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Mr. Flight: I welcome the Liberals' conversion to simpler and, by implication, lower taxes, given that one of the major causes of tax complexity is the overall rate of tax. I hope that they will not mind my saying that they are stealing our line. Earlier this evening, we heard a spirited speech from my hon. Friend the Member for Grantham and Stamford (Mr. Davies), who focused on the enormous complexity that has been introduced into our income tax system. The new clause would monitor that complexity and the cost to the private and public system, which is currently estimated to be £12 billion per annum. It would be useful if some specific measurement of the efficiency of specific taxes were included in the new clause--for example, ratios of collection costs to amount raised.
The Government's stance--that they are keen to simplify tax and have taken initiatives to do so--does not bear the light of day. Over the past two years, the Chancellor has introduced a substantial degree of complication into the tax system. Much of that has been done for headline spin, some has arisen from the mantra of more means testing, and some has been the result of the traditional and continuing Labour prejudice against people with capital, especially small capital. We have ended up with six different tax rates: the gimmick 10 per cent. rate, which does not apply to one's little bit of investment income; a 20 per cent. rate; a 23 per cent. rate; a 32.5 per
cent. top rate on dividend income for top-rate payers; a 40 per cent. rate; and a 44 per cent. rate for those who will be paying tax on the new child credit.
The working families tax credit will cost employers a fortune to administer. On pension contributions, I wonder whether Labour Members realise that there are six different proportions of income that are allowable against tax as contributions for two different scales and different types of pension arrangements, depending on age. I do not blame the Government for that situation because it existed when they came to power, but if any Government were to consider reforming pensions, simplifying the tax rules for pensions would be the most important starting point.
There is an element in the tax system of losing touch with ordinary citizens. It is not surprising that elderly people whose means are small complain of being harassed when they are sent tax forms that they do not understand. More and more people are being dragged into the detailed self-assessment tax net and have to deal with concepts and calculations that they simply do not understand. Their returns will be wrong; the fines will go up, and the Government will find that the quite unnecessary complications in the personal tax system become enormously unpopular.
Citizens want tax rules that they can understand and remember. They want to be able to work out, almost on the back of an envelope, what their tax liabilities will be. There is no reason why tax rules for the average citizen should not be that simple--they were that simple not long ago.
The hon. Member for Kingston and Surbiton (Mr. Davey) pointed out that small business, which is the great creator of new employment in our society, is also particularly hard-hit by the growing web of tax complications, as the Bath report has shown.
To return to my starting point, one of the big background problems for all Governments is the fact that tax avoidance measures inevitably complicate the tax system. This country should never forget the major difference between tax avoidance and tax evasion. In Germany, there is no legal difference between the two concepts. A central part of culture in the Anglo-Saxon world is the distinction between that which is within the law and that which is without the law. Naturally, all Governments want to stop tax avoidance. I might add that most citizens naturally do not want to pay any more tax than they are obliged to. However, I suggest that there is growing Government paranoia about tax avoidance, which is nowhere better illustrated than in the recent IR35 proposals, which are not in the Finance Bill but will be implemented in April 2000.
There are, no doubt, people who use companies to reduce their income tax and national insurance charges. However, as much of the evidence demonstrates, most of
those cases occur in genuine entrepreneurial situations. People set up a business to hire out their services, particularly in the software industry, and they do so through a company. If the Government's proposals remain as they are, they will be a major disincentive to individual entrepreneurship in the service sector. People will not be able to offset their costs; there will be huge hassle in qualifying as an exempt company; and the money that they are paid will have full tax and national insurance stopped out of it.
The proposals will cause huge problems for professional firms. Professional lawyers who second their staff to organisations such as the Financial Services Authority, which will not be able to function without those staff, will face problems. Those proposals emanate purely from the Government's understandable but narrow focus on tax avoidance and their lack of thought about the knock-on effects and injustice caused by many of the proposals.
The best antidote to tax avoidance must be a lower tax regime. In the low tax regimes of the world, it is not worth the possible legal costs to try to make clever cuts or avoid taxation. We on the Opposition Benches have not changed our clothes: we stand for simpler and lower taxation. We very much share the spirit of the Liberal Democrats' new clause, delighted that they are obviously looking to make friends with us, having perhaps been a little rebuffed by Labour. What the amendment recommends is absolutely in the spirit of what we as a party stand for and always have stood for.
Mr. Page:
It is not often that I welcome a Liberal Democrat amendment. I believe that it is the first time in 23 years; I do not rush these things. I congratulate the hon. Member for Kingston and Surbiton (Mr. Davey) on the new clause. It flags up problems that face any Government and the Inland Revenue. The point has been made--although obliquely, and perhaps not as intended. I am sorry that it is late and that it cannot be fully debated and allowed the gallop around the field that it deserves.
