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“tax hike aimed at small business”.
As it puts it, what the Chancellor
“gives with one hand he takes with the other.”
Similarly, Nick Goulding, the chairman of the Forum of Private Business, said of the increase in the small companies rate:
“The increase in corporation tax is a kick in the teeth for Britain’s small businesses”.
My hon. Friend the shadow Chief Secretary spent some time on this subject, so suffice it to say that we shall return to it in the Committee of the whole House and upstairs in Committee thereafter.
Part 6 contains potentially significant extensions to the powers of Her Majesty’s Revenue and Customs, including extending powers of arrest and surveillance across the combined HMRC organisation—even including an ability, as outlined in clause 96, for HMRC to penalise taxpayers when it “thinks” that they have done something wrong. As Anne Redston of the Chartered Institute of Taxation pointed out in Accountancy Age on 5 April,
“You can’t levy a penalty on something HMRC thinks happens”.
“If you’ve done something, or failed to do something then you have a fact, but if they think something has happened how can you appeal?”
The powers of arrest partly result from the merger of Customs and Excise with the Inland Revenue. Although the Treasury has apparently told the professional bodies that it intends the powers to be limited in scope and used sparingly, few such safeguards are included in the Bill. It is therefore unsurprising that we have strong reservations about the operation of the proposals in practice, not least given HMRC’s increasingly heavy-handed method of dealing with taxpayers in relation to tax credit appeals. We will press the Government for safeguards on the way in
which the powers, if the House grants them, operate in the real world, including their effect on the relationship between HMRC and the Serious Organised Crime Agency in combating organised fraud. We will shortly table amendments on the subject for consideration by the Committee of the whole House next week.
Like most of the Chancellor’s finance measures, the Bill contains considerable anti-avoidance provisions, which are included in parts 3 and 5. It is part of a trend under the Chancellor to see a tax avoider around every corner and to devise an increasingly complex tax code to try to prevent that. “Tolley’s Tax Guide”, which is often called the accountant’s Bible, has expanded correspondingly to try to keep up with the raft of additional tax legislation. The Chancellor’s inherent love of complexity means that it has doubled in length since 1997 and now stretches to four rather than two volumes.
I can confirm to the House that, under the present Chancellor, we have finally become a world beater: thanks to his love of complexity, we have the longest national tax code in the world. In 1996, PricewaterhouseCoopers, in conjunction with the World Bank, published an analysis of national tax codes around the world. It showed that the UK’s code stretched to 8,300 pages, surpassed only by India, with a notoriously complex tax code, at 9,000 pages. Japan was third with 7,200 pages, while Switzerland barely got on to the pitch with a mere 300 pages of code. The Economist highlighted all that when its 11 November 2006 edition pointed out:
“Of the world’s 20 biggest economies, Britain is second only to India in the number of pages taken up by its primary legislation”.
Since then, the Indian Finance Act 2006 and the 2007 Finance Bill have added a little under 300 pages to the Indian national tax code. However, back in good old Blighty, the Chancellor’s Finance Act 2006 contained 180 clauses and 26 schedules, which stretched to 517 pages. The tax law rewrite project prepared the Income Tax Act 2007, which helped to clarify some of the Chancellor’s complex tax law in simple English and even repealed some 250 pages of it. However, to do that it added a further 1,100 pages of clauses, schedules and tables to the tax code.
The Bill piles on another 113 clauses and 27 schedules, which represent another 305 pages. In comparison with India’s nearly 9,300 pages of national tax code, the United Kingdom’s stands just short of 10,000 pages. The Chancellor, who always says that he wants to reduce red tape, has burdened the British people with the longest national tax code in the world. When the Financial Secretary responds to the debate, perhaps he will confirm that under his boss we have become a world leader—but as champions of complexity rather than clarity.
The abolition of the 10p starting rate tells a similar story. The Chancellor rushed it through on Budget day in the hope that no one could follow him while he did it. How many of those Labour Members who cheered so loudly on Budget day and waved their Order Papers so enthusiastically realised that they were supporting a tax increase for those on low incomes? How many had worked out what the Institute for Fiscal Studies subsequently told us: that more than 5 million households—predominantly those on lower incomes—
would be worse off as a result of the Chancellor’s Budget and the Bill? How many are happy to go back to their constituency Labour party executives and champion that?
The net effect of those measures is actually to increase taxation on lower-paid families and that must drive ever more of them into the Chancellor’s highly complicated tax credit system, in which we now know that more than half of all the payments are wrong. More than 333,000 people appealed last year against the attempted recovery of an over-payment and fewer than one in 20 are likely, on the latest figures, to succeed. The tax credit system devised by the Chancellor is crying out for reform— [Interruption.] The Economic Secretary shouts out “abolition” from a sedentary position. No, it needs to be reformed, and 90 Labour Back Benchers signed early-day motion 545, calling for reform of the tax credit system, particularly for the reform of the handling of overpayments.
One of the signatories of that early-day motion is the right hon. Member for Birkenhead. In an article entitled, “I won’t make life easy for Gordon by defecting”, in The Spectator of 24 February, he said:
“Gordon has been wrong on Pensions, we’ve run our course on Tax Credits, there’s no more money and we’ve enveloped huge sections of the population in means tested benefits; there ain’t any future in this. There is a need for a mega rethink, and there is a need for a leadership contest.”
