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Dawn Primarolo: Will the hon. Gentleman give way?
Mr. Pelling: Certainly, if the Paymaster General wants to correct me.
Dawn Primarolo: The hon. Gentleman should also quote the Minister who responded to me at that time with an explanation of why the Government's action then was justified.
Mr. Pelling: I understand why the Paymaster General makes that point, but institutionalising retrospection and raising the possibility that a business or person might have to make retrospective payments to HMRC—only for more legislation to be introduced when it is decided that the rules must be changed—is most regrettable.
The most important thing is certainty. The problem with the Bill is that it will not bring certainty to the tax regime.
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1.37 pm
Mr. Philip Dunne (Ludlow) (Con): I share the concerns about the Bill expressed by my hon. Friends the Members for Croydon, Central (Mr. Pelling) and for Cities of London and Westminster (Mr. Field), especially about the Bill's retrospective nature.
I understand the desire expressed by the Chancellor, the Paymaster General and other Opposition Members to minimise the scope for remuneration contrivances to escape the tax and national insurance net. Indeed, I have considerable sympathy with the objective of dealing with the imaginative but essentially contrived schemes about which we have heard. I confess that the use of platinum sponge is a new one on me, too.
However, my concerns go beyond the specific provisions of the Bill. This country has rightly earned great respect in the international business community for the probity of our laws and customs. Indeed, even the HMRC has commanded respect—if little love—for the certainty, if not always the clarity, of its decisions. As we have heard, companies, individuals and their advisers have long enjoyed the ability to base their commercial decisions on a principle of certainty in respect of the tax laws at the time those decisions were made. The law has always been open to interpretation, which has enabled the entire tax advice industry to flourish, but commercial decisions could be made according to the law prevailing at the time.
Unfortunately, the Bill reinforces a very unwelcome principle that has been introduced into our tax law—the ability to change the rules as the Government choose. The Institute of Chartered Accountants has expressed concern about that, as the hon. Member for Twickenham (Dr. Cable) noted. In its briefing paper, the ICA said:
"Retrospective legislation is not a satisfactory solution: not only does it make for uncertainty for employers but there is a real probability that it is ultra vires European Law".
My views on Europe may not be well known in this House, but they are to my constituents and it is extremely rare for me to find comfort in pronouncements from Europe. However, as we have heard from the Liberal Democrat spokesman, there is some case law that needs to be explored in Committee, not least because the Institute of Chartered Accountants states:
"We do not think that anyone reading the Paymaster General's 2 December 2004 statement could have expected the content of this Bill."
Labour Members have focused much of their enthusiasm for the Bill on the impact it may have on fat cats in the City, and reference has been made to the large sums that many people earn there. The issue is not confined to the City of London, however. In my constituency, there is an individual who sells millions of pounds-worth of perfume to the far east, on which he earns substantial commission. That gentleman could take his business anywhere in the world, and I should like to focus on that point.
The Prime Minister appears to have woken up only relatively recently to the challenges of globalisation, but the economy has been at the forefront of global trade for centuries. Since 1979, as economic liberalisation has been successively introduced, mostly under the previous Conservative Government, increased inward
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investment to the UK has provided a major boost to economic growth and productivity. The scale of that investment is well illustrated. The Paymaster General has unfortunately left the Chamber so we cannot confirm whether her regular morning reading includes The Daily Telegraph, but I shall quote a brief extract to illustrate my point:
"Overseas investors own more than a third of the 100 blue chip companies listed on the London Stock Exchange, 10 of those aren't even British, 250 of the 1,066 top flight directors are foreigners and some of our most important industries—such as energy and banking—are largely controlled by European and US companies."
We can thus see that a significant proportion of senior executives in leading companies across industrial sectors, as well as many of those sustaining the City of London's global position in financial services, are foreign nationals, often working for foreign firms. I speak with some authority as a few years ago, before I came to this place, I worked for a foreign-owned bank.
The relevance of those points to the debate is twofold. First, from an individual point of view, a large number of highly skilled and highly rewarded individuals currently choose to work in the UK in roles that they could also undertake overseas. It is not beyond their wit to try to weight their remuneration away from the higher tax jurisdiction. With modern technology and working practices, especially in the service sector, there is a real risk that by introducing retrospection to our tax system for individuals, doubt will be cast over our personal taxation system, which will encourage income to be earned overseas and, perversely, may reduce rather than increase the return to HMRC.
