Previous Section Index Home Page

I can confirm that we have retained the full range of reliefs for people investing in smaller, unquoted companies, including the enterprise investment scheme and venture capital trusts. Rollover relief also remains
24 Jan 2008 : Column 1628
available to people wishing to reinvest in another business. Taken together, those measures include generous income tax reliefs, capital gains tax reliefs and exemptions, which have helped thousands of businesses. We have also retained several tax- advantaged share schemes, which include save-as-you-earn schemes, company share options plans and enterprise management incentives.

In December last year, the Treasury and HMRC issued a consultation document, which included legislation designed to prevent individuals from disguising income streams as a capital return to avoid tax. I will set out the Government’s next steps on measures to prevent abuse of the tax rules when the consultation process has concluded. I want to be satisfied that only genuine investors benefit from the reformed capital gains tax regime.

I have also received representations from the life insurance industry. That is a complex area and there are no clear answers, but we are ready to hear further representations.

The UK business environment remains one of the best in the world. I am determined to keep it that way. My announcement today, with measures to simplify the regime, will ensure that that continues to be the case. I commend the statement to the House.

Mr. George Osborne (Tatton) (Con): In the short, inglorious time in which the Chancellor has been in office, he has had only one original idea on tax, which was a big increase in capital gains, thinly disguised as a simplification. It is now four months since he announced it—four months in which it has attracted the universal opposition of British business; four months in which his own Prime Minister has briefed against him; four months in which he has dithered and delayed on whether to ditch it; and four months in which thousands of businesses have faced uncertainty and instability, as we all waited for him to make his mind up finally.

And so we reach today’s humiliation, as the Chancellor of the Exchequer comes to Parliament, late in January, to announce a retreat on his one big idea. Does he remember saying in his very first interview in the job to the Financial Times, back in the dim and distant days when he still had a reputation as a safe pair of hands, that he thought that we needed to be very clear that

to tax

Now here we are, halfway between the pre-Budget report and the Budget, and he is announcing major changes to dismantle the single-rate CGT regime before it has even been put into place. What a textbook example of how not to write tax law.

May I ask the Chancellor about two features of his plan? First, will he confirm that it still represents a huge tax rise on businesses? He said that the move was a £200 million tax cut; in fact, if we take the whole package, it is a £700 million tax rise on enterprise, at the very moment we face the greatest economic difficulties. Can he name one other major western economy that is planning to raise taxes as its response to the global slowdown? Any claim that the Government are preparing Britain for the rainy days that may lie ahead now lies in tatters.

24 Jan 2008 : Column 1629

Secondly, will he confirm that any pretence to simplicity has also disappeared today? In October, he told us that he was abolishing the distinction between business and non-business assets. Will he confirm that that distinction re-emerges today? He said at the Dispatch Box that

Can he confirm that he is introducing another rate, so that there are now two rates of capital gains tax? He boasted of the simple administration of his new regime. Can he confirm that the lifetime limit will require an entirely new administration within HMRC?

Where does the Chancellor think the extra £700 million in tax will come from? Will it come from the people who start and build successful businesses or from the angel investors who help small companies get off the ground? What about the 4 million employees in the save-as-you-earn share schemes, who as far as I can tell will not benefit from the tax changes that he has announced today, or the entrepreneurs who add value to the British economy—in other words, all the very people whom we should be supporting in the face of global competition? No wonder the latest survey of business opinion, published today, shows that 59 per cent. of people think that he is out of his depth in his job.

In the two years I shadowed the Chancellor’s predecessor, with the exception of Budgets and pre-Budget reports, he never once came to make a statement to the House. But in the six months I have shadowed the right hon. Gentleman, he has been popping up every week, and sometimes twice a week, to explain the latest disaster to befall his Department—the mishandling of Northern Rock, the scandal of the missing discs and now this entirely self-inflicted wound on capital gains tax.

The Chancellor is a decent and pleasant man, and many of the problems that he is dealing with were inflicted upon him by the Prime Minister. However, I am afraid that he is the living proof of what is called the Peter principle, which states:

The misfortune for us all is that his incompetence means higher and more complex taxes on business at the very worst moment for the British economy.

Mr. Darling: I notice that at no time in the hon. Gentleman’s contribution did he say whether he was for or against the proposal. It is a bit like Northern Rock—we are not at all sure what his position is from one day to the next. Indeed, I am beginning to think that he does not know either.

The proposals that I announced last October were right then and I believe that they are right now. It is right to recognise, however, that we need to do more to help small businesses in particular, and the proposals that I have announced today will do that. As I have said, the vast majority of people who have put money into a company and built it up will benefit from the entrepreneurs relief. I believe that that will be welcomed by a large number of businesses.

