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Mr. Mark Hoban (Fareham): I am delighted to be able to raise an issue that causes many people a great deal of concern. By way of introduction, I should admit that I am a chartered accountant. Many people may think that, as a result, the tax system is an open book to me, but it is not and therein lies the nub of the problem. The tax system has become sufficiently complicated that even people who are informed in financial matters find it difficult to understand.
There are several problems with a complex tax system. It allows the adviserslawyers and accountantsthe opportunity to examine the system of tax reliefs, breaks and allowances to minimise the tax bill for their clients, while those who cannot afford advisers feel a growing sense of suspicion and dissatisfaction as they cannot understand the linkage between the taxes announced by the Chancellor in the Budget and their tax bill. Another aspect of the raft of breaks, exemptions, credits and tapers, is that one man's tax break is another man's tax increase. Someone must pay for the tax breaks and the basic rate must increase to take that into account.
A complex tax system is inherently unstable for businesses, and I will give some examples later. The rate of change and the complexity of the tax system mean that it is hard for businesses to plan ahead and set up transactions in the knowledge that their tax treatment will remain unchanged for several years. The complexity of the tax system is also inherently unstable for the Treasury, because the linkages between taxes and the tax take become more complicated and it becomes harder to understand the effect of a downturn on tax revenues. A complex tax system is against the interests of both the taxpayers and the tax collectors, which is why I have raised this subject this morning and why I support simplification.
There are many examples of the complexity of the tax system. Capital gains tax was simplified in April 1998, but many issues arose from that alleged simplification. One example that has been put to me concerns the purchase of two parcels of shares, one before 5 April 1998 and one after. The treatment of the second parcel is relatively simple, especially when compared with that of the shares purchased before April 1998. If I wanted to sell the first parcel, I would have to work out the indexation of the base cost from the date of purchase to 5 April 1998 and I would be taxed on that. I would then have to assess the gain between 5 April 1998 and the date of sale and apply taper relief to that.
Unfortunately, the definition of some assets that are subject to capital gains tax has been changed in recent years. Some shares have been treated as non-business assets and then as business assets, and one must apportion the gain during that time. Those straightforward examples demonstrate why the capital gains tax calculations on relatively simple transactions, such as the sale of small packets of shares, are now beyond the ability of most taxpayers.
Complex taxes also have an impact on behaviour. In the Chancellor's first Budget in 1997, he moved away from a stamp duty regime of 1 per cent. on all transactions to a graduated tax: 1 per cent. up to
In the 2001 Budget, the Chancellor recognised the impact on property transactions in deprived areas by waiving the stamp duty on them. That fell foul of European Commission regulations, so he had to reduce the limit to £150,000. There are now four different rates of tax on transactions in deprived areas: 0 per cent., 1 per cent., 3 per cent. and 4 per cent. We are starting to see price points arising at those thresholds in the property market. The cost of moving between one band and another is significant. If one buys a property at £249,999, one pays stamp duty of only £2,500. If the price increases to just over £250,000, one pays £7,500. It is therefore not surprising that when one talks to estate agents about buying a property, there is much nudging and winking about how much the owners are prepared to sell the curtains for to ensure that the transaction falls below £250,000 and that stamp duty of only 1 per cent. is paid. Although we are considering stamp duty on residential property, we should not forget that that duty is applicable to commercial transactions, whether on the purchase of property or of goodwill. Such high stamp duties impose an additional transaction cost on businesses, but cash costs are not relieved in tax calculations until the asset is sold.
Another interesting aspect of stamp duty is how it has increased the Government's exposure to significant downturns in the value of houses or the volume of transactions in the property market. In 1997, the Government raised £900 million from stamp duty on property sales. In the most recent year for which figures are available, that figure was £3.4 billion. Under their revenue-raising powers, the Government have introduced more instability into their calculation of predicted tax revenues.
We could go on for hours and I have received suggestions of many examples of complex taxes. The Financial Secretary said yesterday that between 1 January 2000 and 1 January 2002 the Inland Revenue employed more than 2,000 additional full-time-equivalent staff. Under this Government, the number of basic rates of tax has increased from 15 to 38. The number of pages in "Tolley's"the bible for tax practitionershas increased by 30 per cent. from 2,559 in 1997 to a whopping 3,414 last year, even after the size of the typeface was reduced to accommodate all the legislation. In its response to the Finance Bill in 2000, the Institute of Chartered Accountants said:
A book by Peter Warburton and the noble Lord Saatchi, entitled "Poor People! Stop Paying Tax!" demonstrated another example of the complexity of the tax system. They proposed that the Government in effect collected 53 per cent. of tax revenues but then gave
The cost of payroll compliance falls disproportionately on small businesses. A business with between one and five employees faces payroll costs of £288 per employee, whereas the cost is only £5 per head for a large business employing, say, more than 5,000 employees. If one looks at the impact of stamp duty on business and at the payroll burdens, it seems the complexity and cost are discouraging job creationthe reverse of the Chancellor's intention. The Government are guilty of increasing the complexity of the tax system to unparalleled heights. Simple transactions are impossible. It is impossible for taxpayers to calculate the tax effects without consulting a tax adviser.
The complexity of the tax system is being exploited by advisers. For example, with inheritance tax, at the moment someone who gives their house to their child has to vacate it if they are not to pay tax on that transaction. However, if they have good tax advisers, they can construct a scheme whereby they give the property to their children but occupy it on licence, thus circumventing the constraints of the inheritance tax regime. That benefit is available only to those who can afford to pay expensive tax advisers.
