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My hon. Friend rightly highlights the burden of the Governments proposals on small businesses. As he has said, what the Government referred to as an
entrepreneurs relief set a cap on the ambitions of those entrepreneurs. Does he agree that it is a peculiar approach on the part of a Government who claim to support enterprise to penalise anyone who is successful above £1 million?
Tony Baldry: The treatment of capital gains tax has been and continues to be a fiasco. Clearly, the Government have arrived at a compromise between wanting to get the greatest possible tax take and not wishing to frighten off the business community too much. The Government have recognised that the business community have understandably fallen out of love with them, and are trying to mitigate the damage.
Business owners have also been hit by reforms to capital allowances, which will raise billions for the Treasury. That makes the giveaways in the Budgeta small £30 million enterprise capital fund, a £12.5 million fund to invest in female-run businesses, and a £60 million increase in the small firms loan guaranteeappear to be exactly what they are: token gestures.
While it is true that businesses will receive more than £680 million-worth of tax relief from the Chancellor over the next three years, it is also true that £1.4 billion worth of new taxes will eat away at any gains that they may make. For most businesses, the rate of capital gains tax will rise from 10 per cent. to 18 per cent., a rate that the Chancellor said would be introduced next month as planned. Britains corporation tax income from companies is higher than that of any other countries except Japan and Canada. Bill Dodwell, a tax partner at Deloitte, has said:
Businesses are worried at the rate at which things are taxed but also on what they are taxed. They are taxed on far more... than in other countries.
Businesses have been hard hit by this Budget. Let me take up what the hon. Member for Selby (Mr. Grogan) said about the tax on beer. As James Clarke, managing director of Hook Norton brewery in my constituency, has observed,
A duty increase would not significantly affect off-trade prices, but would be devastating for pubs... Beer sold in pubs contributes to local economies, and often the pub can be the only retail outlet in a community, but obviously this still needs to be a viable business. Pubs are under increasing pressure from energy and food prices, as indeed we all are, so freezing duty on beer would not only be a real benefit, but it would also be seen as such.
In my constituency, businesses will be asking What next? We are seeing post offices being closed, hospital services being downgraded and village pubs disappearing. What will we see next under this Government? I do not have time, notwithstanding the generous allocation that the House has given me
No. I have no time to do so, or to draw the Houses attention to the fact that nothing has been done to help business with red tape. Labour pledged to
cut red tape in their 2001 manifesto, but even after three Acts of Parliament the regulatory burden on business is worse than ever.
Mr. Michael Meacher (Oldham, West and Royton) (Lab): I do not propose to comment on what was said by the hon. Member for Banbury (Tony Baldry), because he repeated large amounts of what we have already read in the newspapers. What I will comment on, before I come to my main point, is the principal line that the Opposition appear to be taking in the debate. It was taken by the hon. Member for Rutland and Melton (Alan Duncan), by the right hon. and learned Member for Rushcliffe (Mr. Clarke), the former Chancellor, and by the hon. Member for Gainsborough (Mr. Leigh), the Chairman of the Public Accounts Committee. Their argument was that the Government were at fault because they could have prepared earlier and better for the downturn. My argument is that this is not a normal downturn in a regular business cycle, and it is disingenuous and simpliste to suggest that that is so when the two central factors in the crisis are the United States sub-prime fiasco, for which the United Kingdom Government are not responsible, andlinked to thatthe massive shift to securitisation and the opaqueness of trade assets. Because of the complete failure in the role of the credit rating agencies, the toxic effect of that was discovered too late.
I am not saying that the Government are not responsible in some ways. The Financial Services Authority could have acted more quickly in respect of Northern Rock, and there are other aspects of the crisis in the United Kingdom that we need to examine, but I believe that the main responsibility lies elsewhere. It is very easy in opposition, and in retrospect, to blame the Government irrespective of any real analysis of the situation.
Mr. Meacher: The hon. Gentleman came into the Chamber in the middle of the debate, and he keeps popping up, presumably to assure Hansard of his presence. I will give way to him, but perhaps he should have come in earlier and made his own contribution instead of 10 interruptions.
Mr. MacNeil: I am most grateful to the right hon. Gentleman. His right hon. Friend the Member for Holborn and St. Pancras (Frank Dobson) pointed out that the Spanish Government had controlled mortgage lending far more responsibly than the United Kingdom Government. Does that not illustrate the way in which the United Kingdom Government sat idly by as the pressure was building and the pot was boiling?
I accept that when we come to review all this we shall find aspects for which there is some responsibility on the part of any Government, although I think that that is arguable and that different judgments can be made. But my main point is that
merely saying that this massive crisis, this downturn which may turn out to have cataclysmic proportions, is somehow the fault of the UK Government is absurd. That is absolutely not the case. The situation is much more complex and much more unpredictable than that. In a situation of such gravity, it would be better for the House to refer to a real analysis of the facts than to try to gain cheap political capital.
