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Mr. Redwood: Does my hon. Friend agree that, by a mile, this is the dearest tax bill ever presented, and does that make it the worst?
Mr. Flight: As my right hon. Friend knows, the subtle thing is that the taxes are not all in the Bill. A mass of advanced taxes was slipped in last year, or introduced via council tax or by another sleight of hand. The Bill is bad and the overall fiscal measures are extremely undesirable and the worst that I can think of. They are bad on bad.
Economists are increasingly worried that the massive increase in taxation is hitting consumer demand and that that could push the economy into recession. The threat to the property market is added to that. The Government span the Bill and the Budget by citing measures that would build a strong and more flexible economy, but this year's Ernst and Young survey shows that entrepreneurs' view of Government and Whitehall is at rock bottom. Taxation has increased by nearly 50 per cent. since 1996–97 and spending has increased by more than 50 per cent., but there has been a less than 20 per cent. increase in delivery. About 80 per cent. of the tax increase has evaporated through inflated public sector costs and higher bureaucratic and administrative costs.
It is a sad day for me—I say, jokingly, that that is not only because David Beckham has gone to Madrid—because my only son has left to make his career in America, as have so many talented young people to whom Britain does not offer the opportunity they want. The job situation for maturing graduates in this country is as dire as it has been for many years. Too many jobs in the public sector are non-jobs, and there is a dearth of new jobs in the private sector. As Digby Jones, head of the CBI, commented:
- "We are bearing witness to a continual erosion of our competitive position. If the government wants a low-tax, flexible economy, we are not heading in the right direction."
9.50 pm
Denzil Davies (Llanelli): I want to raise a technical issue that relates to two clauses. It was mentioned briefly in Committee and concerns the possible interaction between clause 197 and schedule 42, and clause 148, with the developing jurisprudence of the European Court of Justice in respect of the "four freedoms", as they are described. In particular, I am concerned about the freedom of establishment, which impinges on the ability of member states to legislate in a traditional way on corporation tax and income tax.
I did not serve on the Committee, but I read the reports. Members of it will know that clause 197 and schedule 42 deal with controlled foreign companies, which have been mentioned. Controlled foreign companies are not new, and the clause and the schedule extend the ambit of controlled foreign companies to other areas. There is no objection to that. I am sure that every hon. Member knows that a controlled foreign company is usually a foreign subsidiary of a UK parent company and is located in a country where corporation tax is much lower than it is in the UK.
The Treasury Bench knows that the object is to charge the amount of corporation tax that would have been payable, had the foreign company been resident in the UK, on the UK parent company. There are exemptions and suspensions. The legislation does not apply to all countries or to most European Union countries, although it is uncertain whether it will apply to the 12.5 per cent. corporation tax rate in Ireland.
Although it was denied in Committee, the problem is that the clause could fall foul of the jurisprudence of the European Court if a resident company in the UK is taxed according to UK rules and a non-resident company in the UK is taxed differently. If that non-resident company is resident in an EU member state, there will be a conflict between the traditional way of raising taxation in all member states, which is based on residency and non-residency. As a result, there will be a contradiction and conflict between that and the so-called four freedoms, especially the freedom of establishment of companies within the EU. The problems created by the Court go well beyond controlled foreign companies. I am not saying that the legislation will be challenged, but challenges are occurring all the time, as many hon. Members know. I merely ask my right hon. Friends whether that problem has been considered, although I am sure that it has.
Clause 148 seems fairly innocuous. It changes the terminology from a tax on branches to a tax on permanent establishments, which is how double taxation treaties refer to what are, in effect, branches. Again, there is a problem. Recent cases, such as the Lankhorst case, relate to that well-known concept of the thin capitalisation rule. I will not go into that, but branches do not usually have capital; they rely on the capital of the company to which the branch belongs. It is possible to borrow money, pay interest, get a tax deduction and use the money as if it were capital in the company.
The hon. Member for Arundel and South Downs (Mr. Flight) raised the matter in Committee and my right hon. Friend the Paymaster General was confident in her reply. I do not criticise her reply when she said that she was happy that the challenges could not occur. She
then said, "Of course, all this uncertainty will be taken into account in the ongoing discussions." I am not sure who the discussions are with, but that is how my right hon. Friend was reported. Probably the discussions are with either the Commission or with other countries. It is not a Eurosceptic point but a real problem. How do we dovetail or relate national corporation tax rules into the wider provisions of the European Union?I do not know for how long the discussions will continue, but there is a real problem because we are losing money. If challenges are made, and certainly if there is a challenge made to the controlled foreign companies legislation, what is to stop a British company setting up a holding company in Luxembourg? There are rules that prevent companies from leaving the United Kingdom, but exit taxes are also under threat. In a French case the exit tax has been held—this is certainly the position in French courts—to be contrary to the rules of the European Union.