The Government are committed to introducing a community investment tax credit, which would bring a credit of 25 per cent. of the value of the investment against income tax. I can imagine advisers up and down the country looking at ways to exploit that new relief. To try to ensure that advisers cannot take advantage of the tax credit, the Inland Revenue will draft complicated schemes to prohibit abuse. As a side effect, the scheme will be difficult to administer for those setting up the community finance development institutions, and it will be difficult to ensure that the schemes in which they invest comply with the rules.
The battle between tax advisers and the Inland Revenue is like a long rally in a tennis match, where both players bounce the ball backwards and forwardsthe ball being tax policyand the confused spectators, the taxpayers, try to understand what is happening and when the rally will conclude. The erosion of the tax base is also a consequence of that raft of breaks and regulations forcing up the basic rate. A simpler tax system will provide less incentive to advisers to find ways round the legislation, because there will be less incentive for them to save tax as the basic rate will be that much lower, reducing compliance costs both for taxpayers and for those in the Revenue who try to chase down these complex schemes.
Tax rates distort people's behaviour. I referred earlier to the community finance tax credit. An investor faced with two schemes with a similar pre-tax rate of return will obviously be swayed by the tax incentives put in front of him by the Chancellor when considering the post-tax return. Where one tries to direct behaviour, taxpayers may take sub-optimal investment decisions, which would not always be in the interests of the economy as a whole. One hears many more examples these days of tradesmen who wish their customers to buy materials themselves. That is done for the convenience of not the customer but the tradesman, who, by not having to invoice the customer for the materials and having a low turnover, can escape registration for value added tax. The complexity of the tax system and some of the incentives that are introduced into it distort behaviour.
The fourth consequence of a complex tax system is that the Chancellor can use it as a shield when raising taxes. The headline rates of income tax have not increased, yet the Chancellor has in successive Budgets abolished the married person's allowance and mortgage tax relief. The rates of national insurance for employees have not increased, but for three years from 1999 the upper earnings limit on national insurance contributions for employees increased by more than the rate of inflation.
The biggest example of a stealth tax and the disconnect between the tax and its impact on individuals was the abolition of tax credits on dividends paid to pension fundsa cost to pension funds of £5 billion per annum. Most lay people did not understand that that was a stealth tax increase. They are starting to pay the consequences of that change in tax treatment, as the cost of contributing to their pension funds increases or their benefits on retirement diminish. I wonder whether the decline in defined benefit schemes, which used to be a mainstay of pension provision in this country, resulted from the change in the tax treatment of dividends going into pension funds.
The complex tax system brings inherent instability for businesses. The frequent changes in the capital gains tax regime since its simplification in 1998 have caused a great deal of uncertainty among business men. They wonder whether to undertake transactions when their tax treatment is so uncertain and unclear. When the Chancellor proposed the reform of double tax relief, only the outcry from FTSE 100 companies forced him to change those policies. Sadly, where there has been no consultation with business or the tax profession, the
What are the remedies to the problem? In a debate in another place on a similar issue a couple of weeks ago, much emphasis was placed on the tax law rewrite project presided over by Lord Howe; the fruit of its labours can be seen in the Capital Allowances Act 2001. It takes existing legislation and codifies it so that tax practitioners can understand it. However, simply rewriting and revising tax legislation to make it more comprehensible is not enough to simplify the tax system. We need to ensure that the Government take policy decisions that will lead to a much simpler system.
My first proposal is for more widespread consultation on tax matters. All Chancellors like to pull rabbits out of hats on Budget daythat has been a tradition of Budgets since time immemorial. However, that desire may stand in the way of producing a stable and comprehensible tax system. Springing significant changes on business without consultation denies businesses the opportunity to influence legislation, with the resulting constant fine-tuning that we have seen on such matters as CGT. I suspect and hope that the tax system that emerges from the consultation on research and development that the Chancellor has announced will be much better and more stable than the regime for CGT. Consultation will promote far greater stability in the tax system.
My second proposal is to move to simpler Budgets. This Chancellor, perhaps more than any other, is a great believer in announcing a little on the day, which means that everyone comes away feeling that they have got something. However, when one looks at such initiatives more closely, they are of little real consequence to anyone. The example that sticks in my mindit is so dreadful that the Minister might say that it is apocryphalis the six free breakfasts a year for employees who cycle into work. Indeed, employers can claim tax relief for those breakfasts. That sounds so far-fetched that it is hardly credible, but it is one of the small initiatives announced by the Chancellor. We have said how much the volume of tax legislation has increased in recent years. Legislation for each of the small initiatives adds to that burden and prohibits proper parliamentary scrutiny of the Finance Bill. Better scrutiny will lead to reduced compliance costs and increased simplicity in the tax system; that simplicity will restore the clarity of the link between the state of the economy and the level of taxation.
My third proposed remedy is greater transparency in the tax system. I have already cited the benefits of sweeping away some of the 250 allowances, reliefs and tapers, which would bring about a much simpler and more transparent tax system that laymen could understand. It would help people link Budget announcements to their tax liability, which would be good for the integrity of the tax system and for taxpayers. However, it will put pressure on the Chancellor because a more transparent system will
In conclusion, the tax system is complex and the Chancellor has contributed hugely to its complexity. A simpler system would reduce the dead weight of compliance costs on taxpayers and collectors and would have a much more neutral effect on people's behaviour. Above all, a simpler system would enable taxpayers to hold the Government to account on their tax decisions in the Budget.
Lynne Jones (Birmingham, Selly Oak): I congratulate the hon. Member for Fareham (Mr. Hoban) on raising this important issue and I agree with his conclusion. A simplified system would also remove much of the fraud in the tax and benefits system at a stroke.