Mr. Philip Hammond: The right hon. Gentleman must not suggest that the Oppositions critique of the Governments economic policies is being expressed only in the context of the credit crunch, which, as he said, was not created by this Government. We are running a higher fiscal deficit than all but three developed countries. We have an economy that has grown in an extraordinarily unbalanced way over the past few years, with a housing market that has been spiralling out of control. Does the right hon. Gentleman not believe that, in the absence of the credit crunch, we would still have faced a downturn at some point as those effects inevitably unwound?
Mr. Meacher: I recognise that there were issues of long-term sustainability, some of which the hon. Gentleman has mentioned. In fact his intervention has helped me, because my main argument will pick up some of what he has said.
There was one rather odd omission from the Budget. It contained next to nothing about dealing with tax avoidance. That is quite surprising given the difficult state of the public financesto which the hon. Gentleman rightly drew attentionthe Chancellors obvious need to close the gap, and the current international campaign led by Germany to tackle the scandal head-on, which I consider very important.
As we know, the hole in public revenues amounts to some £40 billion. That is a large amount, and it is increasing. The Treasury forecasts that the figure will be £7 billion higher than was suggested in the October pre-Budget report. The Chancellor had every incentive to claw back tax avoided and evaded to help balance the books without raising taxes for the rest of the population.
A recent pamphlet produced by the Trades Union Congress and written by the tax accountancy expert Richard Murphy found that tax avoidance and tax planningby which I mean fabricating plans artificially in order to pay little or no tax, a device employed by very rich individualsnow account for about £13 billion a year, while the same device employed by companies in rather different ways accounts for a further £12 billion a year. There is obviously plenty of scope for much tougher anti-avoidance measures that would benefit everyone else. If such persons can be made to pay their due and proper taxes, others will need to pay less. Moreover, Inland Revenue statistics show that those who are paid more than £100,000 a year, who constitute less than 1 per cent. of the population, now receive £8 billion in tax reliefs and allowances.
Another important factor that could well have propelled the Chancellor towards a Budget assault on tax avoidance, which I think is long overdue, is that the international atmosphere is much more conducive to tougher action than it has been for decades. Germany,
as we have read, believes that it is losing nearly £25 billion a year in tax evasion by rich Germans holding anonymous trusts in Monaco and Andorra, in addition to others who, rather curiously, were outed by a whistleblower as having secreted huge sums of money in another tax haven, namely Liechtenstein. Germany is now demanding cross-national action to force countries with banking secrecy to share information. That is a favourable climate for the UK to participate and take the lead.
Since there is considerable evidence that super-rich British people also use these and other tax havensnotably the Cayman Islandsfor the same purpose, a crackdown on those avoiding their tax responsibilities could produce big benefits for the UK Treasury and, my goodness, there has never been a time when the UK Treasury needed big benefits as it does now.
Why was that not done in the Budget? I suspect the reason is the stranglehold exerted by the City on the Governmentparticularly on the Prime Minister, I have to saywho have been persuaded that the financial enclave of the City of London is central to the economic interests of the UK as a whole. I submit that of course it has an important role, which I would not downplay for a moment, but the idea that it is central to the UK economy is quite another proposition.
By bending over backwards to encourage hedge funds and private equity firms through the most egregious tax liberalityI refer to the absurdly low 18 per cent. basic tax rate on income from the carry, or share, of the gains on these massive deals, which is less than half the income tax rate payable by top earnersand as a result of other measures, the Government have in effect turned the UK, or more specifically the City of London, into a gigantic tax haven for the internationally mobile business élite. The problem is that, by sucking talent and capital from other parts of the economy, the remarkable successes over the past 10 years, which I am the first to praise, have been bought at a very high priceI would say too high a price.
As the credit crunch is now exposing, City profits on invisibles cannot and never could compensate for the steady, continuing decline of Britain as a manufacturing nationand that is the basis of wealth for all industrial countries. The volatility and excesses of the finance sector are outweighed by the 1 million jobs lost in manufacturing over the past decade, the stagnant industrial output, the £7 billion-a-month trade deficit, and the weakness of manufacturing investment and of the so-called knowledge economyR and Dwhich is confined to a very few sectors. Those also have to be taken into account. My point is not that the City of London does not have a key role, but that it cannot be allowed to exploit that role at the expense of reducing the capability of Britain as a sustainable industrial base.
Even when other countries have recently made what can only be regarded as a very serious effort to counteract some of these excesses in tax avoidance, the UK has taken a lead in blocking them. The UK has for example regularly refused to allow the deduction of tax from interest payments within the EU, which would hugely restrict the effectiveness of tax havens because the basic rate of taxpresumably about 20 per cent.would already have been deducted from the income before it reached the tax haven. There can be
little doubt that this withholding tax proposal of the EU was stymied in order to preserve the UK as a tax haven, given the City of London links to the overseas protectorates and Crown dependencies.
If I may I shall give just one more example of what I think is an industrial and financial way of life that is not sustainable. Maintaining fiscal independence from Europe may be a populist moveclearly it is in this countrybut in reality it enables the international corporations to play the EU and other countries off against each other in constantly bargaining for lower tax rates.
