Finance Bill

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The Paymaster General (Dawn Primarolo): I shall deal first with the style of the rewrite of section 96 of the Income and Corporation Taxes Act 1988. Hon. Members referred to the scheme that operates for farmers. Schedule 24 is written in the tax law rewrite style because it introduces the new scheme for creative artists, which has been widely welcomed by the Committee and by representative bodies. The rewrite arose out of the need to deal specifically with creative artists. The scheme that it succeeds was not well used, no doubt because of its complexity.

I hear what the hon. Member for West Dorset (Mr. Letwin) says when he asks why we did not rewrite the provisions for farmers, and the tax law rewrite project is examining that. However, we are simply replacing one scheme with another as opposed to an update—it would merely be a rewrite of what is working well for farmers. None the less, I am sure that we would all agree that the tax law rewrite style is vastly superior. I take the point about rewriting the scheme for farmers. We did not do that on this occasion, as will be appreciated by the hon. Members for West Dorset and for Torridge and West Devon (Mr. Burnett)—I can get the county, but I always hesitate over whether or not it is west, for which I apologise. We have been focusing on other issues; especially with regard to the difficulties farmers are experiencing with foot and mouth disease. This part of the Bill is not the place to deal with farmers' difficulties. I have listened carefully to the points made by hon. Members about what measures are necessary to assist farmers and I will certainly examine them.

The tapering is quite straightforward. The Chartered Institute of Taxation made a similar point—without the tapering a cliff-edge would be created between those entitled to averaging and those who are not. The same tapering rules are in use for farmers and have been used without difficulty, notwithstanding the points that the hon. Gentleman made about other difficulties that farmers are experiencing. Again, the Government are always prepared to examine arguments, but we were not persuaded on this occasion. None the less, I shall bear in mind the points made by the hon. Gentlemen.

On provisional claims, the hon. Gentlemen answered their points themselves, because averaging is a composite claim affecting two years, not just one. Therefore, to adjust liabilities on the second year on expectation—before the tax year was completed—would bring complications, if not unfair treatment, compared with other methods. The averaging principle, which we all agree is good, is therefore the right one to operate. The provision has been widely welcomed. It is narrow and specific in its application to creative artists, but, none the less, I shall consider again the points made by the hon. Gentlemen. On previous Finance Bill Committees on which I have served, Dr. Clark, you have that seen that I keep my word. When I promise to consider something again, I do so, and the Government would, of course, make the necessary judgments.

Mr. Burnett: I am extremely grateful to the Paymaster General for the points that she has made. I merely want to remind her that expectation of profits and losses is part and parcel of the self-assessment system.

Dawn Primarolo: I take the hon. Gentleman's point. I am trying to take a short cut through a debate on which we do not disagree. As I said, I shall look at some of the points made, but I must consider the balance across the tax system in terms of how other taxpayers are treated. Even though slightly different methods are used in different circumstances, it has the same result for all taxpayers. I acknowledge that the hon. Gentleman has made interesting and fair points, but I think that he will appreciate that they are not part of our current discussion. In good faith, I have taken his points on board.

Mr. Letwin: I am grateful to the Paymaster General for those comments. I know from experience that she means what she says in that regard.

First, I want to put on record a point about the taper. Although I do not regard it as deeply significant, perhaps the Paymaster General will reflect on it. It is perfectly true that the absence of a taper will create a cliff edge—that is evident to anybody. The general principle behind the Government's attitudes to a large number of tax and quasi-benefit tax credit issues is that they would like to avoid cliff edges. The Government, and, indeed, the Chancellor, are keen on relatively slow tapers. However, every taper has two features, and one appears here, alone, which is rather complicated. I do not want to over-stress the point with hyperbole—it is not the end of the world, and it is not that complicated—but it complicates a schedule that is otherwise blissfully simple. In the case of tax credits, the complexity multiplies manifold.

Secondly, by avoiding a cliff edge, tapers cause prolonged but reduced agony. I hope that the Government will reflect on the proposition that it is often better to have simplicity allied to a sudden 100 per cent. marginal rate applying over a tiny patch of terrain than, for example, the prolonged 55 per cent. withdrawal rate in relation to the working families tax credit, which stretches over a large terrain. That is a tiny example of the general phenomenon, and I do not want to claim, as it would be untrue, that artists are facing a massive disincentive in relation to this. However, the complexity is introduced even here. There is a general Inland Revenue or Treasury predisposition to avoid cliff edges. Somewhere in a permanent secretary's training book, it says, ``Avoid cliff edges''.

Dawn Primarolo: Fall off and be hurt.

Mr. Letwin: Yes. The manual should be rewritten to read, ``Seek cliff edges to avoid prolonged and complex tapers.''

