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Mr. Field: I am intrigued by the tense the Paymaster General uses. She refers to legislation that the House "has passed". Our concern is not with legislation where there is a clear intention from the Government. The issue here is retrospection. That is our great anxiety. Where legislation has been passed, and there is clarity and certainty, that is fine, but the point of the Bill is to sweep back as far as 2 December 2004.
Rob Marris: I am following the hon. Gentleman's remarks closely. First, perhaps he can explain how the retrospection for NICs will be different from that which we already have for tax. Secondly, may I point out to him that not many people on minimum wage in my constituency have been getting paid in platinum sponges or any such device? I would expect most people, if not all, who will be caught by this legislation to have had specialist tax advice, quite possibly through their employer. That specialist tax adviser should have told them that anything after 2 December 2004 is at risk. If the tax adviser failed to do so, he or she is at risk in respect of negligence.
Mr. Field: Unfortunately, my constituency contains the City of London, where gold bullion, fine wine and all these contrivance schemes possibly began. It might be different in Wolverhampton. I look forward to visiting the hon. Gentleman's constituency at some point—perhaps in the near future on a ministerial visit, I hope, when Conservative Members are on the other side of the House.—[Laughter.] That might take a little time.
On the hon. Gentleman's serious point, we are concerned about retrospection, particularly in relation to national insurance, because of the potential double whammy for many employers. While one can entirely understand the protection given to employees, which we will discuss later or in Committee, one of the great differences between the national insurance contributions regime and the regime under the Finance Act for income tax is that employers run the risk of not only paying their own 12.8 per cent. but their employees' national insurance part. They might be able to go back and sue their tax adviser, but that might not be a practical solution. While we still have grave concerns about retrospection, which were articulated in the Finance Bill Committee, equally we want to articulate those now and consider the other ways in which the legislation applies.
Let me continue on the path towards the end of this Second Reading. As I mentioned a moment or two ago, the tax avoidance in question might be widespread in particular industry sectors. What would happen if the company concerned has been sold in the meantime, benefiting from what it will eventually become clear are vastly inflated profits?
The sheer uncertainty and potential for unfairness outweigh the benefits of this innovative attempt to deal with the avoidance problem that the Treasury understandably seeks to tackle. Given the Paymaster
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General's broad-brush assertion in her statement of 2 December, how can we be sure that the scope of these retrospective powers will only be used sparingly? Ultimately, the crux of the question is: who judges whether something is to be regarded as unacceptable avoidance?
Most of the Bill's provisions have retrospective effect. The Government are becoming increasingly open about passing such provisions. Previously, such provisions were only described as retroactive, whereas now the word "retrospective" is openly used in the Bill. While most of the Bill's provisions cannot take effect before 2 December 2004, the effect of sections 5 and 6 is potentially unlimited, as any past agreements and joint elections to transfer secondary liability to national insurance contributions to employees can be disapplied. Under those elections, employees were able to pass the national insurance cost risk to employees without limit as to when the election was entered into.
The Bill's retrospective effect necessarily causes uncertainty for UK business. Businesses must be able to plan their activities and cost base in a stable framework. That will be difficult if the Treasury has the power to pass new tax provisions with the retrospective effect to which we have referred. The Government justify their approach by pointing out that the new provisions will not affect the
Only a small minority, however, have unreasonably
"sought to use sophisticated and complex tax avoidance schemes to pass more of a burden onto the rest of us".
Businesses that have attempted to reduce their liability to pay national insurance contributions in accordance with existing legislation are therefore being vilified as antisocial.
Ideally, we need Her Majesty's Revenue and Customs to set out its thinking on the principles guiding its intended implementation of this policy announcement. During consideration of the Finance (No.2) Act 2005, we called repeatedly for more attention to be paid to the pre-clearance procedure. The spectre of retrospection, and with it uncertainty, makes a pre-clearance process ever more important; otherwise, the Treasury seems to be relying on making any such schemes of arrangement so commercially unattractive that the need for retrospective legislation will be rendered redundant. That is more or less the nub of what the Paymaster General said in our exchanges a few minutes or go.
That is not a sensible way to run commercial business. We need to encourage dynamism, flair and innovation. Sometimes, such innovation will get it wrong, but closing down these schemes will apply to flair and innovation throughout our commercial world. A heavily regulated economy in every way will not be good news for this country. Flair and innovation are qualities not just of our tax advisers but of many inventors and people throughout industry. That has been one of the great strengths of this country over the past 300 or 400 years, and is one of the reasons why we are such an important trading nation. The worry with this sort of proposal is that it stifles those two important facets.
We understand that the first use of powers in this area will be to amend the national insurance contributions regulations in parallel with the changes imposed in the
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employee securities element of the Finance Act 2005. That is unobjectionable, but there is a more fundamental question: now that national insurance involves only a notional contributory element, is it not time that the rules surrounding NICs are changed entirely to work alongside those of income tax?
The Bill highlights once again the problem of having two taxes that basically cover earnings. Let us face it: the only reason for having NICs and income tax is to uphold the fiction that the basic rate of tax is 22 per cent., when it is really 33 per cent. That is an expensive fiction that costs businesses millions of pounds in administration each and every year. Perhaps things have now got to the point where it is necessary to consider a single stand-alone income tax with a basic rate of 33 per cent. and an employers' portion of 12.8 per cent.
Rob Marris: Again, I am following the hon. Gentleman's comments closely. He was taking about the risk of stifling innovation. Is he really suggesting that the self-employed, who currently pay, I think, £2.10 per week in class 2 contributions, would be rolled into a kind of super-income tax along with everybody else if his proposal to get rid of NICs were introduced? That might well stifle innovation in our economy, which has been a strength for 400 years.
Mr. Field: It is a good attempt from Wolverhampton, but I was simply putting forward a broad idea that we need to give some thought to simplifying our taxation system. The contributory element of national insurance is fairly meaningless to a large extent.
Sir John Butterfill (Bournemouth, West) (Con): Will my hon. Friend also recognise that NICs are not paid by those who are over retirement age? His proposal would increase the taxation of those who had income in retirement.
Mr. Field: If I am not incorrect, my hon. Friend is some 63 years old. I was his Whip at one time. I suspect that his observation might contain the smallest element of self-interest. I take on board his points, although given the great hopes for the Turner review, if the retirement age increases he might be chasing a particular dragon while he is still below that age. I will certainly have him in mind when it comes to the national insurance aspects of the question.
Sir John Butterfill: My hon. Friend must also recognise that I represent a rather large number of pensioners in Bournemouth, West.
Mr. Field: I have little doubt that my hon. Friend is younger than the average age of most of his constituents.
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