Previous Section Index Home Page

Mr. Hammond: My hon. Friend is right. It is not just a matter of those who are directly affected by the capital gains tax changes; it is part of a bigger picture of indecision, unsignalled change and lack of proper consultation on the business tax regime. If the Minister got out at all and talked to people in City boardrooms, she would know that that has become a real theme that we should all be seriously concerned about. There are
28 Apr 2008 : Column 50
two aspects to the problem. First, there is the substance of the changes that clause 3 introduces, which amendment No. 8 is designed to address; secondly, there is the manner in which they were introduced, particularly the lack of consultation, the lack of clear signposting and the reversal of what had been seen as a long-term commitment by the Government to a lower CGT rate for long-term gains. That, I suspect, as much as the substance of the measure itself, is extremely damaging to the climate for Britain’s entrepreneurs.

By raising business taxes at a time when our competitors are cutting them to support investment and underpin their economies, the Government have undermined business confidence. The abandonment of what was an iconic long-term Labour policy of a 10p capital gains tax rate for long-term gains—announced with great fanfare by our present Prime Minister even before the Labour Government came to office—has dealt a blow to British enterprise and entrepreneurs at a time when we should be promoting it and them.

I have to say that we have a great deal of sympathy with the sentiment behind amendment No. 8, and I agree with almost everything the hon. Member for Dundee, East (Stewart Hosie) said in introducing it. Regrettably, however, it would not quite do what its sponsors wish it to do. It would indeed postpone the change in the main rate from 40 to 18 per cent., but because the implementation provision that the amendment would introduce covers only subsection (1), schedule 2 would be effective anyway, ending taper relief and indexation. It would, I think, have the opposite effect to that which the hon. Gentleman seeks, in that it would push the effective CGT rate on business assets up to 40 per cent., rather than leaving it at 10 per cent., as he intends.

For reasons that I shall outline, we believe that the Government need to go back to the drawing board on CGT reform, consult properly and come forward with a comprehensive set of CGT proposals that recognises the need to promote long-term investment and encourage entrepreneurship.

The amendment calls on the Government to measure and report on the impact of the proposed changes on business investment, the tax burden on investors and the housing market—in particular, the buy-to-let market. As my concerns relate to precisely those areas that the hon. Gentleman outlined—even though my solution is to vote against clause stand part, rather than to support the amendment, for reasons I have explained—I hope that it is convenient for me to set them out now, as time is limited, so that we might not need a separate clause stand part debate.

It all started with the pre-Budget report; hon. Members will remember that saga. The pre-Budget report was brought forward to early October so that it could act as a pre-election Budget—a showcase for whatever bribes the Prime Minister would offer the nation in the election that never was. That plan was torn up when the Prime Minister bottled it and canned the election for reasons that, we are assured, had nothing whatever to do with the opinion polls. The pre-Budget report— [Interruption.] I hear sceptical comments from those on Benches behind me, but I could not possibly comment.

The pre-Budget report still had to go ahead on 9 October, to save face. So the tax strategy for Britain—the world’s fifth largest economy—as we faced the first
28 Apr 2008 : Column 51
signs of economic slowdown in the aftermath of the Northern Rock fiasco—had to be drawn up on the back of a fag packet over the weekend. Even one of the Prime Minister’s closest allies, the hon. Member for Coventry, North-West (Mr. Robinson), described that as

And it showed—in the lack of consultation on proposals for major changes to business taxation and the complete absence of a coherent narrative as key parts of Labour’s long-term business tax strategy were discarded overnight without explanation or warning.

The words of that pre-Budget report speech were scarcely out of the Chancellor’s mouth before they were drowned out by the crashing of gears being thrown into reverse. It was hours before Downing street was briefing against the Chancellor, and just days before the climbdowns began, but the damage to Britain’s reputation as a business-friendly economy will take longer to reverse. I say to the Minister that the damage to Labour’s reputation as a business-friendly party may be irreversible.

A common theme is beginning to emerge from the PBR: the systematic subordination of the long-term interests of the country—even as identified and clearly set out by the Labour party—and of our economic future to the short-term political agenda of our Prime Minister.

The Chancellor’s claim that his CGT reforms were made in the name of simplification was as bogus as the same claim made for the abolition of the 10p income tax rate. The proof is in schedule 3, where the complex and still extremely unclear entrepreneurs’ relief adds a tier of complication to the system that was supposed to be simplified. This is a missed opportunity for comprehensive modernisation of business capital taxes based on a full, extensive and genuine consultation. In fact, the capital gains tax change was a straight tax grab, originally designed to raise £900 million a year for the Treasury, and a wildly misplaced attempt to address the issue of taxation of private equity-carried interest—something that had been exercising the Government and the trade unions before the pre-Budget report and, ironically, a problem that now looks likely to have gone away all by itself, as the bank credit on which private equity deals depend has all but dried up.