Secondly, from a corporate perspective, the more worrying implication is the doubt that retrospective tax legislation introduces in the fairness of the tax system operating in this country. In a global market, companies can choose where to operate. Businesses are highly flexible and many can move their operations to jurisdictions where they perceive commercial advantage. We are increasingly used to the advantages of China and India, about which we hear so much from the Chancellor, in relation to labour-intensive activities, but the capital-intensive sector, where many of these proposals are directed, is highly mobile. A good example is reinsurance, a completely mobile activity, much of which has moved to Bermuda over the last 10 years. Such sectors often remunerate their employees very well.
My concern is that when HMRC is both judge and jury and tax legislation is introduced with retrospective effect, it could seriously erode confidence in the fairness of our tax system. The Government need to take great care. I am not sure whether the Economic Secretary is aware that the last time retrospective tax measures were introduced was under the last Labour Chancellor, Chancellor Healey, and look what happened to him. The serious point is that if companies lose confidence in the tax system, those that are not in this country will think carefully before they choose whether to come to the UK or locate elsewhere. Those already in this country, especially if the breach in the dyke were to be widened with further retrospective proposals, might eventually consider moving away. That would damage the economy, damage confidence in our tax system and damage the Government's tax revenues.
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1.44 pm
Stephen Hammond (Wimbledon) (Con): First, I declare an interest. I was one of the gentlemen who worked in the City, although I assure the hon. Member for Hartlepool (Mr. Wright) that I have neither a magic carpet nor a cellar full of wine.
Rob Marris : What about a platinum sponge?
Stephen Hammond: I have washed this morning, but not with platinum.
The Paymaster General left us in no doubt that the Bill was designed to stop evasion of national insurance contributions by introducing powers that enable the Treasury to make regulations to prohibit the use of avoidance schemes with retrospective effect from 2 December 2004. When the Economic Secretary winds up the debate, I am sure that he will make the valid point that such an intention was set out by the Paymaster General on 2 December 2004 and that the Bill merely brings the national insurance regime into line with what the Government enacted in the Finance Bill this year, so I understand the right hon. Lady's comment that she regards the legislation as non-controversial.
There are four aspects of the measure that we need to consider, however. Much has already been made of the retrospective nature of the Bill, but we should also consider possible use of the powers beyond that for which they were intended; the whole issue of avoidance, evasion and tax-planning; the introduction of an anti-avoidance rule, to which the Liberal Democrat spokesman referred; and the potential cost to business. I want briefly to examine those issues.
I had the privilege to speak on Second Reading of the Finance Bill and served on its Committee, where luckily the hon. Member for Wolverhampton, South-West (Rob Marris) helped us through the explanatory notes. I congratulate the Paymaster General and the Economic Secretary on this Bill, which is to be applauded for its brevity, clarity and its helpful explanatory notes—quite a contrast to the Finance Bill.
The hon. Member for Hartlepool seemed to question the position of Conservative Members. My hon. Friend the Member for Cities of London and Westminster (Mr. Field) has made it clear, not only today but in previous debates in the House, that we do not support anyone who does not want to comply with their tax obligations. That is our position and it extends to national insurance contributions as well.
The Bill, as I understand it, contains three measures: the power to make regulations to create a retrospective liability for national insurance contributions; to allow the disclosure of national insurance contribution avoidance schemes and arrangements; and the voiding of those arrangements and elections. Much has been made of retrospection by my hon. Friends. Any legislation that introduces retrospective powers must be regarded with caution. Understandably, taxpayers are instinctively nervous, for with the prospect of retrospection they also face the prospect of uncertainty and unfairness. Furthermore, and more important, it creates uncertainty for business and especially for business investment. Certainty is a key component in the environment for business investment and one criterion on which business undoubtedly bases its decisions is the
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existing tax and national insurance burden it is likely to face, or the likely burden when a decision is made. If the Government constantly introduce legislation with retrospective effect, it will undoubtedly create uncertainty for business and will affect business investment. An inevitable consequence of the Bill will be some undermining of business investment.