Indeed. In the same article, when the right hon. Gentleman was asked whether he had considered defecting, he replied:
“I am not moving. That is not to say that I am happy in the Labour Party. Who is?”
In fairness, he then flatly rejected the idea of leaving Labour entirely, but mainly on the ground that he did not want to give the Chancellor the pleasure.
We then come to the vexed topic of pensions. The Finance Bill contains some measures that relate to pensions—for instance, three clauses in part 4, including those relating to changes in alternatively secured pensions or ASPs, as they are generally known. However, the Bill does little or nothing to address the massive damage done to the UK’s pension system by the Chancellor’s £5 billion a year smash and grab raid on our country’s pensions.
When we debated the topic last week, the extraordinary thing about the Chancellor’s performance was his absolute and total refusal to say sorry. Despite the misery that he has caused pensioners up and down this country, there was not a hint of contrition or regret. If he is confident about what he has done on pensions, why has he had to spend two years and a considerable amount of taxpayers’ money fighting the release of papers under freedom of information legislation? When challenged and put on the spot, all the Chancellor could manage was to blurt out that Labour had introduced the Freedom of Information Act in the first place.
When the Chancellor’s own Treasury civil servants warned him prior to going ahead with the change that the
“actuarial valuation of the pension scheme assets would fall by up to 20 per cent.; this would cause a shortfall of up to £75 Billion”,
what part of that statement did the Chancellor—and the Economic Secretary, who was advising him at the time—not understand? The Economic Secretary’s hurried defence of the decision was that it had actually
been done at the behest of the CBI. Subsequently, that was flatly denied by the CBI’s then director general, Adair Turner, who, on “The World at One” on 2 April said:
“Let’s be absolutely clear, the CBI never lobbied for an end to tax relief at any time whatsoever in 1996 or 1997”.
I remind the House that, whenever we debate pension changes in the Finance Bill or elsewhere, we have to be conscious that the general public are well aware that, as Members of Parliament, we have relatively generous pension arrangements of our own. For instance, as the Economic Secretary will know well, the hon. Member for Morley and Rothwell (Colin Challen)—or the future Lord Challen of Normanton, as we must probably learn to call him—can now look forward to a comfortable retirement, but what about the millions of pensioners who cannot? It is no wonder that the Prime Minister’s previous pensions adviser, Ros Altmann, said tellingly:
“The Chancellor will go down in history as the one who destroyed our pensions system. He just ignores what he doesn’t want to hear, then tries to cover up the consequences.”
This Finance Bill is brought to us by a Chancellor who is in denial about the misery that some of his measures have caused to ordinary, hard-working families up and down this country. It comes from a man who flatly refuses to apologise for any of this, because he seems to think that humility is a human weakness and not actually a strength. That kind of thinking has led to a poor Finance Bill that does little for pensioners against a background of rising inflation, which has helped to give us the longest tax code in the world but done little for small businesses, and which gives HMRC powers that need to be reined in. In short, it is a Finance Bill from a tired Chancellor, not a future Prime Minister. In view of the Bill’s inherent weaknesses, I urge the House to vote for our reasoned amendment tonight.
9.40 pm
The Financial Secretary to the Treasury (John Healey): This has largely been a good debate, until the huff and puff from hon. Member for Rayleigh (Mr. Francois) at the end. We have heard nine Back-Bench speeches, including substantial contributions from my hon. Friends the Members for Newcastle upon Tyne, North (Mr. Henderson) and for Wolverhampton, South-West (Rob Marris) and from the right hon. Member for Wokingham (Mr. Redwood). My colleagues and I will relish the detailed debates to come in Committee, in which we will show the strength of our case for the reforms set out in the Budget and the Finance Bill, and the weakness of the Opposition’s alternatives—when, indeed, any alternatives are offered.
This is the Second Reading of a Finance Bill designed to build on and reinforce the foundation of economic success and stability in the British economy under this Chancellor. His record has been described by the International Monetary Fund as
“a decade-long record of strong and steady macroeconomic performance”,
“growth of real GDP per capita was higher and less volatile than in any other G7 country”.
The Bill takes further steps to raise levels of investment and innovation, and reinforces efforts to tackle climate change through incentives to greater fuel and energy efficiency and the use of renewable technologies. It supports hard-working families and helps more people into work with personal tax reforms amounting in total to a reduction in personal taxation of £2.5 billion. It also simplifies business taxation and clamps down harder on schemes or arrangements that lead to unfair tax competition or avoidance.
The Opposition’s amendment to the motion leads with assertions that the Bill brings in a more complicated tax system, that it somehow penalises small firms and that it
“fails to equip the UK to compete in the globalised world economy”.
I shall deal in some detail with the business tax reforms in a moment and show that the amendment is wrong on each and every point.