When I heard about the debate, I searched through my files to locate a copy of the Saatchi and Warburton document that the hon. Gentleman mentioned, but I did not anticipate having the opportunity to speak. Indeed, I dashed to Westminster Hall this morning because I thought that there would be far more interest in the debate among other hon. Members than there is. The level of interest is surprising. I thought that, as hon. Members had to complete their tax returns only recently, the issue would have been weighing on their minds more, but apparently not.
We owe thanks to Saatchi and Warburton for pointing out the complexity of the tax and benefits system. As I recall, it has provoked me to table at least one parliamentary question, a copy of which I also managed to find. The answer to that question was that, in the year 2000-01, 69 per cent. of employees earning less than a third of male median earnings paid tax. Sadly, that percentage had increased from 56 per cent. in 1997-98. It is ridiculous that people on such low earnings pay tax and are probably at the same time forced to claim means-tested benefits.
The document entitled "Poor People! Stop Paying Tax!" points out that the tax system collects a staggering 63 per cent. of GDP, and the citizen must then claim back 14 per cent. of GDP by navigating more than 250 allowances, reliefs, exemptions, credits, tapers, indexations, disregards and so on. In the process, we employ 80,000 civil servants to collect the taxes and 60,000 to pay the benefits, at huge administrative cost.
I agree with many of the proposals suggested by people who might be considered my political opponents, which is important, because some consensus on the tax and benefits system is desperately needed. In opposition, parties are fond of highlighting the existence and availability of stealth taxes, but in government, they enthusiastically use them. Perhaps instead those in opposition and those in government should think ahead to how we might behave when our roles are reversed and try to achieve a consensus.
Yesterday, we had a debate about pensions. Bills on tax credits and pensions credits are currently passing through Parliament. Both types of credit increase the complexity of the tax and benefits system, which is deeply worrying, because the extension of means-testing
I am glad that Lord Howe is involved in the tax rewrite project, but I agree with the hon. Member for Fareham that that is not sufficient. The system needs a radical overhaul, and I endorse the proposals made in the "Poor People! Stop Paying Tax!" document. A very large hike in the personal allowance is desperately needed, so that people can earn far more before they start paying tax. A £10,000 tax threshold is being advocated, which would be a radical change.
I have not done the sums, but the general principle of a large rise in the threshold, coupled with a simplification of the different income tax rates, is sound and reform is long overdue. Unfortunately, the Government have introduced greater complexity into tax bands. The 10 per cent. and 20 per cent. tax rates were merely a gimmick; it would have been better to put those resources into raising thresholds. We need to consolidate the various tax rates. We should have one basic rate, perhaps around 20 or 25 per cent., an upper rate that is higher than the present 40 per cent., and something in the middle, which would claw back the benefits from middle income earnersthe bonanza that they would otherwise receive from large increases in personal allowances.
The interplay of national insurance contributions is also relevant. The Chartered Institute of Taxation and other organisations believe that the kink in the systemwhereby between £29,900 and £34,000 the marginal tax rate for each extra pound drops from 32 per cent. to 22 per cent.could be reconciled by raising the upper earnings limit for national insurance in line with the threshold for the higher tax rate. From my political perspective, that would also mean an increase in the tax take from higher earnings. That is unlikely to achieve political consensus, but agreement across the political spectrum could be achieved on the general principles if only the Government were willing to sacrifice some of their sacred cows.
To achieve a more simplified system, we need to restore universal benefits and reduce means-testing. I commend the Chancellor for increasing child benefit, but wish that he had not introduced the additional complexity of the children's tax credit, which effectively takes us back to the position when child benefit was introduced. At that time, family allowances and personal tax allowances meant that higher taxpayers gained more than others for bringing up their children. I acknowledge that the new children's tax credit system is more redistributive, but it is complex. A simpler system might continue with universal child benefit and ensure that it adequately reflected the additional cost of bringing up children. The better-off, including MPs like myself who receive child benefit, would have the additional income recouped through a progressive tax system.
I make no apology for wholeheartedly supporting progressive taxation and for being against increasing taxes for poor people, who should be less reliant on means-tested benefits. Such benefits will always be with us, but should be for the exceptional cases rather than for average groups of people.
When child benefit was first introduced, it effectively rolled up a tax allowance into a universal benefita process for which there is more scope in future for other tax allowances. If a large increase in the personal allowance is the first step, the next step is a flat-rate benefit, otherwise known as a citizen's income. Again, the idea initially came from the right. It may have been proposed earlier, but to my knowledge the first suggestion was from Christopher Monckton, a researcher in Downing street in the late 1980s or early 1990s, when the Tories were in control. The idea may have a longer history than that.
Such a policy would draw people from both ends of the spectrum. It would maximise personal freedom and incentives to save. Every time that it is raised, people say that its time has not yet come. I disagree; in Ireland, for example, there are interesting debates on the subject. However, it may be a second step. As a first step, I plead with the Government to consider the direction that they have chosen and the complexity and amount of means-testing. In the future, 65 per cent. of pensioners will be subject to some kind of means-testing, and I doubt that that will be conducive to the Government's aim of increasing private savings. Surely, we can broadly unite around such principles. If there were the will, such changes could be introduced.
Mr. Michael Jack (Fylde): I congratulate my hon. Friend the Member for Fareham (Mr. Hoban) on securing the debate and on beginning what should be a much more widespread discussion. As the hon. Member for Birmingham, Selly Oak (Lynne Jones) said, it is restricted to a few aficionados at present.
