minister for setting out the proposals before us today. Local government reorganisations are often quite contentious issues. We often find that local populations are not in favour of local government reorganisations; more often than not, local councillors certainly are not in favour of them; and often in the past, Governments of all political persuasions have had to pursue local government reorganisations against the wishes of the elected members and the local populations. That has resulted in some very odd creations over the years, which have not always stood the test of time, whether that is Avon, Humberside or a number of other local authorities that have long since gone.

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In the 1974 local government reorganisation, the town of Wetherby was put into West Yorkshire. I was born in 1976, yet on the doorstep people still complain about not being in North Yorkshire.

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I absolutely sympathise with the hon. Gentleman. Of course, most of my constituency, being west of the River Tame and north of the River Mersey, is in the historic county of Lancashire. We are still very proud of our red rose associations, even though for the past 44 years we have been part of Greater Manchester. The little bit of my constituency on the other side of the Tame is of course still very proud of its Cheshire associations.

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rose—

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I will give way to the hon. Gentleman, because I used a swear word.

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I should make a point of order about whether the word “Humberside” is unparliamentary language—it should be. I do not want to join the fest of people with identity issues, but I can outdo both the hon. Gentleman and my hon. Friend the Member for Elmet and Rothwell. Half of the poor village of Eastoft used to be in the West Riding of Yorkshire and half used to be in Lincolnshire. It was then all put into Humberside, and then all taken out and put into Lincolnshire—and hon. Members think their areas have identity crises. That demonstrates why local government reform is always an absolute nightmare and the Government should steer clear of it.

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I am grateful to the hon. Gentleman. I was not sure whether “Humberside” or “Lancashire” was the swear word I had used. He makes an absolutely reasonable point that where we live and the community we identify with matters. It matters for local government purposes and it matters for the populations we seek to represent.

I pay tribute to all the elected members of the two district councils that we seek to abolish, Suffolk Coastal and Waveney. We do so not because they have done a bad job—quite the contrary—but because the two authorities have come up with cross-party consensus on a sensible proposal to create a new East Suffolk district council. As the Minister said, that new authority has its roots in an old administrative county created in 1888. There was an East Suffolk and a West Suffolk, and people there clearly have an affinity with those old identities. That and the history of shared service partnerships between the two existing district councils, which the Minister also referred to, will stand the new authority in good stead.

When we bring two or more councils together in a new arrangement, there are often rivalries within the new district. Going back to 1974, Tameside, which is one of my two local authorities, was named after the River Tame because the nine towns could not agree which was the most important. Of course, I argue that it is Denton, but the authority is not called Denton metropolitan borough, because everyone disagreed. The point is that there are close working arrangements in the area we are considering. Where such arrangements exist, we should embrace them and allow a locally led proposal to come forward.

I welcome the fact that the merger will save money and that that additional saving can be put back into local service provision. That is absolutely right. However, it would be remiss of me as the shadow Secretary of State not to remind the Minister that that is not new money but existing money. The councils concerned still face significant funding pressures, so I urge him—I know he is a listening chap—when he goes back to speak to his new boss, the new Secretary of State, to keep plugging away at the fact that local government needs an increase in general funding.

Let me end on the point that there is cross-party consensus on the proposal. Ray Herring, the Conservative leader of Suffolk Coastal Council, said in support of the reduction in councillors under the new authority:

“We’re a cost-effective, outward-going, new local authority and you don’t need the number of councillors as you did in the past.”

Mark Bee, the Conservative leader of Waveney Council, said:

“It’s good that it’s been cross-party. We’ve not always agreed, but we’ve at least allowed everyone to have their say.”

Sonia Barker, the Labour leader in Waveney, who voted for the proposed new ward map, said:

“This is about practicalities now and people must respond to the consultation.”

I echo those words and that support. As the Minister said, there is clearly support among the wider public for this change. Now let us make it happen.

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It is a pleasure to serve under your chairmanship, Mr Davies. I do not wish to detain the Committee for long. This was the portfolio dumped on me when I was a Communities and Local Government Minister, so the Minister has my absolute sympathy on this file—I remember how horrendous and awful it was and how I could not wait to offload it after the 2017 general election. He is lucky to have it, however, in his privileged position.

I want to talk briefly about the principles behind where the Department is in terms of future reform of local government and future devolution deals. I shall detain the Committee only for a couple of moments, but the proposal before us is important to my area as well as to the councils concerned.