5.30 pm

Jane Kennedy: Will the hon. Gentleman explain how his party would pay for the consequences of rejecting the proposed change, bearing in mind the comments of his right hon. Friend the Member of Witney (Mr. Cameron), who has said that people should

I think that that question deserves an answer.

Mr. Hammond: As I have said, what we are trying to do is persuade the Government to go back to the drawing board with their business capital tax proposal and look at it again. If we are successful in the vote on clause stand part, we shall not expect the Government
28 Apr 2008 : Column 52
to roll over and play dead, and to accept that as the end of the game. We shall expect them to do some work on these proposals, and then bring back to the House a properly thought out package of capital gains tax reforms on which they have consulted properly with the business sector—unlike the proposals announced in the pre-Budget report—so that we can proceed in a way that does not deliver a blow to British business, British entrepreneurs and British enterprise at a time when our competitors are supporting their companies and their entrepreneurs, and our economy is slowing.

Jane Kennedy: I am always interested to hear the hon. Gentleman’s comments at the Dispatch Box, but I want to press him once more. The costs of the capital gains tax reform, including entrepreneurs’ relief, are £250 million this year, £300 million next year and £500 million in 2010-11. Those are real costs. Can the hon. Gentleman say more than simply that he would seek a postponement, and that the Government would fix the mess that he would get us into if we accepted the amendment?

Mr. Hammond: Actually, the Government got themselves into this mess by meddling with a vital part of the business tax system without any advance signalling and without any consultation.

Let me now put a question to the Minister. Given that she is so worried about the danger of creating little holes here and there in her Budget, where did she find the £400 million that is the difference between the £500 million yield that she has just announced for 2010-11 and the £900 million yield that appeared in the pre-Budget report before the Chancellor executed his U-turn and introduced the entrepreneurs’ relief? I shall be happy to give way to her again if she would like to tell the Committee where she found that £400 million, given her concern about identifying all these parcels of money. However, she appears not to wish to tell us where she found it.

Mr. Brian Binley (Northampton, South) (Con): The Minister seems to have no compassion for entrepreneurs who have run their businesses for a long time on the basis that the receipts at the end of their working lives will provide for their pensions. Does the Minister recognise, and does my hon. Friend agree, that the harm being done to those pensioners is unacceptable and has not been thought about at all?

Mr. Hammond: My hon. Friend is entirely right. Many small business people regard the businesses that they are building up as their pension pot, but it is not just individuals who are suffering harm from these measures. This is not just about some business people or entrepreneurs who will be less well off, less motivated and less incentivised than they might have been The real issue is that as enterprise goes elsewhere and investors take their money and expertise elsewhere, the big loser will be UK plc, and it is our prosperity and our jobs that will suffer as a consequence.

We can add to the list of 5.3 million low-earning families and the owners of small companies at least 270,000 of the 1.7 million employee shareholders, as well as the farmers and other business people whose assets will not be eligible for entrepreneurs’ relief and
28 Apr 2008 : Column 53
those who will lose out from the scrapping of accrued indexation as losers from the Finance Bill. As we also must add the serial entrepreneurs and the business angels providing finance to them—people who have been so important in maintaining the level of innovation and business formation in our economy—it is UK plc that becomes the clear long-term real loser from the measure.

Only new Labour could devise a business capital tax system that incentivises modest success in lifestyle businesses with entrepreneurs’ relief but penalises the growth of the scalable enterprises that will deliver the prosperity of tomorrow; one that halves the rate of tax on buy-to-let landlords and second homeowners while increasing it by 80 per cent. on serial entrepreneurs and up to 260 per cent. on some employee shareholders; one that rewards short-term, quick-turn investors with CGT rates well below income tax while increasing the effective rate most on the very longest of long-term investors who stand to lose most from the loss of indexation relief on all assets held before 1998. The Prime Minister’s moral compass appears to be pointing in increasingly bizarre directions.

If the clause survives a stand part vote this afternoon, schedule 2, containing the detailed measures to scrap taper relief and indexation, and schedule 3, containing the details of entrepreneurs’ relief, will be considered in Committee. We will need to look in great detail at the mechanics of entrepreneurs’ relief—who will get it and who will not—and at the consequences of the taxation of inflationary gains at 18 per cent. in a world without indexation or taper relief.

