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Rob Marris : The hon. Gentleman has put the cart before the horse. We have complex tax legislation because there are anti-avoidance schemes. We do not have anti-avoidance schemes because of complex tax legislation. If one looks at the history one can see which came first and thus which is the cause and which the effect.
Stephen Hammond: I beg to differ—it is the hon. Gentleman who has put the cart before the horse. There are more members of the tax planning community because the Government are creating more complex legislation, in which tax planners seek to pick holes.
Tax practitioners acknowledge that measures in the Bill will act as a deterrent impact, but Joy Svasti-Salee of KPMG says that
It is not clear which schemes will be allowed and which prohibited when they are left unspecified by a general catch-all. By contrast, specific laws would aim to define abuse and avoidance. Discretion has been granted to the authorities over NICs and income tax but, as my hon. Friend the Member for Cities of London and Westminster said, that should go hand in hand with binding tax and NIC clearance granted by the HMRC when its opinion or advice is sought about a tax scheme by a taxpayer prior to making certain decisions about the structure of their financial affairs.
HMRC has resisted that proposal, and undoubtedly the Paymaster-General will repeat that it is not in the business of giving free tax advice. That argument falls, because she has changed the rules, and if a specific proposal is taken to HMRC on a matter of tax or NIC policy in which the authority has acknowledged and increased discretion, it is wholly appropriate that it should have a duty to give a ruling about how it will exercise those powers prior to the implementation of a scheme.
Dawn Primarolo: The hon. Gentleman's argument is based on a fundamental misunderstanding. The Bill does not give discretion to HMRC. The House will decide whether avoidance schemes are to be closed down as a result of the proposal in both the Finance Bill, which introduces primary legislation on income tax, and in national insurance regulations, which are subject to the affirmative procedure. It is the House that takes the decision and no one else.
Stephen Hammond: None the less, if discretionary powers are to be increased overall—[Interruption.] There is obviously a dispute about whether the Government are increasing discretionary powers. It is clear, however, that the Bill fails to introduce a corresponding binding clearance regime, even though that would be desirable.
Finally, what are cost implications of the Bill for business? The regulatory appraisal says that employers who have engaged in avoidance must submit supplementary end-of-year returns for NICs. According to the explanatory notes, that will affect only 500 employers and will not cost more than £3,000 per employer. Does the fact that the number of affected employers is small show that the previous regime was working? Who calculated the £3,000 cost? The regulatory appraisal says that 21,000 small businesses and a further 90,000 self-employed people will incur small familiarisation costs, which is a big extra burden on business. Who made that estimate and who judged the costs to be negligible? The explanatory notes say that the measure will generate an additional £95 million in NICs in 2004–05, and £240 million per annum thereafter. The HMRC website, however, states that the Bill will secure tax and NIC yields of £200 million in 2004–05 and £500 million thereafter. It will be interesting for the House to know which of those is correct.
There are elements of the Bill that may be regarded as non-controversial, but we need to explore the possible use of the powers beyond the purpose for which they are intended, the avoidance v. tax planning issue, the introduction by the Government of a general anti-avoidance rule, and the potential cost/benefit of the measure for business.
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Mr. Richard Spring (West Suffolk) (Con): Nobody could dispute the important principle that illegitimate tax avoidance must be dealt with, but as we heard in our debate today, there are issues concerning certainty, which means that we must consider legislation such as the Bill with great care and sensitivity.
I have two general points to make. First, simplifying the tax system as a whole would, over time, reduce the desire to avoid tax by complicated schemes, NIC schemes or other forms of avoidance. However, as emerged clearly today, retrospection should be used very sparingly indeed. I fear we risk moving away from that principle as the Government desperately try to fill their black hole. Secondly, the increasing burden on small businesses from filling in extra forms and providing even more information to the Treasury as a result of the Bill must be considered in the context of the ever increasing weight of bureaucracy.
I thank all those who spoke in the debate. I was particularly pleased that we had a contribution from the hon. Member for Stoke-on-Trent, South (Mr. Flello), because I see that before he came to the House he was a tax consultant and worked for the Inland Revenue, so I am sure he will make worthwhile contributions to discussions on these matters in future. He spoke about gold, mink coats, coffee beans and other esoteric items. I worked in the financial services industry until 1992, but none of these was on offer, as I recall, though apparently that did happen.
The hon. Member for Twickenham (Dr. Cable) was right to say that it is difficult to brand something as wholly legitimate or wholly illegitimate. There is indeed a spectrum, and in the present context situations are not always clear cut. I agree that we are discussing a practical issue. He spoke, for example, about the clawing back of concessions already made to employees, again taking up the powerful point about the over-complexity of regulations and the tax system. I hope Ministers will recognise that.
The hon. Member for Hartlepool (Mr. Wright) declared how virtuous he had been in his previous life. I say to him as gently as possible that the words "virtue" and "Hartlepool" are not automatically associated in people's minds in the House. I feel sure that he will overcome that in due course. He spoke about NIC scams, the issue of retrospection, and very high salaries in the private sector. However, high salaries are not confined to the private sector. He will know what goes on in local government and the sort of salaries paid to people in primary care trusts and the NHS.