As a former Treasury Minister, I share something in common with the Paymaster General. We have had to deal with the real complexities of the tax system in the form of the Finance Bill. If my hon. Friend the Member for Fareham thinks that everything that every Minister wants emerges in the Finance Bill, I can tell him that an enormous discard process restrains the well-meaning officials from the Inland Revenue who beaver away with a sometimes zealot-like commitment to ensure that money is raised in accordance with what they believe are the wishes of the Government of the day. Ministers must occasionally restrain their enthusiasm, however, and many non-starters in the budget process end up in the wastepaper bin.
My hon. Friend and the hon. Member for Birmingham, Selly Oak gave several cameo observations to illustrate where complexity abounds in the present tax system. If we are to discuss simplification, we must first define what we mean by a simplified tax system. The world is a complex place. If the Government of the day are to secure revenue through the major areas of taxpersonal, business and international taxationto pay the national bills, complex systems will be involved.
We must determine whether we wish to start removing bits of the tax architecture. My hon. Friend the Member for Fareham referred to problems with capital gains tax, for example. I agree with his comments about the Chancellor's fiddly approach to tax.
If we are to have an honest debate, we must start by asking what should stay and what should go, if that is our definition of a simplified tax system. If we do that, we must have a wider debate, which we have not had in this country. We have not discussed tax, as we are all frightened of it. The political parties shy away from discussing it. The Government try to shield themselves from the debate by saying that they will not raise the basic and higher rates of tax. A great shield is held up against anyone who says that Labour is a tax-raising party. The Government, like every other Government, have been forced into raising revenue, however, and many things go on behind the scenes that we define as stealth taxes.
At the end of the day, we are avoiding the debate about what it is legitimate to tax. Our tax system has grown out of building on history; it is not an accident of history. Before the present range of income taxes, many capital taxes were invented: stamp duty, inheritance tax and so on. The world has moved on, but we have not discussed whether it is sensible to tax people's inheritance or to use stamp duty. The current Chancellor has found that stamp duty is a nice littler earner and the dog that does not bite. By putting in a little complexity here and a tweak there, we get a few more billions out of the tax system. Politically, I see the attractiveness of that.
A second way to simplify the tax system is to be honest enough in the 21st century to stop and ask what we are taxing. Are these the right ways for the Government to derive their revenue? We should go back one stage further and debate how much tax it is sensible for a modern economy to contribute as a percentage of gross domestic product. We seldom start the debate about tax from the size of the cake and then ask how we raise it. Instead, Governments have built on the substructure of the tax system that they have inherited from the previous Government. Usually, we add to it, but occasionally we take pieces away. If we are going to talk about simplification, we need to have a fundamental discussion about the purpose and architecture of the tax system. Otherwise, we will end up fiddling.
The Finance Bill is a fiddler's charter. Along the conveyor belt of Budget starters come individual measures, which are perfectly justified and formed in their own way, to tell the Minister of the day what needs to be done. The Paymaster General will have experienced that in her early days, as I did. The Minister, however, never saw the big picturewhat he or she was bolting in or taking out of the tax systemor the added complexity until the tax law rewrite exercise brought forth its first product, the Capital Allowances Act 2001. We suddenly had the book on capital allowances, which was remarkably clear, and we could read it for the first time from beginning to end. The story unfolded. The previous system grew like Topsy. No one could
The rewrite exercise opened an important window on the operation of the tax system. I am glad that the process was begun when I was Financial Secretary and I pay tribute to the present Paymaster General for taking on the exercise. I just wish that she would increase the resources that are available to it, especially with regard to the drafting of the parliamentary counsel, so that the process can be speeded up. As my hon. Friend the Member for Fareham pointed out, the exercise is starting to tease out where improvements could be made. Excellent officials in the Inland Revenue have identified some of them.
The exercise could be a way of refining current law, rather than changing it, especially with regard to schedule E and earned income, but it needs to go further. The Government should not be frightened of having the debate to which I referred.
My hon. Friend pointed out the need for greater consultationan ocean of consultation takes place on the mechanics of the tax system. All sorts of representative bodies spend half their lives whizzing in and out of Somerset house talking to Revenue officials. The problem is that we have not had that discussion about the tax system. If the Paymaster General was feeling brave, why did she not set up a group of interested parties to examine simplification? I would have volunteered my services to help in that task, for what they are worth.
I have met with many representative bodies, including the Institute of Chartered Accountants in England and Wales, the chambers of commerce, the Confederation of British Industry and the Chartered Institute of Taxation. I have told them all that if they want to talk about simplified tax, they should produce some. So far, they have not produced one piece. They have returned to the need for better written tax lawtax law that is more easily understandable and has fewer bells, knobs and whistles on it. If a cleaning up of the tax system is what we mean, that is fine and we should agree with that as a definition.
My hon. Friend the Member for Fareham mentioned one or two examples where the Chancellor has indulged in additional complexity. My position on tapers in the capital gains tax regime is well known. I thought that the taper system was wrong because it made an artificial distinction between long and short-term capital movements. We lack any form of economic appraisal to determine who is right about that. Will the new proposals do what the Chancellor of the day says that they will do?
When Ministers receive tax proposals, they get a generalised statement of their likely impact, but we do not. One classic example, which I raised during the Finance Bill proceedings last year, concerns the reduction in VAT on children's car seats. The Red Book included a series of vaguely connected sentences in justification of the tax. It gave the impression that reducing the VAT on car seats would cut the numbers of children who are tragically killed on our roads by inducing people to buy better seats that provide better protection for children. However, a helpful official at the Department for Transport, Local Government and the
The Paymaster General (Dawn Primarolo) : The right hon. Gentleman knows about that matter as it was dealt with in the Standing Committee. The Government simultaneously increased the grant funding to the Department for Transport, Local Government and the Regions to deal with pedestrian accidents. He can check the record, but I am sure that he will remember that the figures were given to him at the time.