The hon. Gentleman asked about employee share schemes. I remind him that everyone in this country is
24 Jan 2008 : Column 1630
allowed an exemption of £9,200 before they pay any CGT, so someone would have to make a gain—that is not a total shareholder—of that amount in a year. Actually, the average gain under save-as-you-earn schemes is between £2,000 and £3,000, so most employees will be covered by that. One of the interesting things about capital gains tax is that most of it is paid by a comparatively small number of people.

The steps that I have announced today will provide a simpler scheme, with a rate of 18 per cent. We also recognise that we need to continue to encourage small businesses to expand, which is why I have introduced the entrepreneurial relief. That will benefit the vast majority of people who are likely to take advantage of it in the next year and in the years that follow. I will continue to keep these matters under review. It is far better to take the time to get these things right. That is what we have done, and that is what we will continue to do.

Rob Marris (Wolverhampton, South-West) (Lab): I welcome the statement from my right hon. Friend. I wonder whether he can answer this question. If someone had a 20 per cent. ownership of a private equity company that traded in other companies, and that private equity company owned a very small proportion—less than 5 per cent.—of a plc that made a lot of profit, could that individual claim the relief that my right hon. Friend has described, on the ground that their investment was in a trading company, namely, a private equity company, that traded in other companies, and their holding of 20 per cent. was more than 5 per cent.?

Mr. Darling: I am always wary of giving tax advice on the Floor of the House. I set out in my statement the condition that the arrangement would apply to unincorporated trading companies with a shareholding of more than 5 per cent. Certain other conditions would also be attached. If my hon. Friend wants further details, he will find them in the Library. We are aiming the measure at people who have set up a business and are either sole traders or in partnership, or people who own more than 5 per cent. of the shares in their unincorporated business and are an employee or an officer of their company. They are typically the sort of people who have been encouraged to set up a business and might at some stage want to sell up and then invest further. The measures will also help people who have reached retirement, because the first £1 million of gains will be taxed at the 10p rate. Those are people we are aiming at.

I said at the time of the pre-Budget report that, in relation to private equity, whenever there is a wide disparity between different rates—whether relating to income or capital—there is always a problem of people seeking to take advantage of capital gains tax. The 18 per cent. rate will help in that regard. In addition, as I said in my statement and as I have said before, we are seeking to close any loopholes in order to stop the kind of abuse that my hon. Friend might be concerned about.

Dr. Vincent Cable (Twickenham) (LD): May I take the Chancellor back to the beginning of his Odyssey through capital gains tax reform, and remind him of the moral outrage that was being expressed by, among
24 Jan 2008 : Column 1631
others, his colleagues on the Treasury Select Committee at the fact that extremely rich people in the City were paying lower rates of tax than their cleaners? Will he confirm that, after all the twists and turns and comings and goings, those extremely rich people will now be paying 18 per cent.—or, in some cases, 10 per cent.—while their cleaners will now be paying 20 per cent. plus national insurance contributions? In what sense does that represent progress?

Will the Chancellor also explain the impact of all this on the second homes market? Has not he given a tax cut to second-home owners—

Mr. Dennis Skinner (Bolsover) (Lab): Like Chris Huhne?

Dr. Cable: Indeed.

Has not the Chancellor given a tax cut to second-home owners of a minimum of 6 per cent. and, in certain circumstances, of 30 per cent.? Has he considered the impact of those measures on rural areas such as Cornwall, mid-Wales, the Lake district and large parts of rural England, where local people are being priced out of the housing market by second-home owners?

Is the implication of the Chancellor’s retreat today and his move away from taper relief that he accepts that the changes brought in at the outset of the Labour Government, when I believe he was Chief Secretary to the Treasury, were—as, indeed, some of us argued at the time—expensive, unnecessary and a diversion? Will he tell us what was wrong with the capital gains tax system under the previous Conservative Government, which was introduced by Lord Lawson? That system had at its heart a very simple central principle that income and capital should be taxed on the same basis. If, as the Chancellor is arguing and as the Conservatives now appear to want, income is taxed at a significantly higher rate than capital, there is a massive opportunity for tax avoidance as individuals and companies convert income into capital. What estimate has the Treasury made of the potential leakage into tax avoidance from that very familiar route?

Finally and on that basis, may I commend the idea of going back to the 1997 capital gains tax system, which was simple, made generous provision for small business, had indexation and would, on the Treasury’s own estimates, produce an additional tax revenue of about £2.7 billion? That could be used now for cutting the taxes of cleaners and other people on low pay.

Mr. Darling: I do not know of many people who would argue that capital gains tax should be put back up to the 40 per cent. rate. If that is the Liberal party policy, I was not aware of it—and I am sure that many of the hon. Gentleman’s colleagues are not aware of it either. I suspect that two parties in the House will make it their business to ensure that people around the country know that that has become the Liberal party’s policy. As the hon. Gentleman has set out, the Liberal policy has been to end taper relief.