Dawn Primarolo: The debate is extremely interesting. It concerns the hon. Gentleman's wider point, which is to ensure that balance, complicity and equity are proportionate. Some taxpayers may be sacrificed by ignoring the cliff edge on the basis that they make up a small number. That is interesting in terms of how a Government would approach the simplification of tax and it tends to cause tension in any debate about tax changes. I fully appreciate that it is the job of the Opposition to raise such points, however small the group that may be disadvantaged and we shall refer to that in later clauses.

I am looking forward to how the Opposition will approach the debate on equity and simplicity. None the less, the hon. Gentleman is not making a huge point. He does not want to go to the stake on the issue, and nor do I. I am grateful for his comments and I shall consider the matter again. He is right to say that we want to avoid cliff edges, when possible, but we must decide the point at which we say that, unfortunately, some people are subject to the best result, but that this is the best that we can come up with. That will vary in different debates, but the hon. Gentleman's general point is fair and I note what he said.

Question put and agreed to.

Schedule 24 agreed to.

Clauses 72 to 75 ordered to stand part of the Bill.

Clause 104 ordered to stand part of the Bill.

Clause 76

Taper relief: assets qualifying as business assets

Mr. Howard Flight (Arundel and South Downs): I beg to move amendment No. 34, in page 49, line 38, leave out `Those' and insert—

    `In subsection (7) of section 76 of the Finance Act 2000 for ``6th April 2000'' substitute ``6th April 1998''.

    (3) These'.

The Chairman: With this we may take amendment No. 35, in page 49, line 39, leave out `amendments made' and insert `provisions brought into effect'.

Mr. Flight: We welcome clause 76, in general, which extends business taper relief to non-trading companies because of the problems with the definition of trading companies and because greater moral worth is not necessarily attached to trading than to non-trading companies. I suggest gently that to be in accordance with the tax law rewrite, subsection (2) might be better read if it made reference to the dates on which the amendments would have effect rather than referring back to previous legislation.

Our amendments reflect that the extension still has the complexities of different dates between the start of taper relief and the start of business relief. Taper relief rules apply from April 1998, but the new rules on business assets came into force only in April 2000. The result is that many people who acquired assets before April 2000 on terms which then did not qualify for business asset taper, but which now do, have a less favourable as well as a different tax situation from those who acquired business assets after April 2000. In many cases, they may end up paying more capital gains tax, rather than less. The amendments seek to address and cure that problem and to get rid of the considerable tax complexity that results from the two different dates.

10 am

There is a view that it might be more satisfactory, in due course, to have a workable statutory definition of qualifying companies for the purpose of business assets. In addition, there are still investors who are not employees and those who hold more than 10 per cent. We would continue to argue for an amendment to the trading company definition that is based wholly or mainly on purpose, rather than on activities, as at present.

Dawn Primarolo: I remind the Committee of the policy background of the arrangements in the clause. Two principles govern access to the more generous business assets rate of capital gains tax taper relief. The first is to encourage desirable investment by compensating for risk in, for example, unlisted trading companies. The second is to encourage employees to align their interests, so to speak, with those of the company for which they work, through share ownership.

As the hon. Gentleman explained, the purpose of amendments Nos. 34 and 35 is to backdate to 6 April 1998 the benefits of the new definitions of business assets that were included in the Finance Act 2000 and, in particular, the benefits in clause 76. There are several reasons why I do not wish to do that: it would produce no increase in productivity or benefit to the economy; it relates to past behaviour; and it would be expensive, with substantial deadweight costs.

The changes that the Government made last year provided real and positive encouragement to entrepreneurial investment and greater employee share ownership. Our aim is to provide the right conditions to boost productive business activity. The amendment would not achieve that. It provides no encouragement for the future, but seeks instead to reward past activity. Therefore, the hon. Gentleman will not be surprised that I am not attracted to it.

The amendments would be extremely expensive. I am sure that the hon. Gentleman would agree that a cost of some £300 million during the next three years for activity that has already occurred would not be considered a good investment, by any stretch of the imagination. In my view, that expenditure would be wholly wrong. I understand the hon. Gentleman's argument, but the Government are not attracted to it.

In addition, the amendment would require us to revisit closed tax assessments and would direct money away from the new enterprise economy, rather than providing incentives for growth. Those are real problems. I think that the hon. Gentleman agrees with our changes, but wishes that we had made them last year, so that the benefit would have accrued over that time. I am sure, however, that he appreciates that it would not be—dare I use the word?—prudent to use £300 million to reward what has already happened. Therefore, if the hon. Gentleman presses the amendment to a vote, I ask the Committee to reject it.

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