Mr. Jack : The hon. Lady shows sensitivity about the matter in rising to intervene. I will not rerun those debates, but the question was a good way of illustrating that we do not know whether adding yet another element to the tax system was effective. It is the same with capital gains tax. We have no economic analysis to tell us in capital terms whether tapered tax has had a better impact on industry than the previous system of CGT or having no taper at all. My hon. Friend the Member for Fareham mentioned stamp duty and we do not know its impact on property transactions. We do not know whether a cliff edge or a tapered version of stamp duty is the way forward. There are an awful lot of don't knows.
The complexity of our tax system is partly due to avoidance. The hon. Member for Birmingham, Selly Oak touched on that and painted a picture of a pure world in which people would read the words of tax legislation and follow them exactly. I am sure that the Paymaster General will know of many examples of when clever people have read the words. I remember some gentlemen from Close Brothers getting terribly upset when I told them that they could not have a £55,000 personal equity plan. They had read the PEP legislation, thought "What a whizzo idea", bought £6,000 worth of PEPs, parachuted into them the income from £49,000 of an interest-earning asset and set the return so that no capital gains could be levied. It was a wonderful return and a fantastic way of investing, but it blew a hole a mile wide in what the PEP legislation was all about and had to be stopped.
The banks and insurance companies then came up with a whizzo wheeze on life assurance policies, which put at risk £750 million of tax revenue. The famous Glaxo case on transfer pricinga dimension of international taxationput at risk a further £600 million of tax revenue. So, any decent Financial Secretary or Paymaster General who is seeking to safeguard the public purse will always have to block up such holes in the tax system.
During the lifetime of the present Government, the need for general avoidance legislationan all-encompassing super sentence that would stop it allhas been debated but they have rightly drawn back from that. Avoidance is an intellectual battle between clever people who examine tax law and try to interpret it in certain ways. That is the problem. Tax is not scientific; it is a best endeavour to raise money. The ways in which people get round tax legislation illustrate why tax law is
Mr. Edward Davey (Kingston and Surbiton): Will the right hon. Gentleman say a little more about why he is against general anti-avoidance provisions? The Ramsey test case helped considerably, but subsequent cases blew it apart and we ended up in the position that the right hon. Gentleman described. Could not the Government by statute return us at least to a Ramsey-type position and perhaps even better?
Mr. Jack : I said that tax is a set of words open to interpretation and the same would apply to general anti-avoidance provisions. Perhaps someone could provide a set of words to do the job effectively, but I have yet to see it and I remain to be convinced. I was illustrating how a vast amount of tax complexity is due to plugging avoidance holes.
The Chancellor has a tendency to fiddle with many little micro-measures. Research and development tax credits are a classic example. We have no idea what the effect will be. Until we can achieve some economic appraisal of these measures, the tax system will be an open door to fiddling, adding on small measures and providing a sense of well-being to whatever group has achieved something from the Budget. Greater complexity arises for questionable effects.
The hon. Member for Birmingham, Selly Oak referred to playing tunes with the tax system. When I was in the Treasury, I recall one of its officials saying, "Ministers, you can achieve the Conservative promise of a basic tax rate of 20 per cent."no 10 per cent. from us, I hasten to add"even though we are short of revenue". I thought that it was fantastic and wondered where they kept the Harry Potter magic wand. It meant moving allowances, changing national insurance measures, reforming rates here and there. I realised that it was possible to have umpteen variations on the theme and that the machine would continue to turn out money. What was the objective? That was the key point.
The hon. Lady also mentioned flat tax and advocated simple tax systems, with simple rates and allowancesgreat! Starting with a clean sheet, such a system might develop. I refer hon. Members back about seven years to parliamentary questions put by the then Member for Carshalton and Wallington, Nigel Forman, who wrote a good pamphlet on this subject. The answers showed the winners and losers under the arrangements that were current then.
The hon. Member for Birmingham, Selly Oak obviously has a keen knowledge of social security, but making changes means dealing with the winners and losers, which is difficult unless starting out with a brand new system. The Chancellor has gone too far. The hon. Lady was right that the 10p rate was unnecessary window dressing.
On the other hand, the PAYE autopilot, which works extraordinarily well, shields two thirds of taxpayers from much of the system's complexity. Those who have to fill in the self-assessment tax form wander into such
Lynne Jones : I accept the problem of winners and losers, but that should not stop us from moving towards the system that I advocate. I agree that it will be a slow process, but we could have a consensus that that is what we should aim for and work towards it.
Mr. Jack : I draw my remarks to a conclusion by saying that I agree with the hon. Lady. However, tax is one of the great politically sensitive matters. It is almost like deathno one wants to talk about it. The Government of the day want to be able to say that they are not raising too much tax or that they are doing wonderful things with the bits of their handiwork that they admire, but they will not talk about the legitimacy of what they should tax and how they should do it.
If there were a public debate on the matter, we might find new ways to raise revenue that the public would think legitimate. If that could be done, some of the superstructure could be dismantled. For example, in France there is VAT on food and people return from visits there saying how cheap the cigarettes and the booze are. The French have a nice little source of revenue and food seems to be cheap too. We cannot talk about that, however, because both our major parties say, "We will not put VAT on fresh food, children's clothes, books and periodicals." That may be right, but we have not discussed it because it is a no-go area.
To deal with simplification, we must first define "simplify", consider the history of the tax system and its legitimacy and have a proper, public debate about the matter. If we were not frightened to talk about tax we might find a way to simplify a complex system in a complex world.