As matters of increasing complexity emerge in our taxation system, and as the Inland Revenue increasingly twists and turns and adds regulation on regulation to avoid the inevitable, the effect on small businesses will become intolerable. The hon. Member for Kingston and Surbiton mentioned the pressures on small businesses and the Bath report. Compliance costs are rising day by day, and small businesses are finding them an increasing burden to bear. I can quote some examples.
I know of a company that employs just over 100 people. It received a form from the Department of Trade and Industry the other day, which took the senior finance man four clear days to complete. If the company had not completed it, the panoply of law, pressure and fines would have descended on it. There must always be the temptation for those in small businesses to fill in any figure and send off the form, and then say, if ever checked, that they must have made a mistake. The person to whom I have referred was most conscientious; he did everything properly and filled the form in fully.
A company of more than 100 people can withstand such demands, but what is it like for a smaller firm, in which the finance man is required for the day-to-day handling of the company accounts? As time goes by, pressure on such smaller businesses will grow and grow.
It is no secret that I was hoping that new clauses 2 and 12, which deal with the IR35 question, would be selected for debate. My hon. Friend the Member for Grantham and Stamford (Mr. Davies) has touched on some of the problems that will result from that measure. Again, it will mean pressure on small businesses. Indeed, avoidance and perhaps even evasion may be brought about by the Inland Revenue's actions.
As night follows day, Inland Revenue solutions to tax avoidance often tend to throw the baby out with the bath water. I always find it sad that the Government, who are no doubt driven by their masters in the Inland Revenue, look more to traditional methods for the solution than to the future. I say that because I believe that we are on the edge of a trading revolution, at which new clause 11 hints. There will be huge consequences for tax raising, which may be somewhat similar to the way in which Gutenberg's invention of movable printing broke the vast powers of the Church some five centuries ago.
As hon. Members--I can see them looking at me--have instantly grasped, I am referring to the growth of internet trading. It would not surprise me to find that history repeats itself, with the Revenue trying to block certain internet activities, just as the Church tried to block the printing revolution that swept through Europe in the 15th century. You would correctly rule me out of order, Mr. Deputy Speaker, if I moved into the detail of how the Church's hold was greatly loosened--if not broken--at that time, although it would be fascinating and I know that Labour Members would love to hear it. However, it would be wrong for me to take that course. I merely point out that another major effect of the move away from handwriting to printing and publishing in quantity was to contribute to breaking the hold of Latin as a common language at that time. The IT revolution that is introducing the internet will be the reverse of that because it brings with it a common language--English, or perhaps I should say American.
The new clause provides for an analysis of the Budget which will mean an annual reassessment of everything included under the new clause--the costs of compliance and of tax raising and collection will have to be reviewed constantly. Such matters will not be dealt with once and then forgotten for five or 10 years; their consideration will have to be on-going.
The Government seem unaware of the tide of change that is sweeping towards traditional trading patterns. If they are aware of it, they will realise at the same time that their powers are strictly limited. Politicians want to police the internet--perhaps to stop pornography. However, the majority of those politicians do not realise that that is the least of the threats to the established order. The new clause focuses on the accelerating trend of change. Internet users can, and will, use encryptions to transmit electronic data that will be impossible for tax inspectors to read. At least, data will be readable only at vast expense by using an extremely large computer to crack some of those encryption codes. As such codes use large prime numbers, a vast amount of computer time will be needed to break down a relatively short message. That will be impractical for the state to do.
The new clause hints at an erosion of the tax base which will have severe consequences for Government revenues. To remove such controls from the Government will mean a move away from central provision to a situation in which individuals--not politicians--decide on
the state that they want. Individuals will make decisions in many spheres of activity by paying for those activities themselves rather than relying on their provision by the state. That will result in a marked reduction in what Harold Wilson called the social wage. Such a tendency will be driven by the erosion of tax bases caused by the encryption of trading on the internet.
If anyone thinks that I am dreaming, or that this is pie in the sky, I tell them that the process has already started. It applies easily to goods for which information can be encrypted and made immune from tax inspection--films, music, airline and theatre tickets, advice of any kind, books, magazines, holidays and even, perhaps, the activities of personal service companies. The IR35 changes may well help to drive companies towards exactly what I have described. If we add to that the mobility of companies--the ability to trade elsewhere in the world--then it will require a Government who are fleet of foot and of mind to stay on top of that pile. The provisions of the new clause point in that direction.
Nothing proves a point better than the practical example that people will migrate--physically or electronically--to the most favourable tax regime. The last part of the new clause makes exactly that point. It says that the Budget report should include an analysis of the effect of the Budget measures on
"progress on the simplification of tax administration for all taxpayers."
If that progress is not made, the taxpayer will migrate.
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