I believe that our proposals of October and of today provide the right approach. Simplifying taxes must be a good thing if we can do it. What I sought to do in
24 Jan 2008 : Column 1632
October was set out a much simpler capital gains tax system at a rate of 18 per cent., but I recognised that we needed to do more to help small businesses in particular. As I said earlier, there are 760,000 small businesses in this country. There is additional help—it is important to remember this—through venture capital trusts and enterprise investment schemes. The enterprise schemes have raised about £6 billion and have invested in 14,000 companies, while venture capital trusts have raised about £3 billion and helped about 1,400 companies. That shows that there are many other things we can do to help small businesses through the capital gains tax and income tax regimes. I believe that what I have announced today will be good for small businesses. I have listened to what people have had to say and I believe it important to get the issues right. Overall, simplifying the tax has to be the right way forward. I can see no justification for putting the rate of capital gains tax back up to 40 per cent., which is what I now understand the hon. Gentleman’s and the Liberal policy to be.

John McFall (West Dunbartonshire) (Lab/Co-op): May I welcome the Chancellor’s statement? It is a huge step forward to have moved in 10 short years from a tax rate of 40 per cent. to 18 per cent. and with accompanying simplification. It is important for the Chancellor to continue to encourage entrepreneurship, which includes the private equity industry. However, may I say that there is a loophole in that management fees are not taxed? That information has come to me from the private equity industry, so I hope that the Chancellor will seek to close that loophole.

The insurance industry has also had discussions with me over the last couple of weeks and it is concerned that the new regime will disadvantage savers. I would ask the Chancellor to have further discussions with that industry to ensure that we do everything we can to encourage savings.

Mr. Darling: I am grateful to my right hon. Friend for his welcome. On his last point about the insurance industry, I did say that we have had discussions with that sector, but there are particular problems with one particular set of products. It is not immediately obvious that sorting out that problem will not create other problems. As I said, Treasury officials will remain in discussion with the industry. If we can resolve that problem, let us do so, but I believe that there may be considerable difficulties in doing so. As to the loopholes and various other points that my right hon. Friend raised, I keep them all under review. As a result of what I have announced today, I hope that small businesses, whose organisations have called for help of this nature, will recognise that we are determined to do all we can to help them. People who have made the effort and put all their skills and enterprise into setting up businesses should be helped to grow them and then hopefully to grow other businesses. We want to do everything we can to help them.

Mr. Iain Duncan Smith (Chingford and Woodford Green) (Con): It is a bit rich for the Chancellor to come here and accuse my hon. Friends on the Front Bench of not saying whether they are in favour of or against the proposals, when he has been both against his own proposals and in favour of them at almost exactly the
24 Jan 2008 : Column 1633
same time? Will he now accept that his Chief Secretary has let the cat out of the bag, as he has recently made it absolutely clear that under the new set of proposals people in Britain will be subject to a significant tax hike?

Mr. Darling: I do not think that that is right. I have just explained that the cost of the proposals announced today is about £200 million, which will go back into the small business sector. It is important, however, that we not only help small businesses but maintain stable finances in this country. I am not sure that the right hon. Gentleman was a supporter of the Conservative Government all the time in the 1990s, but he will certainly remember that they got into real difficulties because they could not manage their own finances.

Tom Levitt (High Peak) (Lab): Any tax system must have the confidence and consent of those involved in it, and today’s statement is a fair and sensible response to the consultation that has taken place. Will my right hon. Friend confirm that if the two owners of a hypothetical company of 40 or 50 employees, which has been established for about 30 years, for example selling management services to the not-for-profit sector, sold that company this year, the tax regime would be more generous now than it would have been under the taper system that preceded it?

Mr. Darling: As my hon. Friend describes, there are advantages for people who have set up and are perhaps considering selling small companies. If the other measures are taken into account, such as the small loans guarantee, the enterprise investment scheme, venture capital trusts and the regional help given, we are doing a lot to help small businesses, as well as helping the employees. It is also important to remember, as it is sometimes overlooked, that people have an individual annual tax allowance of £9,200 before they pay any capital gains tax. The proposals that I am announcing today represent significant help to a lot of small businesses, as we expect about 88,000 to be able to take advantage of them next year, most of them paying the 10p rate not the 18p rate; and the 18p rate is significantly less than the 40p rate that we had under the Tories and which the Liberals apparently want to reinstate.

Mr. Michael Jack (Fylde) (Con): What has puzzled me about the Chancellor’s announcement is that when he was first in the Treasury he espoused tapered tax as a key ingredient of long-term, stable capital formation and business investment. He has now abandoned that, so if he wanted to retain the advantages of his first premise, why has he not grandfathered the rights of the existing system to existing investments? If he wants his claimed benefits from the new scheme, why does he not move to that for new investments?

Mr. Darling: Quite simply because I think that that would make the system very complicated and difficult to administer.

Next Section Index Home Page