My hon. Friend the Member for Croydon, Central (Mr. Pelling) rightly pointed out that complexity encourages avoidance. That is the theme that has run through the debate. Simplifying the system would increase revenue and promote certainty. My hon. Friend spoke of wealth creation and the important role of wealth creators in our society. My hon. Friend the Member for Ludlow (Mr. Dunne) spoke about uncertainty and the fact that the Bill reinforces the principle of retrospection. He was right to say that there was always the risk that people coming to work in the United Kingdom from abroad had arrangements for a proportion of their remuneration to be made elsewhere. He noted that we were in a globally competitive
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marketplace for good people. The City of London is hugely important to our financial and economic well-being, and he was right to highlight the re-insurance market.
In a thoughtful contribution, my hon. Friend the Member for Wimbledon (Stephen Hammond) emphasised the need for great caution with regard to retrospection. He spoke of the importance of certainty for business investment purposes, the threat of investment being undermined by the lack of certainty, the importance of defining constraints and the movement towards a more general anti-avoidance culture, with all that flows from it.
Many experts have commented that we need more assurances on the scope of the proposed powers and the way in which they will be used. It is not sufficient that the explanatory notes state that the retrospective powers will be used only in anti-avoidance situations—a point made tellingly by my hon. Friend the Member for Cities of London and Westminster (Mr. Field). Who will judge what constitutes unacceptable avoidance? We need to treat retrospection with great care.
Many firms will be setting out their tax plans and accounts for the forthcoming year and will already have done so for the previous year. In its 2004 pre-Budget report, the Treasury Committee stated in respect of retrospection:
"The Inland Revenue should, without jeopardising their position, publish a paper setting out their thinking on the principles which will guide the way they implement this announcement".
The explanatory notes, though welcome and clear, are not a full and satisfactory substitute for such a paper. At least businesses will then have additional certainty about how the law will apply to them.
Clause 1 seems to indicate that the powers will be used in such a way as to ensure that as far as possible NICs, income tax and PAYE are changed in parallel. Although we welcome the assurance from the Paymaster General that businesses would be given time, a coherent approach is necessary and we would welcome the Government's assurance that that is their intention and details of how it is to be orchestrated.
After reading the explanatory notes, outside observers were struck by the fact that the overview of statutory payments in annexe B is an illustration of how much work has to be done by employers on behalf of the Government in handing out the benefits. In the regulatory impact assessment, the Government attempted to assess the Bill's potential impact and came to the conclusion that the combined impact of the measures included in the Bill
"will not impose significant additional burdens or costs on employers unless they engage in contrived schemes to avoid income tax and NICs on remuneration paid to their employees."
They further state that the NIC avoidance measures are not aimed at businesses of any particular size and will not affect small businesses disproportionately. However, it should be remembered that small businesses may find it more difficult to attract quality personnel, and therefore need to be able to offer tax-efficient employee incentive schemes.
As the Government have already announced, the powers in the Bill will first be used to tackle NIC avoidance through employment-related securities. It has
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been suggested that that will disproportionately affect the businesses that the Government originally intended to promote by introducing tax-efficient employee incentive schemes such as the enterprise management incentive scheme. That requires clarification. I do not expect the Minister to comment specifically on the scheme this afternoon, but it would be useful if he could write to me explaining how such a scheme is likely to operate in future.
The enterprise management incentive scheme was introduced in the Finance Act 2000 and it neatly demonstrates the conflicting and contradictory aims that may be the result of complicating the tax system and over-regulating the business community. The scheme was designed to help small, growing companies to recruit and retain high-calibre individuals who would otherwise be attracted by more established businesses offering better salaries. A qualifying company is allowed to grant share options worth up to £3 million to any number of its employees. No tax or NICs are payable on the grant of the share options, provided that they are capable of being exercised—and are exercised—within 10 years. If, on the exercise of the share option, the price at which the employee can exercise the option is at least equal to the market value of the shares when the option was granted, no tax or NICs are charged.
While such schemes are welcome for trying to help smaller, entrepreneurial companies to attract and recruit high-quality individuals, the Bill might disproportionately affect the very companies that the Government are trying to help to implement similar schemes, for similar purposes, by mitigating the amount of NICs that they pay. I am thus citing a practical example of what we are talking about, so I would like the Minister to shine some light on how the system is likely to work in practice.
We have seen huge growth in the size of the Red Book over the past few years, and our tax system is now very complex. A frenetic game of cat and mouse has been played on tax avoidance, primarily regarding NICs, between the Treasury and the Revenue, and the tax advisory sector, which devotes ever-increasing amounts of time and effort to exploiting legal loopholes in legislation to minimise NIC liability or other forms of taxation. The whole tax advisory business has blossomed under this obsessively bureaucratic Government.
The need for Government revenue and the complexity of the tax system provoke and increase attempts at avoidance because they cause too many loopholes to be exposed. If the Government are intent on continuing to deal with the symptoms rather than the cause, the patient will continue to get sicker. Meanwhile, an annual dose of alternative medicine in each Finance Act will simply not give us a long-term cure.
It has been estimated that 21,000 small businesses, and perhaps a further 90,000 self-employed persons, will incur learning and familiarisation costs as a result of the Bill. Ministers must realise that regulations do not exist in a vacuum. Once they leave Whitehall they do not simply float away. Regulations have had a significant and direct effect on businesses that have to devote time and resources away from increasing production so that they can focus on compliance with Government regulations.
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The British Chambers of Commerce says that the total cost of regulation to British business is now running at many billions of pounds—it has increased dramatically. The Government have introduced over 27,000 regulations since coming to office, which is an average of nearly 4,000 each year, or 15 new regulations every working day. They have hugely increased the burden of regulation since they came to office.
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