Let me first deal with the contributions of the many hon. Members who have spoken in the debate. The hon. Member for Chipping Barnet (Mrs. Villiers) professed to be concerned about what she described as the erosion of competitiveness in the UK over the past 10 years. We are unique in all the major economies in avoiding a downturn in the past 10 years. We grew faster last year than all the other major economies. We have taken the national income per head up from seventh to second place in the G7 economies over the past 10 years, and the World Bank now rates our economy sixth in the world for ease of doing business. Those factors are hardly a basis for the concern that she professes to have about a loss of competitiveness over the past 10 years.
The hon. Lady went on to make three points. The first was on zero-carbon homes and was echoed by the hon. Member for Rayleigh, as was her second point, on the increased powers for Her Majesty’s Revenue and Customs. Her third point related to concerns about the provisions on managed service companies and it was echoed by the hon. Member for Falmouth and Camborne (Julia Goldsworthy). I shall try to deal with each of those points in turn.
On incentives for zero-carbon homes, the hon. Lady’s criticism that the provision is flawed because there is not a large number of such homes is evidently a flawed argument. We would not want to use public taxpayers’ money to incentivise things that are already being done. The new provision is designed precisely to change behaviour and to encourage the widespread building of zero-carbon homes, which is not happening at the moment.
Mr. Francois: Perhaps the Financial Secretary can solve a mystery. As it appears that the only one of those developments that the Government can cite is in the Chief Secretary’s constituency, presumably they know how many there are. How many are there?
John Healey: The hon. Gentleman misses the point again.
John Healey: The specific answer is that there are plans in Gallion Park in the constituency of my right hon. Friend the Chief Secretary for precisely the sort of development that we want to see. [ Interruption. ] The point about the policy is precisely that it aims to encourage behaviour to achieve what we do not already have.
Turning to the changes to powers for HMRC, in essence, the legislation provides that HMRC should have access to appropriate powers in the provisions of the Police and Criminal Evidence Act 1984, adapted to meet the particular concerns and circumstances of tax investigations. In many areas, the police have powers that will not be available to HMRC, such as the power to stop and search. The hon. Members for Chipping Barnet and for Rayleigh promised detailed scrutiny of the proposals in the Committee of the whole House and in the Public Bill Committee, and we look forward to that, as it is important that we get those provisions right. It is important that proper safeguards are in place alongside the consolidation of those powers.
The hon. Members for Falmouth and Camborne and for Chipping Barnet accused us of rushing in the provisions on managed service companies. Given the scale of the MSC problem, it was necessary to act promptly, as it was estimated that there were almost 250,000 workers in MSC companies in 2005-06, and that number is rapidly growing. MSC providers, their advisers, employment agencies and accountancy bodies have all discussed the plans with us in detail as part of the consultation that ran from the pre-Budget report in December to March this year. May I tell the hon. Member for Chipping Barnet that we will, of course, look—
Mrs. Villiers: Will the hon. Gentleman give way?
John Healey: May I respond to the hon. Lady’s principal point? If I do not answer it, of course I will give way.
The hon. Lady was particularly concerned about freelancers. It is only freelancers operating through MSCs who are affected by the changes. Freelancers who are engaged directly by an agency, who are in business on their own account and run their own personal service company, or who are in other business structures such as umbrella companies, are not affected. That is because, in the vast majority of cases, MSCs are used to disguise employment, and the existing rules that ensure employed levels of tax and national insurance contributions are not applied. The measure in the Bill therefore ensures that workers in MSCs pay the same tax and national insurance as other employees, thus providing a more level playing field for businesses and workers who comply with the rules. Freelance workers can still work flexibly. In fact, many employment agencies and their representative body—the Recruitment and Employment Confederation —support the measures in the Bill.
Mrs. Villiers: Does the Financial Secretary believe that any contractor who outsources administrative and management matters relating to their personal service company is a tax dodger?
John Healey: We have made it clear that we do not intend that the provisions—indeed, we have deliberately drawn them up to this end—should affect those who operate through personal service companies.
My hon. Friend the Member for Newcastle upon Tyne, North treated the House to an insight into his experiences as a trade union negotiator and cited some of the deals that he used to negotiate, including 27 per cent. wage increases. All I can say is that I am glad that he is a Member of Parliament, rather than operating in the workplace; otherwise I suspect that he would come to the attention of the Governor of the Bank of England. The conclusion that he drew from his experience, both before and since coming to the House was very important: overriding everything else, there is significant value in stability, which the monetary and fiscal framework introduced since 1997 has helped to bring to the UK, which the Organisation for Economic Co-operation and Development described as “a paragon of stability”. He was right that the major result that matters to most people and certainly to Government Members is jobs, and there are 2.6 million more jobs in the British economy than there were 10 years ago. He is right that the challenge for the next decade lies in increasing skills and learning throughout the system to allow those in work to continue in work and those not yet in work and seeking work to gain opportunities for the future.
On air passenger duty, the hon. Member for Falmouth and Camborne urged me to cite precedents for changes in taxation being introduced before Budget resolutions are debated. I have cited previously in the House the example of the increase in the supplementary charge on North sea oil and gas. I have also written to the Chairman of the Procedure Committee to underline the point and to explain that, in law, a resolution made under the Provisional Collection of Taxes Act 1968 has the effect
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