Mr. Edward Davey (Kingston and Surbiton): I congratulate the hon. Member for Fareham (Mr. Hoban) on securing the debate and the right hon. Member for Fylde (Mr. Jack) and the hon. Member for Birmingham, Selly Oak (Lynne Jones) on their excellent contributions to it.
I recommend to hon. Members the report of the debate sponsored by the noble Lord Howe in the other place on 23 January. I welcome the fact that both Houses are debating what the right hon. Member for Fylde was right to call a key issue. Liberal Democrats believe that a simpler tax system would be of huge micro-economic significance to the personal and corporate sectors. I shall deal later with the costs of complexity, which have been discussed and which are much larger than has been acknowledged.
I declare an interest of sorts. The tax law review committee of the Institute for Fiscal Studies, of which I am a member, established a working party chaired by Sir Alan Budd on the institutional need for tax simplification. The committee will publish a report in due course. I hope that the Minister and her colleagues will respond positively to the ideas advanced by the group, which includes members of all parties and many external experts.
The right hon. Member for Fylde talked about starting with a definition of a simpler tax system, which he seemed to define only in terms of the language. I want a wider definition. To build a simpler tax system, we must consider long-term tax policies, the reform of existing taxes, which have been discussed today, and the process of implementing those policies. We must bear in mind that some of the complexity arises from the way in which taxes are administered, not from the taxes themselves. We need to look at the bureaucracies and how they organise themselves. Often, their organisation leads to unnecessary complexity, such as the separation of Customs and Excise and the Inland Revenue, about which the Minister has trenchant views.
Political parties need to assess their tax measures in the light of simplification. We need to widen the long-term debate and to deal with some of the sacred cows that have wandered into the polity of Britain. It is a shame that in the beginning of the 21st century we cannot discuss measures that we debated vigorously in the 1970s and 1980s. It is a retrograde step. It is a symptom of spin politics that we should de-spin for the sake of the taxpayer.
I want to talk more about the processes. In his Hardman memorial lecture Lord Howe emphasised simplicity and stability. He talked about the need to reduce the volume and pace of change, which is important. We should look at ourselves in the House as we are responsible for that in many ways. An examination of the processes involves both looking at ways to stop the situation getting any worse and reviewing what has already happened.
Lord Howe and others have suggested that we should get rid of the annual Finance Bill. I agree. The right hon. Member for Fylde talked about the need to protect the revenue yield to the Treasury. That is right. Nevertheless, we have an annual Finance Bill only because income tax and corporation tax are not permanent taxes on the statute book. If we reformed the Provisional Collection of Taxes Act 1968 and made income tax permanent, we could think about tax policy in a longer term way. We could have a comprehensive tax review to go alongside the comprehensive spending review. We could look at tax policy over a period of three or four years rather than have this annual change, which is a dynamic in itself for more legislation and increased instability in the system.
Let us consider changing the Finance Bill regime. I am attracted by the idea of separating the Finance Bill into two partswhatever remains of it after the reform of the 1968 Act. A change in excise duties requires a Budget resolution and a quick Finance Bill to put it in place. Perhaps every year, or preferably every two or three years, we could have a technical taxes Act to deal with some of the detailed changes in a more protracted way with greater consultation. Let us reform the Finance Bill system so that we do not make it any worse, and let us also look at the past and at some of the ideas floating around the various institutes and professions.
Let us look at building on the wonderful tax law rewrite project. I pay tribute to the hon. Member for Fareham and to the Paymaster General for their work and support for that project. It produces a whole set of reform proposals, which it cannot deal with because its remit is tightly drawn only to rewrite the existing law. What will happen to all those ideas? Although Lord
On the costs of complexities, some people question whether that is a problem, although business men or tax consultants readily admit that it is. What is the real cost? The figures are not readily accessible. We have had various estimates over the years, primarily from Professor Sandford and his team at Bath university. I saw a figure suggesting that compliance costsI believe that his definition of compliance costs in this case is both private and public sector costsequated to 1.5 per cent. of GDP, so we are talking about £15 billion to comply with and administer the tax system.
Professor Sandford's latest work is entitled "Why Tax Systems Differ" and was published by Fiscal Publications in 2000. It has a chapter on administration and compliance costs, which goes into some academic detail about how one goes about working out those costs. The major conclusions are that we are only beginning to develop the methodology of working them out; that it is difficult to make international comparisons, for a number of reasons; that high public sector administration costs might not be a bad thing if they reduce private sector compliance costs; and, that compliance costs are higher than previously thought and we must start to take them seriously, which is the key point. Professor Sandford talks about much greater interest in the issue and many more studies being commissioned, and I give the Government credit for commissioning some of them.
I hope that the Paymaster General will elaborate more today than she and her officials have done in recent months in answers to my parliamentary questions. For example, I asked the Chancellor of the Exchequer whether he had received a final copy of the study by Professor Anne Hansford into the compliance costs to business of the UK tax system and when he would publish the study. The Paymaster General replied:
The Government have commissioned a four-year research programme, but I hope that they will not wait until the end of that period before sharing some of the lessons with us. We want to help, which is an important reason for them to do so. The Paymaster General is looking at me over her glasses because she cannot believe that Opposition Members want to help the Government, but this is a shared project. It is not a project of the Government of the day; it is a project through which we as parliamentarians can improve the system.
I urge the hon. Lady to say more about the studies that have been commissioned, to share her thoughts on how the Government are looking into the issue and the research that they are doing and, as the right hon. Member for Fylde said, to involve us, because that is terribly important. To tempt her into doing so, I shall end by praising the Government on one or two matters. There is no doubt that consultation on tax measures has improved under this Government. The pre-Budget report is a big step forward and, as the right hon. Gentleman said, they have been supporting the tax law rewrite project.
