Dawn Primarolo: I can tell the hon. Gentleman that there are no plans for the Government to make changes to these particular provisions. I have seen the speculation about the amount that a particular organisation is suggesting. There has been correspondence with that organisation to explain to it why we believe that that figure is totally incorrect. Given the very tight controls that will exist on property transferring into a pension fund, and what happens when that property comes out of it, I do not recognise the points that are being made by that organisation. We need to be clear that this is part ofthe property ofa pension fund, and the pension fund decides how it is used. Much as I pay a great deal of attention to any suggestions that this will be used as an avoidance vehicle, such suggestions are at present unfounded.
Ed Balls (Normanton) (Lab):
Does my right hon. Friend agree that the fact that in Britain we now have a
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10 per cent. rate of capital gains tax for long-term investments means that Britain now has one of the most attractive tax regimes for small businesses to invest and grow? Does she recall that, when that measure was first introduced in this House, Opposition Members of all parties attacked it on the ground that it would lead to tax avoidance and does she agree that, had we taken their advice, we would have denied British business and small business the real benefits that have flowed from that reform?
Dawn Primarolo: I well remember that, during the debates on the capital gains tax reforms introduced by this Government, Opposition Members forecast that it would be a disaster and would not assist in the rebalancing of the economy, particularly in relation to investment rules. They are in danger of confusing the rules on capital gains, and the very fair tax regime that exists in that regard, with the specific proposals on putting together a pension fund that enables investment to produce an income for individuals in retirement. The continual rationalisation and equalisation of those investment choices led to the changes in the pension fund.
Let me return to the specific measures on avoidance in this Bill. As I said, the Government have always made clear our determination to ensure that the tax system is fair and is seen to be fair. We have taken a series of concrete steps to prevent abuse of the tax system, and we will continue to close tax avoidance schemes as we become aware of them. Indeed, that was also the policy pursued by the previous Government. Any Government who acted fairly on behalf of the vast majority of taxpayers would pursue a policy to prevent a small number of taxpayers from receiving tax payments to which they were not entitled.
Such avoidance schemes create economic distortion, provide commercial advantage over compliant taxpayers, and redistribute tax revenues in an unfair and arbitrary manner. Therefore, in addition to the VAT measures and extension of the disclosure rules I mentioned earlier, this Finance Bill will introduce legislation to counter various forms of exploitation. That includes clauses 24 to 31 and schedule 3, which will close down schemes where companies seek to gain a UK tax advantage by exploiting differences within and between tax codes; clauses 32 to 34 and schedule 4, which prevent arrangements that enable individuals and trustees completely to avoid tax on capital gains; and clause 39 and schedule 7, which will prevent avoidance by companies and individuals using financial product-based schemes.
As announced in December 2004, this Finance Bill will also introduce legislation to close arrangements that seek to avoid or reduce income tax. Clause 12 and schedule 2 will tackle that specifically with regard to remuneration using employment-related securitiesa matter to which the House, the Government and previous Governments have had to return repeatedly, to prevent this abuse. Clause 40 and schedule 8 will update the transfer pricing rules introduced by the Finance Act 1998. Those prevent parties who have a control relationship over a company from entering into transactions on a non-arm's-length basis to obtain a tax advantage. A further change ensures that the rules cannot be avoided by putting financial arrangements in
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place up to six months before a control relationship exists. To counter a number of stamp duty land tax avoidance schemes, clause 49 and schedule 10 will close known loopholes: for instance, limiting artificial group relationships which have been set up purely to avoid clawback of group relief. The definition of "undertaking" will also be restricted in relation to acquisition relief to trades other than property trading, so that only genuine businesses can benefit.
The clause that I have just mentioned has been subject to some amendment, which I want to draw to the House's attention, as compared with the legislation originally presented to the House in the first Finance Bill back in March. We have listened, and amendments have been made to ensure that stamp duty land tax measures work as intended for home reversion plans, loans or deposit schemes and to ensure that group relief clawback cannot be avoided by the use of leases. There are a small number of other amendments to clauses in the Bill, which include ensuring that legislation introduced by clause 39 and schedule 7 does not affect routine arrangements concerning preference sharesanother matter on which we received representations. They will ensure that other common corporate structures not set up for the purpose of avoidance are not affected. We have also extended the period of transitional protection to some companies allowed by clauses 24 to 31 and schedule 3, and we have time-limited the regulation-making power to amend a number of life assurance company tax provisions granted by clause 42 and schedule 9.
In addition to those and other minor technical changes, the Bill includes a new clause and scheduleclause 37 and schedule 6which were not included in the previous Bill. Those make amendments to the international accounting standards legislation in the most recent Finance Act, again responding to representations: in this case, that legislation would inhibit commercial restructuring.
To conclude this summary of the Bill, let me mention the further international measures introduced by clauses 51 to 65. Those make changes to legislation that will give certainty regarding the tax treatment of some transactions involving new European companies, particularly when they are formed by merger. They will also enable UK businesses to take advantage of this new type of corporate vehicle, if they so wish.