I am not against reform of local government—far from it—and it is good to hear that councillors in many parts of the country agree that there is a need for reform in some places. Such reform, however, must always be by consent. From some of what I hear about the future of devolution deals or local government reform more generally, one of the things that worries me is what exactly is meant by “consent”. My concern is not only about the consent behind this decision but about where consent comes from.

Worrying comments have come out, perhaps from the Department, about the future of devolution in Yorkshire, for example. In my area, we have a great fear that it will be forced on us. That is relevant to the proposal we are discussing purely because the principle behind the decision we take today in terms of what counts as consent is the same as the principle that will be applied to future devolution.

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Order. May I ask the hon. Gentleman to direct his comments towards East Suffolk?

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Indeed. My question to the Minister is this: what exactly are the principles on which consent is determined? If it is simply on the basis of people who happen to be in leadership positions on local councils at the time, that may not be sufficient in other parts of the country when looking at devolution deals and other changes to local government.

Will the Minister assure us that the Department will at all times ensure the maximum and broadest support for changes to local government structures or devolution, not only for the councils we are discussing, but for the future of where the Department is going on local government? Will he give us that assurance without referencing Yorkshire—I am sure he will want to assure me that nothing will be forced on my area against the consent of the people of the East Riding of Yorkshire and North Lincolnshire—because the debate is in the context of East Suffolk?

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rose—

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I am very pleased to see that Sir Christopher Chope has joined us. You are not on the Committee, but I shall be very pleased to hear your words.

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Thank you very much, Mr Davies. It is a pleasure to serve under your chairmanship.

I have come along this afternoon so that I can ask a few questions, because this topic is very relevant in my area. I shall not draw on my area at the moment, save to say that a proposal will come before the House shortly for Christchurch Borough Council to be merged with Bournemouth and Poole Borough Councils into one new unitary authority, against the wishes of the people of Christchurch.

Putting that to one side, I am concerned that the Secondary Legislation Scrutiny Committee in the other place has reported on the draft statutory instruments but that we have not yet had any reference to that report. I hope hon. Members will indulge me and allow me to bring to their attention what that Committee had to say. It expressed concerns about the instruments and asked, as a result, for them to be brought to the special attention of the House. The issue centres on local consent or, as my hon. Friend the Member for Brigg and Goole said, consent itself.

The Lords Committee said that local support is deemed to have been accepted because a very large number of people abstained, but in the open consultation process in East Suffolk, 114 responses from the public were against the proposal and 17 were in favour. A recurring concern among objectors was that a single council covering a large geographic area would weaken local democracy, and that certain areas would be under-represented. In response, the Ministry said that

“following the consultation, a ‘myth-busting’ document was published on the councils’ shared website to address the principal concerns raised during the consultation process.”

The House of Lords Committee asked for additional information from the Ministry, and it is fair to say that it did not find that additional information satisfactory. In appendix 1 of the Secondary Legislation Scrutiny Committee report, it asked:

“Have the councils published a summary of consultation responses?”

The Ministry responded:

“The councils have published the results of the consultation, which can be found via the following link”.

The second question was:

“Have the councils offered any evidence that the ‘“myth-busting” document’ was widely read by local residents, in particular by any of the 114 members of the public who were against the proposals?”

The answer from the Ministry was:

“The myth-busting document was provided to all respondents to the original consultation who provided details for further contact to be made”—

in other words, it was probably not provided to very many. It continued:

“Therefore, though it may not have been provided to all individuals who objected, it would have been made directly available to those that expressed an interest in further information. It was also freely available on the East Suffolk website. In short, the councils made every effort to ensure the information was available. It may be the case that one of the impacts of the myth-busting document was to result in few people feeling the need to make representations during the period for representations, see below.”

The third question was a reference to the explanatory memorandum:

“‘After the Secretary of State announced his initial decision that he was minded to implement the proposal, there was a period for representations lasting from 7 November 2017 until 8 January 2018. 20 representations were received. Of these 17 were supportive of the proposal, one was neutral and two were opposed.’ The EM makes it clear that only 2 of these 17 responses were from members of the public. Have the councils offered an explanation for why so few members of the public responded at this second stage?”

The answer was:

“These representations did not form part of the council-run consultation but were submitted as a result of the opportunity provided by the Secretary of State to any interested party to send to him directly any representation regarding his initial minded-to decision to proceed with the merger. The Council did make clear locally that there was a period of representations by informing local stakeholders, parish councils and other interested parties directly. As mentioned above, it may be that the intensive distribution of the myth-busting document reduced the need to make representations at that point.”