Clearly, she is minded to support us and I hope that she will move from sympathy to activism by setting up the institutions, processes and policy review that will enable us, over five or 10 years, to tackle this major problem.
Mr. Howard Flight (Arundel and South Downs): I add my congratulations to my hon. Friend the Member for Fareham (Mr. Hoban) on securing the debate, in which extremely valuable contributions have been made. I hope that this debate and the recent debate in the House of Lords will be the start of a much more open and focused public debate.
I should perhaps declare an interest, having established a Centre for Policy Studies committee under the chairmanship of Lord Young to consider the areas in which there may be scope for simplication and to make proposals. It is interesting that competing bodies are doing the same.
Unfortunately, the Government have made the tax system more complicated than it needs to be, particularly in proliferating personal tax rates, as is evidenced by the speedy increase in the length of "Tolley's" tax guide. I shall not name names, but I spoke to a Treasury Minister just this week who commented that they regretted having to employ an accountant to do their tax return because they did not have time to deal with the complicated forms. As more people are dragged into complexity, the risk of lack of compliance will increase, as will extreme annoyance.
I pay tribute to the Revenue staff. They do an amazing job in dealing with our tax system. For eight years in the 1980s I sat on a Treasury tax consultative committee. In those days, representatives of different parts of the country's economic life were sounded out in confidence about potential tax changes and their impact. It is a pity that the committee was eventually wound down in, I believe, the early 1990s.
It is important that Paymasters General remain in post for a reasonable period of time to gain intellectual mastery of the brief. I congratulate the Paymaster General on that, because I have observed in the pastnot in the case of my right hon. Friend the Member for Fylde (Mr. Jack)that if Tax Ministers move too frequently, the situation tends to worsen.
Let me discuss some principles. My right hon. Friend raised the big question of legitimacy, but other obvious principles should be considered. One is as old as tax itself: the cost-efficiency of taxation. We should consider not just the costs to the Revenue of collecting taxes but the costs to businesses and people of paying taxes. Some areas of tax are extremely efficient and, manifestly, some are less efficient. That is one criteria.
I believe passionately in the principle of not distorting economic activity. There is a growing tendency for taxation to do that. It is crucial not to damage the gross national product and not to drive economic business activity abroad or allow it to go elsewhere when it might come to the UK. I remember fighting the cause of the investment management industry when I sat as its representative on the Treasury consultative committee. I pointed out that Dublin and Luxembourg were getting huge amounts of fund management business that London should have, that the business would be more honestly and better carried out in London, and that the central issue was whether tax should be stopped on interest paid by money and bond funds. For whatever reasons, the Revenue did not agree, and we lost huge amounts of income and employment because about £500 billion of business was done elsewhere.
I am cautious about using the tax system to encourage certain types of behaviour rather than simply to raise revenue efficiently. The most fashionable aspect of that at present is environmental taxation. One can see the logic, but I suspect that the results are often contrary to the intentions. It may drive some businesses to areas where there are less stringent environmental checks, and it can lead to nonsensical outcomes. For example, it is not surprising that many people ended up with wrong codes under the new car taxation arrangements. The requirement for employers who provide cars to report the carbon dioxide engine emission details to the Inland Revenue is strange. No doubt manufacturers of cars will eventually provide it, but it is not information that someone responsible for PAYE can easily find.
Mr. Edward Davey : Does the hon. Gentleman think that the Inland Revenue should instigate a completely new coding exercise oras seems to be the intentionrequire individual taxpayers or advisers to contact the Inland Revenue?
We all say that it is wonderful to take measures that are good for the environment, but I believe that they can lead to taxation that is economically damaging or misconceived. We should be wary of using the tax system for objectives other than solely raising tax. The taxation of cigarettes is complete madness[Laughter.] Yes, I declare an interest. The revenues are far lower than they should be and it encourages smuggling on a wide scale. At least theoretically, the taxation of tobacco and alcohol should be on the supply and demand curve for maximising tax revenues. It is misconceived to think that people's behaviour can be changed purely by imposing taxation that is designed entirely for other areas.
It is crucial to keep the tax system for individuals sufficiently simple for them to understand. In a recent debate in the Committee that considered the Tax Credits Bill, I was shocked to hear the Financial Secretary say that we could have a system like a television set that was so complicated that no one would understand it, but that all people had to do was turn the switches on. Whether people are paying tax or receiving negative income tax, if they do not broadly understand the rules we invite chaos, if not semi-fraud. Clearly, complexity does create fraud.
There is a relationship between the number of Inland Revenue or tax officer staff and the amounts of tax paid and of taxpayers. Although the United States has a reasonably complicated tax system, the ratio of people working in the Internal Revenue Service to tax paid and taxpayers is much lower than it is here. The Paymaster General seems to be shaking her head. Perhaps we will have a chance to return to that.
Layer on layer of taxation is a problem that is most evident in relation to pensions taxation and company taxation. As my right hon. Friend the Member for Fylde said, the solution may be to take bits of the architecture out.
Anti-avoidance measures are unavoidable. The principle of having only general anti-avoidance provisions was tested in Canada, where it created the problem that commercial transactions had to be pre-cleared, which occupied large numbers of inland revenue staff and considerably delayed the process of commerce. The clear distinction between evasion and avoidance is essential to the honesty of our society. It is understandable that people will want to pay as little tax within the law as they can, but they must know whether or not they are crossing the boundaries of the law. A degree of rough justice between fairness and efficiency is required. In recent years we have bent over backwards to honour fairness where it is both tax-inefficient and not necessarily appreciated by citizens at large. My hon. Friend the Member for Fareham described what was wrong with tax complexity and the problems that it could cause to government and business.