The power to create regulations for retrospective liability is enacted in clauses 1 to 4 and although those clauses confer that power on the Treasury, the Bill also supposedly constrains the power to the extent that such regulations can be made only to reflect in national insurance regulations previous retrospective changes to the income tax Acts, only where the Treasury considers it expedient for national insurance contribution regulations to have that retrospective effect, and only back to 2 December. However, in all those cases the Treasury is acting as its own constraint, so we need reassurance from the Treasury about the scope of the powers, the exact nature of the constraints and the way in which they will be used. The explanatory notes state that the powers will be used only in anti-avoidance measures. That is not helpful, reassuring or terribly explanatory. The Government will want to reassure the House that those powers will be proportionate to the mischief that they aim to tackle, and that they are sufficient only to catch tax avoidance schemes. They should not be so wide that they are disproportionate, and taxpayers' legitimate expectations to be taxed in accordance with the law when the transaction is carried out should not be abused.
Clauses 1 to 4 will be used to bring national insurance contributions regulations in line with regulations imposed by schedule 2 of the Finance Act 2005, especially in relation to employee securities for taxation purposes. If I understand clause 1 correctly, the powers will be used to ensure that, where possible, NIC and income tax PAYE legislation are changed in parallel. If that is the Treasury's intention, it would be useful to know that the process will be managed. It is desirable that NIC and income tax disclosure rules be made in parallel. Clauses 1 to 7 suggest that that is the intention behind the Bill, but I should be grateful if the Economic Secretary answered some practical concerns. If the rules are included in regulations as secondary powers, as the Bill suggests, when will the draft regulations be available? Will the Economic Secretary confirm that they will be subject to proper scrutiny and that the disclosure rules for national insurance and income tax will be similar?
The Government's attitude to tax planning, as opposed to tax avoidance, has been subject to a great deal of criticism, and the issue was raised several times in the Finance Bill Committee. It bears repetition that planning tax liabilities is entirely lawful, but in the Bill the Government appear to maintain their stance that any tax planning is avoidance. Taxpayers have the right to organise their affairs in accordance with the law—that is tax planning. If the Government deem that law inappropriate, that is not the taxpayer's fault. Tax planning should not be confused with tax avoidance.
The Government are pursuing something that began in the Paymaster General's statement on 2 December 2004 and, indeed, the Finance Act 2005. The Bill is
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widely drawn and tax authorities are given wide discretionary powers, so the Government are effectively introducing the general anti-avoidance rule that they first sought to introduce in 1997. In 1997, the Chancellor asked the Inland Revenue to investigate the impact of a general anti-avoidance rule, but, following objections, the Government pursued the disclosure regime route. However, if disclosure legislation is too widely drawn its powers extend beyond those of anti-avoidance or appropriate disclosure regimes, as wide-ranging and arbitrary powers are introduced for tax authorities that go well beyond the mischief that they are intended to address.
In a statement on the pre-Budget report in December 2004, the Paymaster General stated:
"experience has taught us that we are not always able to anticipate the ingenuity and inventiveness of the avoidance industry. Nor should we have to."
The Select Committee on Treasury has no doubt that the Government moved from a disclosure regime to a regime of general anti-avoidance rules. Its Chairman, the right hon. Member for West Dunbartonshire (Mr. McFall), stated:
"What is new is the declaration that future schemes, not yet devised or which have not yet come to the Inland Revenue's attention, may be stopped as from 2 December 2004. This amounts to a general anti-avoidance rule".
The Government must address certain issues if they wish to move from a disclosure regime to a regime for the taxation of rewards and national insurance. If a general anti-avoidance regime is deemed necessary because avoidance is supposedly rife the Government may fall into the trap of creating more tax legislation of increasing complexity and thus an increasing number of opportunities for the clever gentlemen described by the hon. Members for Stoke-on-Trent, South (Mr. Flello) and for Hartlepool to devise tax avoidance and evasion schemes. It is therefore disappointing that the legislation has been introduced, because it highlights the need for a simpler tax system with fewer reliefs, exemptions and discontinuities to thwart most tax avoidance
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