The House of Lords Secondary Legislation Scrutiny Committee said that it was not convinced by that. Indeed, the means by which many of these orders are developed is by the Secretary of State not carrying out the consultation himself, which he is entitled to do under section 2 of the 2007 Act, but by relying on the councils to carry out that consultation. It has been made clear to me by officials in the Minister’s Department that the invitation for representations is a very different proposition from a formal consultation. A consultation is an active engagement by the Government with interested people, and an invitation to them to submit their reviews in response to consultation questions. To invite representations is a much more passive exercise. Unless people have it drawn specifically to their attention that they can make representations, they often fail to do so. The fact that so few representations were made following the Secretary of State’s “minded to” decision does not, in my submission, establish the consent that my hon. Friend the Member for Brigg and Goole made clear is an important part of such a change.

May I draw the Committee’s attention to one or two of the observations that were made in response to the original consultation, which was carried out by the parties to this proposal? People said that they did not like the idea of boundary changes about which they had not been invited to make any submission. There will be fewer councillors, which means that each will be more remote from local people than they are. Part of one of the statutory instruments is designed to enable the Boundary Commission to make changes to boundaries to reflect the reduced number of wards. I would be grateful if my hon. Friend the Minister told us whether the proposals to reduce the number of wards that are set out in that statutory instrument were the subject of proper public consultation. In my submission, they should have been. The effect of that instrument would be to give him retrospective authority to invite the Boundary Commission to make changes. Reading between the lines, it seems that a lot of those changes have already been made and, indeed, will be implemented by the second of the statutory instruments.

I have those concerns about the boundaries, but a lot of concern has also been expressed about the need for local people to be properly consulted. “Why,” they ask, “couldn’t we have had a local referendum?” I understand the strength of that argument. Councils may hold local referendums, which are the best and surest way of establishing whether there is genuine local consent for a proposition. My council in Christchurch held a local referendum following a “minded to” decision by the Secretary of State. On a 54% turnout, 84% of people were against the proposition. That just shows the extent and strength of interest that can be generated in a local community when there is a proper consultation and, as was suggested by some of the respondents in this case, a local referendum.

The difficulty arises when there are two councils that both wish to change but are not necessarily in tune with the wishes of many of the residents of their areas. That is why we legislators have an important responsibility not to allow these statutory instruments to go through on the nod, without proper scrutiny. We have a responsibility to speak not just for the elected councils but for the people who live in the area.

That point was made strongly by the House of Lords Secondary Legislation Scrutiny Committee, which states at paragraph 19 of its report:

“We would urge caution in deploying this argument”—

the argument that the councillors support the change. It adds that

“if the views of councillors are a sufficient indicator of local reactions, there would be no need for the programme of consultation and engagement described in the”

explanatory memorandum. It also states:

“Given the strength of concern about the proposal evidenced in the responses to the open consultation of 2016, we are also not convinced that the low level of responses to the late-2017 period for representations reflected widespread acceptance among local residents: it might equally well result from a sense that further objection was pointless.”

That attempt to pull the wool over the eyes of local residents by saying that further resistance is useless is something that many people in Dorset have seen first hand in recent months. That is another reason why we as legislators should be on the ball and alert to ensuring that democracy really does mean that we do not change the rules without proper consent.

In normal circumstances, it is not possible to abolish even a parish council without the consent of the parish councillors and the people living in that parish.

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Order. May I invite the hon. Gentleman to try to focus his comments on East Suffolk? I realise he is making some general principle points and that he has strong concern about Christchurch and Bournemouth, but I do not want a proxy conversation about that. If he could focus on East Suffolk, that would be appreciated.

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I was trying to do that, and I am sorry if I failed.

My last point was about the need for consent in relation to the powers being used to merge councils. Where there is consent, it can be a strong card. Indeed, that is why the Opposition support this measure. However, let us look at the consent of not just councils and councillors but the people whom they represent—the people who elect them. In that context, I was drawing an analogy for district councils. Under normal law, even a parish council cannot be abolished without the support not only of that council, but of the people who live in the parish. That is a potent point on which to end my short submission.

I hope hon. Members think carefully before they decide which way to vote. I also hope that they listen to what the Minister says in response to concerns expressed about boundary changes, and whether there has been sufficient consultation. Is the number of councillors, which will be significantly less than it is currently, right? Do people feel—we know they do from the representations of people from Lowestoft—that they will be under the cosh and taken for granted by those in the rest of the new local authority area?

