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Dr. Cable:
My hon. Friend is right, and he has helpfully prompted me to mention something that I omitted from my remarks about capital gains tax taper relief. Clearly if people buy property and hold it for 10
years as individuals—if not as companies—and resell it as an investment, that not only bids up prices in areas such as his, but provides a substantial tax shelter for the individuals concerned.
David Taylor (North-West Leicestershire) (Lab/Co-op): The hon. Member for Runnymede and Weybridge (Mr. Hammond) implied that payment of council tax by the rich somehow compensated for their avoidance of other taxes on a grand scale. Someone in a property in this borough of Westminster—the one owned by the Mittals, say, which is worth £48 million—paying band H council tax is probably paying less than an ordinary working person in a band D house in North-West Leicestershire. That is not much of a compensation, is it?
Dr. Cable: The hon. Gentleman has made my point for me, in a striking way.
Mr. Redwood: Does the hon. Gentleman also think it unfair that well-off people who are legally settled in Britain and paying taxes here can buy every new issue of national savings and accumulate a very large sum which is entirely free from tax on income and capital gains? Does he want to stop that as well?
Dr. Cable: To be honest, I have not reflected on the concession that is given. I would rather reflect on it than attempt a glib answer, and as that was an interesting question, I shall do so.
Mr. Hammond: I am grateful to the hon. Gentleman for his generosity in allowing a series of interventions. May I return to his point about taper relief on non-business assets over 10 years? Does he recognise that within that gain, in the absence of indexation, is a significant element of inflationary gain? Will he comment on his party’s proposals, which involve taxing what is a purely inflationary gain at the end of that period?
Dr. Cable: It is true that in the report we published we did not set out how an inflation taper system might operate. I certainly accept intellectually that inflation should be compensated for in some way, and when we are called on to set out our policy in more detail, we shall describe how that can be done.
I also acknowledge, as the hon. Gentleman has raised this broader question, that when it comes to capital gains tax there are certain benefits from the taper relief. It was designed to encourage particular types of company. Defending the position that I am taking, Lady Noakes, a Conservative spokesman on these matters, inquired in another place:
“My Lords, does the Minister agree that some of the tax incentives utilised by private equity were designed to support and encourage real venture capital? If he agrees, can he explain why investment in early-stage companies has declined from 10 per cent in 1998 to 2 per cent in 2005?”—[ Official Report, House of Lords, 10 July 2007; Vol. 693, c. 1285.]
The original objectives of the concession have clearly not been met.
I am happy to take interventions, but I was interrupted at a point at which I was trying to explain about the complex ways in which sophisticated tax
advisers can help non-domiciles to avoid paying inheritance tax, which is one of the most difficult taxes to avoid in the United Kingdom. According to Mr. Tailby-Faulkes, whom I quoted earlier,
“UK property is always within the IHT net on the death of the owner, even if they haven’t been domiciled in the UK.
A simple way to mitigate this is to have a mortgage on the property... But one problem is that if foreign income or gains are used by the foreign domiciled borrower to pay the mortgage then these will be taxable remittances.”
That is a problem, but he has thought his way through it:
“A solution can be to take out a loan with a foreign lender; as long as this is on interest-only terms, using foreign income and gains to pay the interest costs will not count as a taxable remittance.”
There are mechanisms to deal with even the most intractable tax-avoidance problems.
It was precisely because of that set of concerns that the Prime Minister, then Chancellor of the Exchequer, wished to initiate a review of the whole question, which he did in the 2002 pre-Budget report. He said:
“Building on this work, the Treasury and the Inland Revenue will assess how the current rules work in practice, and will publish a background paper to aid discussion of how the rules compare with the Government’s principles.”
What happened to that 2002 initiative? No report has ever been published, no review of policy has ever been described, and no calculations have ever emerged to establish whether or not it would be beneficial to the United Kingdom.
Julia Goldsworthy (Falmouth and Camborne) (LD): When our hon. Friend the Member for Lewes (Norman Baker) asked that very question during Treasury questions last week, he received the following answer:
“The Government’s review of the residence and domicile rules is ongoing. The Government are mindful that any change to the current system would need to balance carefully the principles of ensuring fairness and of promoting the UK’s international competitiveness.”—[ Official Report, 12 July 2007; Vol. 462, c. 1605.]
Does my hon. Friend agree that if the review is “ongoing”, it is about time we received a report?
Dr. Cable: One would have thought that five years might produce a less bland analysis of the issue. In the meantime, some of us have been trying to find out how far the Treasury progressed with its inquiries and what are the preliminary results. I asked the then Economic Secretary to the Treasury, the right hon. Member for Normanton (Ed Balls)—now Secretary of State for Children, Schools and Families—about that some months ago. When I asked him specifically how much tax had been forgone as a result of the concession, he replied:
“Estimates of the tax forgone in the UK as a consequence of the use of the remittance basis by those not domiciled in the UK are not routinely made... No estimates have been made of the economic benefits to the UK from the retention of the domicile laws on taxation.”—[ Official Report, 30 April 2007; Vol. 459, c. 1383W.]