It is a real problem that extends beyond teachers paying income tax in France when they work across the border in Germany. I suspect that it will be examined. I suspect that the Treasury is much more worried than it makes out to be. I do not know the answer but an answer must be found to protect the revenues of this country, and to protect the money that comes into the Treasury as a result of taxing people in the normal and traditional way.
9.56 pm
Mr. Laws : There is no doubt that in terms of weight of paper and length, this is one of the heaviest and longest Finance Bills in history. There is little doubt, however, that in terms of substance it is probably one of the thinnest Finance Bills of the past 20 years. To me, at least, it suggests that the Government are running out of ideas and creative inspiration.
Our proceedings have been lightened from time to time by the turns of the Chief Secretary, but in terms of the substance of the Bill, all too much is missing. I shall make some general comments about the proceedings of the Bill and then consider the substance of some of the major elements of the measure, before relating it to the Government's wider economic policy.
Given the general way in which the Finance Bill has been handled this year, I shall make three requests. I suspect that they would be shared and to some extent mirrored given the comments made by the occupants of the Opposition Front Bench. First, can we in future have some foreknowledge of Budget day from a Government who tell us that they believe in fiscal transparency, clarity and predictability in fiscal policy? Do we have to continue with a situation where Budget dates are fixed by the Chancellor of the Exchequer one or two weeks in advance to suit the needs of the Labour party's media management? If we believe in fiscal transparency, let us and those outside the House who want to know when the Finance Bill will be introduced each year be informed well in advance. Let the date be fixed every year.
Secondly, whether this is a thin Bill in terms of substance, no doubt the measures in it are important to many people—not only tax accountants but business
people throughout the country. It is vital that we have the necessary time to scrutinise all the measures in the Bill.Opposition Front Bench Members who are responsible for scrutiny of the Bill have done a good job in covering a large portion of the Bill this year, but a number of amendments, new clauses and portions of the Bill have not been scrutinised, including some of the amendments and new clauses that were tabled for consideration today in the earlier part of our proceedings. I ask the Chief Secretary to consider next year reinstating consideration on Report and Third Reading over two days rather than one elongated day. I ask him to ensure that consideration in Committee is sufficiently lengthy to enable us to consider all parts of the Bill. In addition, the length of the Bill—447 pages to cover a relatively sparse amount of policy and substance—is of concern. The Government are determined to try to make the Finance Bill more accessible and shorten the existing legislation, but they appear to be doing so without any eye for the new measures that they introducing, their length and the way in which they are increasing the complexity of our tax system.
I am afraid I have only two generally positive comments about the Finance Bill. One relates to the report, which has already been mentioned, produced by the Economic Affairs Committee in another place. It is immensely useful, even if we do not want the other place to involve itself too much in financial matters, for us to be able to draw upon the Lords' undoubted expertise. If the Government do the House and people outside the courtesy of allowing us to know in advance when the Budget will take place, it may even be possible for the Economic Affairs Committee to anticipate those developments so that we can have its report before Committee proceedings conclude, as happened this year.
Before I go on to the substance of the Bill, I should like to make a slightly more generous comment, and thank the Chief Secretary, the Paymaster General and the Economic Secretary both for the generally good natured and sometimes humorous way in which they have conducted proceedings and for their willingness to amend provisions on different issues, including the stamp duty issue affecting social housing tenants that we discussed today, in the light of representations from the Opposition.
The Bill is relatively insubstantial and includes some extremely worrying measures. There is a series of tax changes of great complexity, but there is little or no evidence that the Treasury has given any thought whatsoever to the question of whether those changes justify the amount of money spent on them. There are concerns about whether the change to stamp duty in deprived areas will be abused. Will it benefit small, deprived communities in the parts of the country that it sets out to benefit, or will it merely help the big commercial enterprises that are often based in the inner cities? The Government have not provided any assessment of the economic benefit of those measures.
Today, we debated tax reliefs on savings, and the Economic Secretary made an admission, which he did not regard as surprising, that the Government are spending billions of pounds of tax relief on savings without the slightest idea of whether they are doing
anything more than shifting savings from one class of savings instrument to another. We have had no assessment at all of whether the change has any economic value in increasing the total stock of savings. The Government are spending a great deal of money on research and development tax credits, but we do not know whether they are of any benefit because the Treasury do not seem to be carrying out any scrutiny of whether the expenditure of Government money to pay for tax revenues forgone makes any sense. It is extraordinary that the Treasury should insist that other Departments should achieve good value for money in their expenditure while it is making no analysis whatsoever of immensely expensive tax changes.
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