The Budget laid down measures that enable our country to respond to and meet the challenges of a changing society facing a competitive global economy. This second Finance Bill will enact legislation that ensures fair taxation by reducing avoidance, simplifying regulation and supporting important actions such as gift aid. I commend the Bill
The measures mentioned by my right hon. Friend will be very much welcomed by Labour
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Members. On the tax credit system, howeverwhich has benefited many people and could only have been introduced by a Labour Governmentin view of the constant mistakes and overpayments that cause difficulties to many constituents, and certainly mine, will she promise that she will examine the workings of the Preston office and see what can be done to improve administrative arrangements and minimise those difficulties?
Dawn Primarolo: Tax credits are not the subject of this debate, but there was an excellent debate about them in Westminster Hall this morning to which Members from all parts of the House contributed. If, after reading the transcript of that debate, my hon. Friend feels that my attention needs to be drawn to any further issues, I shall be more than happy to listen to him.
I congratulate the Paymaster General on her presentation of the Bill. This is the first time since Labour came to power that a Finance Bill has not been presented by the Chief Secretary. He is presumably in Luxembourg trying to save the rebate, something of rather more significance to the Exchequer than the measures that we are discussing.
As the Paymaster General acknowledged, the Bill consists largely of anti-avoidance clauses that were excluded from the truncated pre-election Finance Bill on grounds of complexity and the need for more detailed scrutiny. Since then, the Government have made a number of minor changes, which we welcome as far as they go and which vindicate our decision not to allow such complex legislation to go through on the nod. On key issues, however, major concerns remain.
Let me say at the outset that Conservative Members recognise the need for the Government continually to address tax avoidance and the racier forms of tax planning in order to protect the Exchequer, although it would probably help if the Treasury started with a bit of housekeeping at home and tried to avoid giving away £2 billion of overpaid tax credits. Many of the tax avoidance opportunities themselves arise from the increasing complexity of tax legislation. Since 1997, the volume of tax statute in force has almost doubled, creating a bonanza for lawyers and tax accountants.
This is a practical issue. Tax planning is a fact of life for international business, as is tax competition between Governments. Governments everywhere face the same challenge: to reduce the loss of revenue from tax avoidance and tax planning, while ensuring that they do not weaken their international competitiveness. The right balance must be maintained between those competing objectives.
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We understand the Chancellor's predicament. He faces a fiscal black hole, with independent commentatorsincluding the Institute for Fiscal Studies, the International Monetary Fund, the Organisation for Economic Co-operation and Development and the Item Cluball predicting that tax receipts will need to rise sharply if the golden rule is to be observed. He is in any case already projecting a hefty additional contribution from United Kingdom corporations. The Budget projections show corporation tax takes soaring from £34 billion this year to £43 billion next yeara 28 per cent. projected increase in the corporation tax burden, on the back of a growth forecast of 3 per cent. for the economy, at a time when our competitors are increasingly lowering their corporation tax rates.
We have two overarching concerns. The first is practicalwe fear that the Treasury's collective judgment may have faltered under the pressure to find additional sources of revenue and the temptation to address all the avoidance schemes disclosed under the Finance Act 2004. Complex legislation is being proposed to produce additional revenues in the short term. Consultation has been limited, and the Treasury's response to some of the concerns raised has been, to say the least, rather high-handed. Assurances that wide powers will be used only narrowly in practice are no substitute for tightly drafted legislation. There remains a real possibility of inflicting damage on some of the UK's most dynamic business sectors in the medium term, and thus of damaging the UK economy's international competitiveness in the long term.
A successful anti-avoidance measure must increase the tax take while neither adversely affecting transactions not primarily designed for tax-avoidance purposes nor imposing on business a burden of compliance disproportionate to the additional revenue generated. Not all the measures in the Bill will pass those tests, and in Committee we will offer suggestions for achieving its anti-avoidance objectives without the collateral damage that the current drafting risks.
Our second overarching concern is the direction in which the Government are taking the tax code. Certainty and transparency are the hallmarks of a fair, effective and competitive tax system. A taxpayer is entitled to know with certaintybe it an individual or a multinational corporationwhat he may or may not do in planning his tax affairs. He is entitled to expect that his treatment be laid down in statute, not determined by administrative fiat; he is entitled to expect that another taxpayer in similar circumstances will receive treatment similar to his; and he is entitled to be protected from retrospective or retroactive legislation.
There can be no doubt that this Bill carries us further down the path away from that ideal in several key respects: by giving powers that ought to be exercised by Parliament to officials, so that Revenue guidance will determine how much of the complex corporate anti-avoidance legislation works in practice, and by the use of retroaction not just back to the date of a press releaseit is bad enough, but perhaps fitting, that a Government who govern by spin have determined to legislate by press releasebut back even further, fundamentally altering the future commercial outcome of arrangements entered into perfectly legally, and
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sometimes, as in the case of the venture capital industry, with the active endorsement of the Treasury. In so doing, the Bill introduces an arbitrariness that undermines the fairness and predictability that are essential elements of an effective tax system.