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It has been wonderful to see hon. Members use the debate as an opportunity to display their extensive knowledge of local government restructuring, stretching back to the 1970s—some time before I was born—and to hear them emphasise and assert their strongly held regional identities. I gently say to my hon. Friend the Member for Elmet and Rothwell that, as a North Yorkshire MP, I appreciate why any community would feel sad about not being included in God’s own county—and, if I might say so, the best part of Yorkshire.

I thank the hon. Member for Denton and Reddish for his thoughtful and constructive comments. I appreciate his support. I will listen to what he says on local government funding and discuss it with the new Secretary of State. He will know that we may have some differences on that score, but I appreciate his commitment to local government in all of its aspects, and I enjoy our exchanges here and elsewhere.

I turn to my hon. Friend the Member for Brigg and Goole. When I first came into Parliament, I had the job of filling the shoes of the previous Member for Richmond, which was an impossibly tall order, and now I have perhaps the even bigger task of filling my hon. Friend’s shoes—so great was he in his job that it now has to be split between two Ministers. Unfortunately, I cannot fully answer his questions about devolution, as they come under the portfolio of the Under-Secretary of State for Housing, Communities and Local Government, my hon. Friend the Member for Rossendale and Darwen (Jake Berry), who I know will engage fully with him on them. However, on unitarisations and mergers, the criteria laid out by the previous Secretary of State last year in a written ministerial statement, and further emphasised since, refer to

“a good deal of local support”.—[Official Report, 7 November 2017; Vol. 630, c. 48WS.]

That is the test that the Secretary of State has to ensure is met, and he will judge each case on its merits. That is with regard to mergers and unitarisations, rather than devolutions, which I am sure the hon. Gentleman will pick up with my hon. Friend.

Turning finally to my hon. Friend the Member for Christchurch, it is a pleasure to see him after our discussion last week in the debate on West Suffolk. I will touch on the specific points that he made. Having debated the issue a couple of times with him, the Government simply do not agree with the view that there is not widespread local support for this merger.

As I laid out in my opening statement and then re-emphasised, an independently commissioned poll showed that 72% of local people supported the proposal. That was further supported by almost all locally elected representatives including Members of Parliament, the vast majority of councillors and all major stakeholders locally, including businesses, community groups, health trusts and chambers of commerce. On that point, we may have to agree to disagree.

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The Minister is not just disagreeing with me, he is disagreeing with the Secondary Legislation Scrutiny Committee of the other place, which drew the instrument to our attention on the grounds that there appeared to be “inadequacies” in the consultation processes.

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As my noble Friend Lord Bourne has said, we do not share the view of that Committee in reaching that conclusion. For the reasons that Lord Bourne and I have laid out, we think there is a substantial body of evidence to support the conclusion reached by the Secretary of State that there is considerable local support for these proposals. One test is clearly the extensive support from locally elected, democratically accountable councillors and Members of Parliament in East Suffolk.

Turning to my hon. Friend’s other point about democracy, I agree that people should feel that democracy is not too remote. He mentioned Lowestoft. I am pleased to tell him that, as a result of all the engagement that went on regarding the proposals we are considering today, new parishes have been created for Lowestoft and Alton. That was a result of the engagement that councils had with their communities, and was a response to their concerns. The creation of new parishes will ensure that the people in those communities have adequate representation.

On my hon. Friend’s point about warding and new boundary arrangements, there is a proposal to reduce the number of councillors by just over a third. That proposal was put forward by the councils themselves, which came to that number based on guidance from the Local Government Boundary Commission. Informal conversations have already been had with commission on the carrying out of a full re-warding should these statutory instruments be agreed to. As part of that process, there will be a full public consultation, as Members would expect from such a formal process.

In conclusion, I echo the comments made by the hon. Member for Denton and Reddish in paying tribute to all the councillors and bodies involved locally for the hard work they have put in over the past year to bring these plans to fruition. They are to be commended for their diligence, innovation and desire to serve their communities to the best of their ability. I hope hon. Members will join me in commending them by supporting these orders today.

Question put and agreed to.

Resolved,

That the Committee has considered the draft East Suffolk (Local Government Changes) Order 2018.

DRAFT EAST SUFFOLK (MODIFICATION OF BOUNDARY CHANGE ENACTMENTS) REGULATIONS 2018

Resolved,

That the Committee has considered the draft East Suffolk (Modification of Boundary Change Enactments) Regulations 2018. —(Rishi Sunak.)

Committee rose.

Draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018 Draft Double Taxation Relief (Switzerland) Order 2018 Draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018

The Committee consisted of the following Members:

Chair: Stewart Hosie

† Aldous, Peter (Waveney) (Con)

Blackman, Kirsty (Aberdeen North) (SNP)

Cooper, Rosie (West Lancashire) (Lab)

† Djanogly, Mr Jonathan (Huntingdon) (Con)

† Dodds, Anneliese (Oxford East) (Lab/Co-op)

† Ford, Vicky (Chelmsford) (Con)

† Lefroy, Jeremy (Stafford) (Con)

† Mackinlay, Craig (South Thanet) (Con)

McGovern, Alison (Wirral South) (Lab)

† Mann, Scott (North Cornwall) (Con)

† Morris, James (Halesowen and Rowley Regis) (Con)

† Rutley, David (Lord Commissioner of Her Majesty's Treasury)

Smith, Angela (Penistone and Stocksbridge) (Lab)

† Smith, Jeff (Manchester, Withington) (Lab)

† Stride, Mel (Financial Secretary to the Treasury)

† Walker, Thelma (Colne Valley) (Lab)

† Western, Matt (Warwick and Leamington) (Lab)

Mike Everett, Committee Clerk

† attended the Committee

Third Delegated Legislation Committee

Wednesday 9 May 2018

[Stewart Hosie in the Chair]

Draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018

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I beg to move,

That the Committee has considered the draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018.

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With this it will be convenient to consider the draft Double Taxation Relief (Switzerland) Order 2018 and the draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018.

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It is a pleasure to serve under your chairmanship again, Mr Hosie. The base erosion and profit shifting—BEPS—order brings into effect the multilateral convention to implement tax treaty-related measures to prevent base erosion and profit shifting, which is commonly and thankfully referred to simply as the multilateral instrument. The orders in respect to Switzerland and Uzbekistan amend our existing double taxation agreements with those countries. All the instruments bolster the UK’s network of international tax arrangements and deepen our commitment to avoiding double taxation while preventing tax evasion and avoidance.

Double taxation agreements—DTAs—are bilateral agreements between the UK and other countries that aim to ensure that profits, income and gains are taxed only once. They develop the UK’s economic relationship with other countries and vice versa. DTAs provide critical certainty for cross-border firms and enhance co-operation in tax matters to stimulate economic growth and prevent tax avoidance.

The OECD/G20 base erosion and profit shifting project recommends a number of changes to DTAs, including the introduction of minimum standards to prevent tax avoidance by those who abuse tax treaties, and measures to improve the resolution of tax disputes. In addition, it recommends action to prevent so-called hybrid mismatches and the avoidance of permanent establishment status.

To enable those enhancements to DTAs to be made as soon as possible, more than 100 countries in a group chaired by the UK drew up the multilateral instrument. The group adopted the text of the MLI in November 2016 and it has now been signed by 78 jurisdictions, including the UK. It is in the process of being ratified by those jurisdictions. Individual DTAs will be modified by the MLI only if both jurisdictions have signed it and have given notice that they wish the DTA to be covered by it. The UK intends the MLI to cover all our DTAs that are agreements under international law and that do not already include provisions that we want from the MLI.

Except in relation to certain minimum standards, parties implementing the MLI are also permitted to reserve against provisions. If either party to the DTA has reserved against an MLI provision, that provision cannot modify the DTA. Following consultation, the UK proposes to adopt those provisions that are a proportionate and effective defence against the abuse of tax treaties, in addition to the minimum standard provisions. We intend to reserve against provisions that have a disproportionate effect on commercial transactions or that are unnecessary in the light of other measures taken to address the misuse of the international tax framework.

At the time of signing the MLI, the UK submitted its list of reservations to the OECD, which was published on the OECD’s website. Some minor amendments to that list have also been published on gov.uk. Those amendments relate to bilateral arrangements that have been agreed since the submission of our original list of reservations.

To ensure complete clarity for taxpayers, HMRC will prepare consolidated versions of treaties showing how they have been modified by the MLI and will publish those in good time before the modifications take effect. Where possible, it is our intention to agree those texts with our treaty partners. The order ensures that the UK can use the MLI to implement our commitments under the BEPS project and that our DTAs contain robust and proportionate defences against tax avoidance to the benefit of the UK and our treaty partners.

Let me now turn to the other two orders, in respect of Switzerland and Uzbekistan. The Switzerland order amends our existing 1977 DTA. To give effect to DTAs, the Swiss Government transpose them directly into domestic law, so it is much more straightforward for them to amend their law by amending the existing DTA, rather than by adopting the MLI separately. As a result, we agreed with Switzerland to implement modifications that would have been made by the MLI through this order.

