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Dr. Vincent Cable (Twickenham) (LD): As the hon. Member for Cities of London and Westminster (Mr.   Field) acknowledged, we are dealing with rather recondite material and, unfortunately, I drew the short straw among my colleagues in deciding who would speak about it. But in terms of general principles, I   broadly endorse what the Government are trying to achieve through the Bill. My colleagues and I voted for higher national insurance contributions to fund the health service, so it follows that we want such revenue to be realised. There are two broad objectives: to ensure revenue integrity, and to reduce the cynicism that inevitably arises when some people pay their taxes but others manage to get round doing so. I understand the Government's broad strategic objectives, which seem perfectly sensible.

The problem is that in talking generally about tax avoidance it is very easy to get into a moralistic mindset—a mindset that crept a little into the Paymaster
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General's speech. Frankly, this area is an ethical quagmire. The Government were helped by a question posed by the Chairman of the Treasury Select Committee a few months ago. He asked what the difference was between legitimate and illegitimate tax avoidance, and the Paymaster General produced a reply that is well worth quoting because it provides a framework for this discussion. She said:

That seems a good working definition of the distinction between legitimate and illegitimate tax avoidance and, so far as it goes, perfectly sensible.

However, on reflecting a little more, I concluded that what we are dealing with is not a simple, stark, clear-cut division between legitimacy and illegitimacy. There is a continuity or spectrum of behaviour, and at one extreme there are cynical and manipulative schemes. But at the other end of the spectrum, there are forms of tax avoidance that we all regard as perfectly legitimate and,   indeed, that the Government encourage. As I   understand it, part of the Financial Secretary's job is   to encourage tax avoidance. He introduces environmental taxes that, if successful, stop people doing certain things and therefore reduce Government revenue. That is the will of Parliament and it is sensible, good economics and good for the environment; but it is promoting tax avoidance.

At the other end of the spectrum are these fancy avoidance schemes, but somewhere in the middle is the kind of behaviour that we all get up to in our private lives as we try to organise our affairs in such a way that we pay as little tax as possible, within the law. A few weeks ago, I was talking to my grown-up children, who live in London and are having horrendous problems dealing with their mortgages. I am considering making a gift from my modest savings in order to help them, and it occurred to me—it certainly occurred to them—that if I manage to organise my affairs in such a way that I do not die in the next seven years, I will help them to avoid paying inheritance tax. That is tax avoidance. Of course, it does not fall within the Paymaster General's definition of illegitimacy because it does not constitute an organised scheme. But if instead of simply doing a back-of-the-envelope exercise, I did things properly and went to a financial adviser, an accountant or a solicitor, such a course of action would, I think, be illegitimate under the terms of the definition given. Certainly, the definition is hazy, so it is probably useful to approach it not in a moralistic way but in a practical way.

The practical issue is how the Government can reduce tax avoidance. We are dealing with a very big area: in respect of this source of leakage, the figure of £300 million has been quoted. The Inland Revenue has estimated that it suffers itself from tax avoidance losses of some £2.5 billion to £3 billion in VAT, and probably £10 billion in direct taxation, so the Bill deals with only one corner of a much bigger problem.

I turn to an interesting and important aspect of the Bill that is at the heart of some of the criticisms offered by the hon. Member for Cities of London and
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Westminster. The point was summed up by the Chairman of the Treasury Select Committee, when he said:

That is not necessarily good or bad, but it does break important new ground by embedding in the legislation the principle of retrospective action. As the hon. Member for Cities of London and Westminster suggested, that could create problems in respect of one of the basic principles of taxation: certainty.

In Committee, we shall doubtless confront a question that will be at the heart of public debate on this issue: whether the principle that the Government are introducing conflicts with fundamental principles in law as we understand them. The Institute of Chartered Accountants, which has looked at this Bill in some detail, questions whether this new principle is compatible with European law. I do not know—I am not a lawyer and certainly not a constitutional lawyer—but I draw the House's attention to a very important legal ruling that dates from April, through which the European Court of Justice is trying to tackle head-on the question of whether a measure such as the one before us is legitimate in terms of European law principles.

One paragraph of that ruling appears to suggest that what the Government are doing is not compatible with European law principles, but another paragraph appears to constitute the Government's defence. It is worth quoting both, because they will prove central as this legislation proceeds. The first paragraph states:

If it is correct that this legislation diminishes legal certainty, it may well violate European justice as it applies to tax law. The following paragraph, however, is   more qualified. It states:

in other words, retrospectively—

A key issue will be whether the legitimate expectations of those introducing such schemes have been respected. It is a fairly narrow point and it is not clear to me who is right and who is wrong, but as the Bill proceeds we will need proper clarification of whether its legal basis has been thought through in terms of those wider principles.

There are two other practical problems that the ICA and others have thought through, and on which the hon.   Member for Cities of London and Westminster touched. The first concerns a legislative principle and the way in which this House proceeds. As I understand it, one consequence of the manner of the Bill's introduction is that secondary legislation will be introduced at the same time as primary legislation, so   there will not be the traditional opportunity for
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a   12-month period of consultation of those affected by such legislation. I am not sure that I fully understand the   problem here, but it has been highlighted by the practitioners and it would be useful if the Government commented on it.

The other practical problem, which the hon. Member for Cities of London and Westminster also mentioned, is the question of what happens to those employers who, although they are clearly party to such schemes, may not have prompted them. What happens if such an employer finds that, because the legislation is invoked retrospectively, in practice they cannot claw back concessions already made to the employee? Such an employer is the piggy in the middle who has been stuck with the liability. What is their position?

In conclusion, I would like to summarise my argument by making two wider points. First, although   it is right and I fully support the idea of pursuing anti-avoidance as far as is possible and practical within the law, it is not always clear that the   Treasury's emphasis should be on anti-avoidance. It should reflect further on the problems created by   over-complexity. One of the leading authorities on British tax law—Edward Troup, who happens to be one   of my constituents and who frequently appears before the Treasury Committee—summarised the problem elegantly:

That is why I and my colleagues, as well as the Conservatives, are looking further into the whole principle of tax simplification. Our commission got going a little quicker than theirs, but whether it will end up recommending some version of a flat tax, I do not know. I have an open mind on that matter. The underlying principle of pursuing simplicity is clearly very desirable.

Finally, it is not a question of simplification alone. We   also need to focus more on the question of tax   administration and the competence of the tax administration authorities. I do not have many people in Twickenham running around with gold bullion, but I   have do have many people who work in the computer industry. They often send me e-mails from their occasional employer, the Inland Revenue, with positively hair-raising tales of computer breakdowns involving something called ERIC and management failures in the Revenue that are costing billions as a result of weak, unsatisfactory and badly managed revenue-collection systems. I do not know the truth in that matter: I am not part of it, but I see the fragments shown to me by people who are witness to it.

I believe that more revenue could be realised by the Treasury through better tax administration and tax simplification than through the pursuit of anti-avoidance measures. As far as the Bill goes, the principles behind what the Government are seeking to achieve seem sensible, subject to the various specific legal and practical steps that we shall pursue in Committee.
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1.22 pm

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