That was five years after the study had been initiated.
Part of the problem with the right hon. Gentleman’s answer is that—although I am sure that this was not intentional—it is not actually true. The Government
have been obliged on several occasions to divulge the results of their work. A few years ago, a freedom of information request by a magazine called Accountancy Age produced what is described as “a heavily redacted memo” from the Inland Revenue to the Paymaster General, dated 15 December 2003. The memo contained the statement:
“Many non-domiciled residents pay substantial amounts of UK tax. We estimate that, in total, they pay about £5 billion in UK tax and NICs but only escape tax of about £1 billion of unremitted income and gains.”
Therefore, there is a basis for an analysis—and, indeed, there might be a positive outcome.
I repeatedly press the Government for updates on those figures and more detailed analysis, and the answer I receive is remarkably secretive. The latest statement from Her Majesty’s Revenue and Customs is:
“HMRC does hold some information prepared since 1 January 2005...but we are not proposing to disclose that information because we think that the information is subject to an exemption under section 35 of the Freedom of Information Act 2000—information held for the formulation or development of government policy.”
I ask the following obvious question: what on earth have the Government got to hide? If this is a beneficial relationship—if it is to the benefit of the UK economy—why do the Government not publish, given they have nothing to lose? All we are asking for is a straightforward statement of the benefits to the UK in tax terms, the revenue that is being forgone and a balanced evaluation of whether this is good for the UK economy. In the final analysis it might well be a perfectly sensible arrangement that is necessary in a globalised world economy, but I would like to see such a proper analysis of that. Instead, the Treasury have addressed the matter in a secretive manner.
David Taylor: Does the hon. Gentleman accept the thesis of the previous Government—and, indeed, of the current one—that any vigorous attempt to tighten the domicile rules will undermine the City’s role as a global financial centre? Does he acknowledge that there is a trade-off, and at what point would he be willing to trade off some flexibility on the definition of domiciled status?
Dr. Cable: The hon. Gentleman is right that there is a trade-off, and it would be foolish to be dogmatic one way or the other.
I have another quote on non-domicile tax relief from a leading City tax specialist, Richard Murphy:
“When I have sat with Treasury officials and asked them why don’t they do something about this, it is because they are frightened the money will leave London and they think there is a benefit to this.”
We say, “Quantify the benefit.” That is all that we are asking for. The benefit could indeed be huge—as the right hon. Member for Wokingham (Mr. Redwood) said. If so, why is the Treasury so frightened of making the case? One would have thought that it would be a straightforward and easy case to make, but in almost five years of deliberation the Treasury have clammed up completely in terms of giving any facts or analysis of the situation.
One reason why the Treasury ought to focus on this question is that it appears to be easy to get non-domiciled status. I was not aware that that was the
case until one of my staff who has a grandfather from Switzerland made inquiries. He asked, “If I wanted to become a non-domicile taxpayer, how would I do that?” Those who wish to do so get a four-page form which must be filled in. So far as I am aware, there is no extensive vetting by the Inland Revenue. They just proceed, even though they might have very tenuous connections with the UK. It might be for that reason that the number of those involved is rising rapidly: there were 105,000 in 2003-04, 112,000 in 2004-05, and perhaps the Minister will tell us how many have been granted that status since.
I do not wish to make a dogmatic case for or against this form of tax relief for very wealthy people. Like the hon. Member for North-West Leicestershire (David Taylor), my instinct is that there could be some sensible limitations. One obvious limitation would be to restrict the number of years for which it is possible to enjoy non-domiciled status. Allowing that period to go back to the era of people’s grandparents or parents seems to me to be remarkably generous. A period of 20 years, which would align with the inheritance tax rules, might be a fair compromise. It would also be fair and right that even if we were to allow non-domiciled investors to continue, in the interests of the City, to enjoy tax relief on their overseas income—although I should say in passing that the Americans do not allow that—some specific exemptions, such as that capital gains tax is not subject to anti-avoidance rules, clearly should be dealt with.
I hope that what I have said will stimulate debate on the non-domiciled rules—I do not think we have ever had one during my 10 years in Parliament. I have said a little about capital gains tax, and I wish to talk briefly about a couple of other major taxes of importance to the very wealthy.
Steve Webb: Before my hon. Friend moves on, he mentioned anti-avoidance and I ask him to touch briefly on the concept of a generalised anti-avoidance rule. I am a layperson in terms of these matters, but I have always felt that a presumption that active avoidance techniques should be ruled out as a point of principle would be preferable to the current piecemeal approach. Does my hon. Friend agree?
Dr. Cable: Yes. We have argued for that, and I believe that the Government want to move in that direction, although they have been slow in implementing that. What my hon. Friend proposes is obviously right and would make it more difficult for companies to set up in business with the specific purpose of promoting anti-avoidance. The Government have made it clear that they want to tighten up where they can. However, the Government are having a drive on tax evasion, as opposed to tax avoidance. They have offered a generous amnesty to large numbers of very wealthy people who have not been paying taxes that they legally should have paid. A perfect combination of policies would be to pursue assiduously the evaders while tightening up on avoidance.