The Saatchi and Warburton proposals appeal to me greatly in principle, for the same reasons that the hon. Member for Birmingham, Selly Oak (Lynne Jones) outlined. One of tasks of the committee in which I am involved is to consider the viability of those proposals. The overlap between the number of people who pay tax and the number who receive benefits is about 40 per cent. It is not as easy as simply raising the tax threshold and doing away with many benefits because one is dealing with overlapping but not concentric groups of people.
The corporate area is not of great interest to citizens at large, but there is still scope for masses of simplification, and I commend the Institute of Directors' 11 quick wins, with which I shall not deal at length.
Dawn Primarolo : There are only 10 minutes of the Adjournment debate left. I know that the hon. Gentleman has many interesting things to say, but if I am to answer hon. Members' points, I implore him to be brief.
There is scope to deal with corporate taxation. On personal taxation, the major principle is that although it is okay to introduce complexity for those at the top end of the scale, if that creeps down to the majority, and especially to those at the bottom end of the scale, it becomes unworkable. That is where we are going, and it is largely unnecessary.
The Paymaster General (Dawn Primarolo) : First, I congratulate the hon. Member for Fareham (Mr. Hoban) on securing the debate. The convention is for short replies from Ministers in Westminster Hall debates and I hope that all hon. Members who took part will excuse the fact that I shall be unable to answer every question.
I shall assist the hon. Gentleman with some information that he quoted from parliamentary answers. If he returns to the question that he asked about capital gains, he will notice that the paragraph that gave him the answers of 7.4 per cent., 14.8 per cent. and 29.6 per cent. is preceded by a statement that those figures were calculated by "ignoring behavioural changes". The right hon. Member for Fylde (Mr. Jack), who experienced the tax law rewrite and is a former Financial Secretary to the Treasury, touched on that matter when he referred to simplification.
The hon. Member for Fareham quoted figures on the increase in Inland Revenue staff. Unfortunately, he did not mention that 8,400 staff were transferred directly from social security work in the Contributions Agency and that 3,700 were transferred in with tax credits. The increase in the number of staff in the Inland Revenue was around 245 in the period he discussed, which, given the vast increase in taxpayers due to the Government's economic reforms and success in getting people back to work, is not a large increase when compared with the increase in workload.
Mr. Hoban : I was careful in picking my numbers from the parliamentary answers because the disconnect clearly took place during the first part of the Administration as new functions were brought into the Inland Revenue. I was well aware of that issue, but time prevented me from pursuing the matter further with the Minister's colleagues.
The point of the debate has been to suggest that the United Kingdom is suffering, but I remind hon. Members that the UK has more direct foreign investment than a large number of other countries and that we are now fourth in the worldwide league table. Both the Organisation for Economic Co-operation and Development and the International Monetary Fund have pointed out that the United Kingdom is one of the most conducive environments in which to do business and continues to attract half of all new headquarters of multinationals. The UK and its economy are in a very buoyant position.
Simplification involves a number of propositions. We would all agree that simplification is correct and that we should try to achieve it, but it must be balanced with certainty, fairness and what we intend the tax system to do. As the right hon. Member for Fylde pointed out, to start from the proposition that whatever we do in the tax system no one will try to circumvent it and do something else, is simply to fail to face up to what is really happening. There must be intervention on the basis of fairness. I intend the tax system to be used as it is supposed to be and for relief to be given as it is meant to be. I will come back to anti-avoidance.
Another question involved in simplification is whether Members of Parliament believe that there is any role for the tax system to intervene on market failure. The hon. Member for Arundel and South Downs (Mr. Flight) says not, but that is not business's view, nor the view of many of his Front-Bench colleagues. It seems to me that people want complexity when they believe that it suits them. The capital allowances legislation is an example of that. People do not want complexity if it means that their taxes are higher.
What the Government must do, and have been doing, is to examine how to balance simplicity, fairness and equity and look at what it is acceptable for the tax system to do and not do. The Government have clearly laid out our objectives for the tax system. They are to
Of course, fairness to one person can be uncertainty to another. The hon. Member for Fareham mentioned tax planners. I find it breathtaking if he is seriously suggesting that there will be a truce and that tax planners will say that they will never try to put bits of legislation together that were never intended to go together to minimise relief. Of course that is not the case. There is always that intellectual challenge, as the right hon. Member for Fylde pointed out.
The next question is how to defend ourselves against that possibility. How do we have simply written and easily understandable legislation? I wholeheartedly support the tax law rewrite project, and the capital allowances legislation, in particular, is fantastic. We have tried to get to such a truce and asked if we could have general anti-avoidance legislation, but business said, "No, that is no good". Can we have smaller, or mini, general anti-avoidance legislation? The problem with the anti-abuse legislation is that it is so large. Again, business says, "No." The hon. Member for Fareham says that we should consult more. We consult, and business says, "No."
I do not mind having the debate that right hon. and hon. Members have suggested this morning. It is important, however, not to enter that debate with rose-tinted glasses, believing that the tax system is neutral and that people do not try to manipulate it. The purpose of the tax system is to raise money fairly to invest in public services. I am happy to have had this short debate and I do not mind having it again and again because the more people who understand what goes on in the tax systemhow people try to manipulate it and where the winners and losers arethe more they will understand that the process of simplification, fairness and certainty in investment is a difficult balance, which the Government are striking.