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At the outset, may I thank my hon. Friend the Member for Cities of London and Westminster (Mr. Field) for his role in scrutinising the Bill in Committee? It was not an onerous Committee, but he and my hon. Friends made great progress in asking detailed questions of the Paymaster General. I am therefore grateful for his work on the Bill. As the Paymaster General said on Report, this is my first opportunity to speak on tax matters as a Front-Bench spokesman. I am a chartered accountant, albeit a non-practising oneI except, of course, my annual struggle
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with my tax returnand I look forward to engaging in constructive debate on tax with the Treasury. I believe that the hon. Member for Hartlepool (Mr. Wright) is a chartered accountant, and he, too, will wish to make a contribution to our debates.
For the benefit of Members who are new to the Bill, including my right hon. and hon. Friends who participated in our debates on Report, may I reflect why the Bill is needed? The Paymaster General referred to avoidance issues, but a separate Bill on national insurance is needed because of the way in which national insurance and other taxes are administered. The Bill makes additional provisions to the Social Security Contributions and Benefits Act 1992. Before 1999, national insurance contributions were managed by the Department of Social Security. Since then, they have been managed by the Treasury. Until national insurance was brought within the Treasury's remit, the national insurance and the income tax systems were often out of sync, and it took some time for national insurance to catch up with changes in income tax. Indeed, at one point, the Treasury and the DSS announced wildly differing approaches to the taxation of share options within weeks of each other. At least the Bill tries to manage those processes and bring them together.
The Bill has two principal objectivesfirst, to apply disclosure arrangements in the Finance Act 2004 for taxes other than national insurance to national insurance itself, and, secondly, to create the opportunity to levy retrospectively additional or new national insurance charges in cases in which the Government believe that schemes have been contrived to avoid national insurance. As the explanatory notes acknowledge, that is a first for national insurance:
That captures the flavour of our earlier debate on retrospection. I wish to highlight three issues that have been raised in debates on the Bill: retrospection; the breadth of the Bill and the problems that that has caused; and the delay between the introduction of primary and secondary legislation, and the comments that the Paymaster General made about the subject.
On retrospection, we have debated the Paymaster General's statement in December 2004 and the issues that arise from it. There are concerns about retrospection, but I do not want to reopen the wounds that were exposed on Report. The Institute of Chartered Accountants, in a letter from the tax faculty to the Paymaster General in February this year, highlighted three issues, including, first, the test of certainty and the fact that taxpayers should be aware of how much tax they pay. They are entitled to expect that they will be taxed in accordance with the law in force at the time of the relevant transaction. Retrospection undermines those expectations of certainty. Secondly, the institute considered the legal basis of retrospection and the way in which it sits in the wider context of EU and human rights law. Looking at emerging EU case law, it said that
The Bill does not, as far as I am aware, provide a transitional period for the removal of a right. The test of the Bill, therefore, may not be in the House but in the courts.
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The third issue raised was the potential of retrospective legislation to undermine the credibility of the UK tax system in the eyes of UK taxpayers. The Institute of Chartered Accountants rightly observes that by and large the UK tax system has a high degree of credibility, the tax rules are obeyed, and taxpayer compliance and honesty are good. If we introduce increased uncertainty into the tax system by greater use of retrospection, the predictability and certainty that is such a feature of the UK tax regime will start to diminish, perhaps leading to concern on the part of international employers. If they come to the UK and site operations here, will they find the tax regime changing without prior warning? We need to bear in mind those three aspects when we consider retrospection and its impact on the overall tax environment in which we work.
A further concern about retrospection is its impact on the law-making process. If retrospection on a wide scale becomes institutionalised, will law making become lax? If the Revenue thinks that it can have a second bite at the cherry by using retrospection to correct mistakes that it has made in drafting legislation, will that create an environment in which the Revenue takes less care in drafting the original legislation? I am sure the Treasury and Her Majesty's Revenue and Customs will not see retrospection as a way of taking a more relaxed approach to drafting legislation. On the whole they are diligent in drafting legislation and we want that to continue.
We discussed today the breadth of powers in the Bill. I remarked earlier that tax advisers were surprised at the content of the Bill and the breadth of the measure. In its report on the 2004 pre-Budget report the Treasury Committee, commenting on the Paymaster General's statement on 2 December 2004, stated:
"The indication in this statement that the Government will continue to announce proposed legislation, effective from the day of the announcement, to stop schemes which come to their attention is nothing new."
"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 in this area of taxation of income and rewards, although no new powers are being taken by government."
So, in the Committee's view, the very thing that the Government had backed away fromintroducing their disclosure rules in the Finance Act 2004because of criticism from the tax law review committee at the Institute for Fiscal Studies and comments from the Chartered Institute of Taxation, they seemed to have backed towards. We need to look again at how the legislation works.
The Paymaster General spoke of the importance of making sure that the proper or right amount of tax is paid. In seeking to extract that, how do the Government distinguish between planning, mitigation and avoidance? There is a spectrum. If people are following the law, at what point do the Government intervene to tackle avoidance issues? We will need to consider that. The Paymaster General referred to the process for scrutinising secondary legislation, and that may give us the opportunity to do so in Committee when those
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statutory instruments are laid. Taxpayers have a right to expect that the tax law on the day on which they undertake a transaction will continue to apply to that transaction going forward.
The third and final issue that I shall comment on is the delay between primary and secondary legislation. Primary legislation tackles the PAYE and income tax aspects of a contrived scheme. Under the Bill the consequent national insurance secondary legislation can come forward so that amendments made to income tax legislation to close down avoidance schemes can be used in national insurance legislation to close down similar loopholes.
Rob Marris : Is the hon. Gentleman suggesting that he favours a move to a portmanteau Finance Bill that covers national insurance, because national insurance is no longer the responsibility of the Department of Social Security, which is now the Department for Work and Pensions, or is he content to continue with dual-track BillsFinance Bills and national insurance Bills?
Mr. Hoban: As ever, the hon. Gentleman has made a pertinent and thought-provoking point. Some have suggested that national insurance and pay-as-you-earn are coming closer and closer together and that a distinction should not be drawn between PAYE and national insurance as a way of funding contributory benefits. I am not sure whether PAYE and national insurance should come together. My hon. Friend the Member for Tatton (Mr. Osborne) has set up a commission under the chairmanship of Lord Forsyth to review the tax system. It will consider simpler taxes and may examine that area, on which I do not want to comment today.
The delay between primary and secondary legislation relates to my earlier point about the different origin of national insurance contributions, and national insurance has taken some time to catch up since its management by a separate Department. The Bill allows for a 12-month delay between primary legislation and statutory instruments coming into force.
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