David Taylor:
The hon. Gentleman is being generous in giving way. On the appropriate approach to avoidance schemes, will he look at the early-day motion 1652 that I have co-sponsored, which draws attention
to the regrettable attitude of the five big accountancy firms to devising, promoting and implementing tax avoidance schemes on a grand scale that have no commercial substance? Those firms are heavily involved in artificial loans, fictitious assets, secretive trusts and transfer pricing, which deprive the Exchequer of billions of pounds every year and therefore restrict social investment, and which transfer the load of financing public services to taxpayers with less means than the very rich people whom those five accountancy firms service.
Dr. Cable: The hon. Gentleman is right, and I am sure that those firms would say that as long as the system permits it, why should they not pursue fee income from their clients? The only way to prevent that would be to have the kind of rule that has been described. It is my understanding that the Government want to move in that direction. Will the Minister tell us how far they have got?
Julia Goldsworthy: My hon. Friend might be interested to know that during discussions of this year’s Finance Bill there was some evidence of mini general anti-avoidance rules being discussed in terms of issues such as stamp duty land taxation. However, the industry’s concern is that that might be in addition to the existing Government regulation, and it asks for a simplification instead of additions to the already complex taxation system.
Dr. Cable: I thank my hon. Friend for that intervention. She worked extremely hard on the Finance Bill and is much closer to the technical issues than I am, and I am sure that she is right.
Let me say a few words on unfairness in relation to other taxes that bear upon wealth. Stamp duty is a tax on transactions rather than a wealth tax, but it does relate to property assets. Two elements of unfairness should be dealt with. The first involves what is technically known as the slab system. When a certain threshold is reached—£250,000 for the 3 per cent. limit—the purchaser pays the full 3 per cent. on the total sum. Therefore, somebody who purchases what is nowadays quite a modest house pays £7,500. Somebody who buys a house worth £500,000—in much of south-east England that would be a modest home—will pay 4 per cent. on that total, which amounts to a £20,000 tax bill in cash. That is an extremely onerous form of taxation and, moreover, it is not progressive.
Another beneficial loophole to those who are well organised and wealthy means that if they arrange to buy a house through a corporate offshore vehicle, they can pay as little as 0.5 per cent. stamp duty. Many very wealthy people use that loophole. I am surprised that the Government have not alighted on that problem in their efforts to combat tax evasion.
Mr. Philip Hammond:
I carefully read the Liberal Democrat document that was published last week, and I have a question about the slab versus the slice system. The hon. Gentleman proposes to move from the slab to the slice, but will he confirm whether that will apply at the £500,000 threshold, or is the document suggesting
that when £500,000 is reached, the entire value of the property will become subject to the 4 per cent. rate from the first pound?
Dr. Cable: We are recommending the principle that it should apply up the scale. Exactly how that will operate depends substantially on the state of the property market. If the hon. Gentleman wants a good description of how a reformed stamp duty system would work, several years ago the Council of Mortgage Lenders produced a set of numbers showing how a progressive scale of charges would work. We would endorse that principle, although the detailed arithmetic would have to be reworked in the light of current numbers.
Andrew George: I apologise for dragging my hon. Friend back to property taxation and capital gains tax on second homes. The issue is not just raising fair taxes on those with wealth, but using the available records of those who would have to pay capital gains tax as a means of rationing properties through the planning system if a change-in-use class order were introduced, as our party proposes. Does my hon. Friend agree that the issue is not just fair taxation, but using the tax system to ensure that properties can be rationed so that those in the most desperate housing need, rather than second home owners, get properties?
Dr. Cable: I would quibble a little over the word “rationed”, but the sentiment of my hon. Friend’s intervention was helpful and supportive, and I agree with him.
I do not want to spend long on inheritance tax because those who suffered through discussion of the Finance Bills of the past few years—my hon. Friend the Member for Falmouth and Camborne (Julia Goldsworthy) soldiered on the front line—have talked about inheritance tax ad nauseam for hours, if not days. There are some odd features of the way in which the inheritance tax system has worked out in recent years, and the numbers are simple. Since 2000, the number of estates valued at more than £2 million for inheritance tax has declined by 8 per cent., in the context of an enormous increase in the number of properties worth more than £2 million. The number actually paying inheritance tax has fallen. On the other hand, the number of estates valued at between £300,000 and £500,000 has increased by 20 per cent. Essentially, the tax is voluntary for those at the top end of the scale because they have access to sophisticated advice, while middle class families—that is essentially what we are talking about—who are not familiar with the various devices available to them, particularly through gifts, are paying the tax, unaware of the potential for avoiding it. Clearly that is fundamentally unsatisfactory.
I shall summarise a few of our proposed steps to make the system fairer—they are modest, and part of a much more comprehensive approach to taxation—to bring together the threads of my argument. First, it is clear that the reliefs on capital gains tax—such as taper relief—should go because they are expensive, unfair and reward wealth unsatisfactorily with no evidence that they produce significant economic change of behaviour.
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