For Uzbekistan, the order implements many of the provisions available under the MLI, including minimum standards on preventing treaty abuse and improving dispute resolution. In addition, the order provides for a general update to the existing text to reflect changes to the OECD model tax treaty and the domestic laws of the UK and Uzbekistan. Importantly, the changes remove a barrier to UK companies claiming benefits in respect of dividends from Uzbekistan created by the introduction of a dividend exemption regime in the United Kingdom. That will enhance the investment climate for UK businesses in Uzbekistan, to the benefit of both countries.

The orders enhance our commitment to tackling international tax avoidance and evasion. They also strengthen the integrity of our network of DTAs and remove barriers to investment by UK businesses. I commend the orders to the Committee.

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I am grateful to you, Mr Hosie, for chairing today’s proceedings. I will focus my remarks on the MLI—I am grateful to the Minister for that shortening, for all our sakes—but I will also refer to the Swiss agreement in passing.

As the Minister rightly explained, the MLI is an innovative new way of effectively spreading, or leading to a convergence of, tax policy, developed by the OECD. Essentially, it is a set of different amendments to double tax agreements. All countries that have signed up to the MLI will implement all the amendments in all their double tax agreements, if the other country is also a signatory to the MLI.

As the Minister also explained, the OECD has promoted that approach to try to make all double tax treaties better at stopping base erosion and profit shifting. Given that Britain has a comparatively large number of double tax agreements—which are very varied in terms of how they prevent double taxation and, I would say, often facilitate double non-taxation—it appears sensible for the UK to adopt the MLI. As I noted in the discussion of the MLI in the Finance Bill Committee in January, it was encouraging to see the UK taking a leading role in defining and agreeing the MLI, marking—I would say—quite a contrast with its attempts to block international co-operation when it comes to improved transparency for trusts, for example.

None the less, three areas of the legislation raise significant concerns, all of which arise from a point I made on 16 January in the debate on the Finance Bill, when the UK’s adoption of the MLI was first mentioned in law. I expressed concern that we lacked sufficient information to understand why the Government had taken certain decisions, and not others, in relation to their implementation of the MLI. As the Minister explained very ably in his introductory remarks, countries that are adopting the MLI have a series of choices to make about how exactly they do so and which of its provisions they take on board.

Back in January, the Government did not provide much information about why certain choices had been made. We did not get a lot more information, to be honest, in the Minister’s otherwise illuminating introductory remarks. That is quite a big problem, because traditionally double tax treaties have often led to source countries in particular, which tend to be developing countries, being denied tax revenues, which then accrue to already profitable firms in richer countries—not necessarily even to the revenue of richer countries.

We need more information on three areas, and I hope that the Minister will be able to provide some. That is essential if we are properly to show that the Government are holding to the principle of policy coherence for development in more than just a rhetorical form.

My first question is, why did Britain decide to exclude some of its double tax agreements from the list of countries mentioned in its adoption document? As colleagues may know, when a country signs up to the MLI, it has to indicate the double tax agreements to which it will apply the MLI. The UK excluded double tax agreements with Austria, the Falklands, the Faroe Islands, Guernsey, the Isle of Man, Jersey, Switzerland and the United Arab Emirates.

The Minister explained why Switzerland is not included. Are there any other countries where DTAs are put into primary legislation or passed through national legislation? I would have thought there are quite a few, so that seems like a slightly peculiar explanation of why we have taken a different approach to Switzerland. Does the Swiss system have a unique approach to tax legislation? I did not know that it did. Perhaps the Minister could explain that, because otherwise we would expect to see a similar approach being adopted to lots of other countries. That does not seem to be the case.

Given that a number of the jurisdictions that I have mentioned have been referred to in investigations into tax avoidance and evasion, it seems rather peculiar that they are not included here. It would be interesting to hear what the Government’s reasoning was and whether the requirements of the MLI are likely to lead to amendments to the double tax agreements for those jurisdictions too. If they are, what is the timetable to do that?

There are a number of targeted anti-avoidance rules in the MLI that countries can choose to adopt, but our Government decided not to. In the explanation of the MLI that we had previously, it was stated that that was essentially because they were too stringent. The Government stated that

“the mechanical test introduced by those provisions”—

the excluded ones—

“could deny treaty benefits in circumstances that are not abusive and would not target any genuine avoidance structures more effectively than the PPT”,

which is the principal purpose test.

The Minister said that the provisions were excluded because it was believed that they would have a disproportionate effect on corporate transactions, or they would be otherwise unnecessary. I find that a rather peculiar assessment, as do a number of experts. The principal purpose test is a very wide test—it includes a lot of discretion. Often, it is quite difficult for tax authorities to use it without being challenged, and most authorities and experts agree that strict and tight rules are better, because they avoid such ambiguities.