The credit crunch and the approaching downturn, which some people, even today, believe may have very serious consequences, show that a different approach is now necessary. Not only is closer regulation of the financial markets clearly now imperative to prevent future damage to the international economythe precipitate collapse of Bear Stearns is clearly not the last of itbut the UK in particular can no longer afford either the prohibitive cost of the tax privileges of the City or, just as importantly, the collateral manufacturing damage inflicted on Britain as an industrial nation. [ Interruption. ] Before the hon. Member for Runnymede and Weybridge (Mr. Hammond) gets carried away, let me remind him that Winston Churchill, as Chancellor in 1925, said that he would rather see industry with head held high and finance less proud. He was absolutely right, and that applies just as much now.
In particular we need a fundamental change in the tax culture in this country so that corporations and super-rich individuals no longer regard it as a dutyas we learned from Tesco in the press a few weeks agoto minimise tax by any artificial devices that can be dreamed up to secure private gain. It is surely, by contrast, a responsibility that they make a fair contribution to the overall public gain of which they are a part.
There are several ways to achieve that. Obviously a key one is to seek to eliminate tax haven abuse. The non-governmental organisation Tax Justice Network calculates that the total assets now held by the wealthiest people in the world in tax havens amounts to a staggering $11.5 trillion, at a potential cost to world Governments in tax forgone of about $255 billion. To put that in context, the money lost to Governments worldwide is more than two and a half times total global aid flows last year.
Mr. Prisk: The right hon. Gentleman is talking about the amounts that high net-worth individuals have, which he says are lost to Government. How would he comment on the contributions of people such as Bill Gates, who give a huge proportion of their income to the very aid that he is trying to support? Governments do not have to do that on their own; individuals can contribute to it.
That is fine. I know that some of the richest people such as Gates, Warren Buffett and, to some extent, Richard Branson have made substantial contributions, which is extraordinarily creditable, but
that is not an argument for saying that very wealthy individuals should not pay their full, proper and due tax.
In the UK alone, the tax amnesty for those holding accounts with the offshore branches of some UK high street banks in the main Crown dependenciesI am thinking of Jersey, Guernsey and the Isle of Manis expected by the Treasury to yield a recovery of about half a billion pounds in tax from just 60,000 people, or 0.1 per cent of the population, who admit to undeclared income in these places. That shows the sheer scale at present, and it is unacceptable.
I am not against amnesties; I understand why we have had one now, and I think it is succeeding. Instead of just having occasional amnesties, however, all UK dependencies and protectoratesparticularly the Cayman Islandsshould now be required to use the same standards of disclosure and accountability as the UK itself. The UK standard should also be tightened by requiring all UK-registered companies to report annually on all their overseas subsidiaries, including their revenues and how many people are employed. If we were to introduce that transparency, it would dramatically improve the prospect of fair and balanced tax collection, and I intend to table an amendment to the Finance Bill to that effectif the Government do not do that first. [Interruption.] Yes, I think that that is unlikely, which is why some of us need to assist and nudge an arm or two.
There are several other ways of dealing more effectively with tax avoidance and evasion. We should look at the tax reliefs and allowances that accrue to those earning over £100,000 a yearthe richest 1 per cent. of the population. One might ask: what is the justification for enhancing by means of tax reliefs an already enormous salary, when that will mean that others will have to pay more to compensate?
Mr. Love: I agree with many of my right hon. Friends points, although I must say that we ought not to set manufacturing and finance in competition with each other; both must flourish within our economy. How does he respond to the classic argument that is made against his case for proper taxation of the wealthy, which is that they are so mobile that they will simply move outside the jurisdiction of the UK authorities?
I was talking about how we might deal with offshoring, and I also wish to talk about the domicile rule. Frankly, it is indefensible. If it were abolished, that would recoup more than £4 billion in lost taxation. Abolition might not be the answer, but there should certainly be a considerable reduction in its application. As for so-called capital gains on all assets held for less than a year, they are clearly not capital gains but a form of income, and they should be treated as such and be subject to income tax. That would save about half a billion pounds in otherwise lost tax. Also, the tax authorities should make it absolutely clear that they are deadly serious. The UK should co-operate with other countries, particularly in Europe, to ensure that tax is
paid where the taxable economic activity occurred. That would largely stop misallocation of profit to tax havens.
More complex tax avoidance should be tackled by enshrining in law the general principle that wherever an otherwise commercial transaction is added to any arrangement the sole or main purpose of which is to reduce tax liability, Her Majestys Revenue and Customs should disregard the artificial addition and tax the transaction accordingly. Counter-productively, HMRC is being run down by 25 per cent. in the five years to 2010. In order that corporations and super-rich individuals understand that tax avoidance does not pay, it should instead be built up substantially, as the Treasury calculates that each member of HMRC staff recovers 96 times their full cost of employment.
Artificial tax avoidance and tax evasion are a cancer on the body politic. Economically, this is the best time for decades to launch a systematic campaign to eradicate that, and I look to the Treasury to set it in place.
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