It would be helpful to hear from the Minister why we did not adopt articles 8, 9, 10 and 14. They apply a minimum ownership threshold for reduced tax on dividends, which makes rules about capital gains from shares and entities owning immovable property more precise. Those articles apply an anti-abuse rule for permanent establishments situated in third jurisdictions, and prevent the splitting up of contracts where companies game the system and pretend, for example, that one building site is delivered through a whole bunch of different contracts, when really it is delivered by just one firm.

All those measures were designed to prevent the kind of abusive behaviour that is frequently adopted by firms trying to avoid tax, especially in developing countries, yet the British Government have decided not to adopt them. Incidentally, the other country that has done that is the Netherlands, which I do not think has a model that we should aspire to when it comes to policy coherence for development in tax practice.

We need illumination from the Government on the rules on permanent establishment. Indeed, the Minister referred to those in his introductory remarks. I am very confused about precisely where Government are when it comes to the taxation of digital companies and assessing where their permanent establishment is. In relation to this MLI, the Government decided they would not adopt article 12 on the artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies. That contrasts with two other policy positions from the Government, which themselves are contradictory.

We have a new position paper from the Government on corporate tax and the digital economy, which says that they want much more ambitious measures, which could be agreed as part of the overall EU package of change. But in April, at the informal ECOFIN meeting, the Chancellor seemed to suggest through a spokesperson that the UK would instead only aim in the long run for internationally agreed measures—in particular, only those that the United States would agree to. That could take a very long time because, as we know, the US is directly against any development in this area from the OECD and the EU.

It would be good for the Government to tell us what we will do. Will we take proactive action on permanent establishments, as with the Google tax? Will we co-ordinate that with the EU? Will we try to do that with the OECD? Will we wait for the US? Surely, we should be an example in this regard. It will be interesting to hear the Government’s assessment.

Finally, in contrast to previous areas that I just mentioned, where the UK Government should have opted in to certain measures but decided not to, it is very strange that the Government have opted in to so-called mandatory binding arbitration in their adoption of the MLI. That will mean that if a multinational taxpayer triggers a dispute with the UK’s interpretation of a treaty and the dispute is not resolved within two years, the ultimate decision about whether the UK or the multinational’s home country has the right to tax the income under dispute will be taken by a panel of tax professionals—not through ordinary routes.

There are many problems with adopting that procedure, and they are analogous to some of the concerns raised around the inclusion of investor-state dispute settlements in trade deals, which occasioned a lot of public debate. I am sure that all members of the Committee will have received a lot of correspondence from constituents on that matter. Why did the Government not provide an assessment of the impact of adopting mandatory binding arbitration on the extent to which our tax policy will be coherent with our development goals? I raised this issue in the Finance Bill Committee, and was grateful to the Minister for listening to me there, but we did not get that information before this statutory instrument came before the House, and we need it.

I am well aware that, as the Minister said during the Finance Bill Committee, countries have to agree to arbitration in their adoption of the MLI before it can be applied to them, but that does not detract from the fact that the resources available to developing countries, particularly very low-income countries, to devote to their case and to amassing the information that would need to be provided to those tax professionals are minuscule in comparison with those available to the sort of multinational companies that we might be talking about. It would be a David and Goliath-style contest, and I am very concerned that that would not comply with policy coherence for development.

Finally, it is unclear why the Government have failed to provide an indication of how Parliament will be able to scrutinise the operation of this mandatory binding arbitration. We have gone in the wrong direction on this—the Government have expressly adopted paragraph 23.5 of the MLI. That paragraph requires written agreement from companies and their advisers not to disclose any information they receive in the course of their proceedings, which goes further than the default, to try to prevent that information being publicised. It is not clear to me how that is consistent with ensuring appropriate scrutiny of tax policy by Parliament, which the Government have repeatedly told us they are committed to. It would be helpful if the Minister could explain why that decision was taken.

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I thank the hon. Member for Oxford East. It is not long since we jousted and debated, and it is good to be back doing exactly that. I welcome the overarching support for the MLI in her early remarks, particularly in respect of tax avoidance and the double taxation avoidance measures, although I understand that she has some issues around arbitration, which I will come to in a moment. I too have fond memories of clause 32 of the Finance Bill last year, which provided the powers under which the MLI is being brought forward for consideration.

The hon. Lady posed a large number of questions and I will attempt to answer as many as I can—I was busy thinking about the answers to some when the next two or three arrived in train, so if I do not cover everything, I would of course be very happy to take a representation from the hon. Lady after the Committee and look at them in more detail.

On advertising and the reservations that we might be seeking from the MLI, we have provided information on the OECD website and subsequent changes appeared on the gov.uk website, so the information is in the public domain. We will be required to provide that information to the OECD some four months before this measure comes into effect and it in turn will advertise the reserved elements that we decide on at that time.

The hon. Lady asked why we do not include all the DTAs. She is absolutely right that the UK has a large number—from memory, I think it is around 130—and about 121 will be potentially covered by this measure. The answer is that, in some cases, the DTAs largely conform to the changes that would be introduced were they to be subject to the MLI. In some cases, it is not necessary, as our treaty contains substantial provisions. Our first-time DTA with Colombia would be one example.

The hon. Lady asked whether Switzerland taking these tax changes directly into domestic law, rather than less efficiently through the MLI, was a unique circumstance. I believe that it is relatively unique—my officials have just nodded. It is something of an unusual situation. That is the reason that both countries have decided to approach the matter in this way.

The hon. Lady mentioned permanent establishments and various related issues, asking why we were reserving against those particular matters. The general response to that and like matters is that the Government do not believe that they would have any major material impact on what happens with the taxation of revenues from one country coming back into the United Kingdom. Of course, those measures would bring with them various administrative burdens on business, which the Government always seek to minimise where possible.

The hon. Lady raised the issue of consultation on digital taxation, slightly at a tangent to the matter at hand. I would welcome her intervention if I have misunderstood her, but I think she was referring to our consultation on the taxation of businesses making profits via digital platforms.

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I am grateful to the Minister for seeking clarification. The reason I mentioned it was that, with the adoption of the MLI, we have what many would view as quite a lax approach to defining permanent establishments, compared with article 12, if we had adopted that. However, in that consultation, the Government seemed to suggest a stricter approach. There seems to be a contradiction, which in itself is contradicted by what the Chancellor said at the informal ECOFIN—he seemed to say that we need to have US agreement before we can have stricter rules.

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I thank the hon. Lady for that clarification. I take this in two parts. These are different situations. When it comes to taxation of profits derived from digital platforms, be they social media, search engines or online marketplaces, the critical thing is to ensure that we tax the value that accrues to the interaction of consumers with those marketplaces. We are working with the OECD and the European Union, as the hon. Lady pointed out, to come up with an appropriate way to address that particular challenge of the current international taxation regime. As to the Chancellor’s remarks about whether we might go it alone or have to wait for America, I am not entirely sure that he said what was reported. That is the information I received, although I did notice those comments in the press, as did the hon. Lady.

We have debated mandatory arbitration before. The essential point is that, in order to enter into a DTA, both sides have to agree that it is an appropriate treaty to enter. Both sides have to be comfortable in the round with it. There is no circumstance in which the United Kingdom could therefore force a country against its will to enter into agreement with mandatory binding arbitration.

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Surely it would be helpful, given the differences in resource that could none the less be provided between developing and developed nations, for the Government to carry out that analysis into the use of mandatory binding arbitration, and whether it exemplifies policy clearance for development. It would be wonderful to hear a Treasury Minister say that the Government might consider adopting this and doing so explicitly.

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The Government’s view is that mandatory binding arbitration is a very useful element of these agreements. In the absence of that, the process undertaken might be ultimately inconclusive. In order to ensure that these agreements work efficiently, we believe there is great merit to that approach.

I lastly turn to parliamentary scrutiny. Matters reserved against will be for the Government to determine in time although, as I have indicated, we have already put out preliminary suggestions of what we will do. As time goes forward, this or any other Government may decide to remove some of those reserved powers. It is down to this Committee and this moment to take a decision on whether in the round all those possible changes are agreed to or not. On that basis, I urge that we move forward with the recommendations.

Question put and agreed to.

Resolved,

That the Committee has considered the draft Double Taxation Relief (Base Erosion and Profit Shifting) Order 2018.

DRAFT DOUBLE TAXATION RELIEF (SWITZERLAND) ORDER 2018

Resolved,

That the Committee has considered the draft Double Taxation (Switzerland) Order 2018.—(Mel Stride.)

DRAFT DOUBLE TAXATION RELIEF AND INTERNATIONAL TAX ENFORCEMENT (UZBEKISTAN) ORDER 2018

Resolved,

That the Committee has considered the draft Double Taxation Relief and International Tax Enforcement (Uzbekistan) Order 2018.—(Mel Stride.)

Committee rose.