Mr. Mark Field: I appreciate that my hon. Friend is coming to the end of his comments and he is making a very good case in respect of the confused nature of the Government’s dealing with the matter in the run-up to October and, more particularly, in the panic since. To try to pre-empt the Financial Secretary’s comments, I should say that one positive side of what was perhaps intended at the outset—although my hon. Friend has raised some doubts about its real nature—is the idea of simplification. Will he make it clear that we in the Conservative party very much favour the idea of simplification but that, obviously, during the past six months we have seen some object lessons in how simplification should not be carried out?

Mr. Hammond: Of course simplification of the tax system is a good thing in itself, but not at any cost. We have ended up with the worst of all worlds, a system that disincentivises entrepreneurship and yet has created a regime more complex than the one it replaced.

Entrepreneurs’ relief is a fudge. It was a hastily cobbled together minimum concession to buy off the most numerous, although not necessarily the most economically important, group of losers from the pre-Budget report changes. We will need to review how it works for employee shareholders; for investors in the highest risk companies that might historically have listed on a junior stock market; for members of limited liability partnerships, who seem to have been forgotten in the drafting of these provisions; and for the market in insurance bonds, which, on the face of it, will disappear under these proposals.

28 Apr 2008 : Column 54

This is an ill thought out measure, introduced without consultation or early warning. It has imposed a huge retrospective cost on thousands of businesses. At a stroke it has withdrawn the single tax measure, taper relief, that had been held aloft as the symbol of new Labour’s commitment to business. It was hailed as a simplification but it was a simple stealth tax. Because it was made up on the hoof without a consensus behind it, the Chancellor had to back down at a cost of some hundreds of millions of pounds, and the Financial Secretary cannot tell us where that money is coming from. The Chancellor introduced the entrepreneurs’ relief and thus created a system more complicated and more unfair than the one it has replaced.

At the end of this little charade, as we face a global economic slowdown, we have a capital gains tax system that not only increases taxes on business entrepreneurs, but will be less fair in operation, will encourage short-termism and will be more complicated than the regime it replaces. This cannot be the way forward.

I would have liked to support the amendment but, for the reasons I set out earlier, we believe that it will be more effective to send a signal to the Government by voting against clause 6 stand part and by asking the Government to go back to the drawing board, to look again at the package of proposals, to consult properly with business and to come back to the House on Report with something a little better thought out.

Mr. Jeremy Browne: This feature of the Bill is a classic example of what a Government do when they are driven by political considerations rather than the overall requirements of the economy. At the Conservative party’s autumn conference in September of last year it put forward a series of proposals on taxation in anticipation of a possible general election—of course, none of them went any way to helping people who had been adversely affected by the doubling of the 10p rate, but we will come to that later. The Government felt they needed to respond to the Conservatives’ apparent seizure of the initiative and as a result the Treasury was thrown into an exercise. That process may have lasted only a couple of days but, in that time, the Treasury went from having a blank sheet of paper to drawing up a series of taxation proposals that would have a deep and significant effect on business and on our economy.

My party has a different view from that of the other parties in this House on how much money capital gains tax should raise and what its role should be in relation to other forms of taxation. The parallel that my party draws is between the taxation rate paid by people who are taxed on their capital and the rate paid by those who are taxed on their income. I am extremely supportive of wealth creation; we need an economy that generates prosperity so that people can prosper in their private lives and so that we can afford to fund key public services. However, it offends the sensibilities of the Liberal Democrats and many millions of people throughout the country that there are people in Britain, who work in private equity and the like, who pay a much lower marginal tax rate than the people who clean their offices. In our view, that cannot be right.

Our starting point is that capital gains should be taxed at the same rate as income, as was the case under Nigel Lawson when he was the leader of the Thatcherite vanguard in the 1980s. This is hardly a particularly
28 Apr 2008 : Column 55
left-wing policy; it is entirely in tune with what other Governments have proposed in the past. The danger otherwise is that people with good accountants who are able to convert their income into capital will pay considerably less as a share of tax, and we will effectively create a two-tier system: one for those who are taxed on the money they take home at the rates we will now have to get used to—20p and 40p, with national insurance contributions in line with that—and another for those who enjoy much more favourable rates of taxation, despite having considerably higher earnings.

Mr. Philip Hammond: Does the hon. Gentleman accept that in the world in which we actually live, where both capital and many of the most innovative entrepreneurs are mobile, the benchmark must be not what Governments did in the past, but what other Governments are doing now in creating regimes that our entrepreneurs and businesses have to compete against?

Mr. Browne: I understand the hon. Gentleman’s point, but I return him to the point that there is a large amount of mobile labour comprising people earning considerably smaller sums who are being expected to pay a higher proportion of their income in tax than people who are able to convert their income into capital; there are people who are able to move freely across the European Union for whom that is the case. The Liberal Democrats do not wish the overall share of taxation to rise as a proportion of gross domestic product. We would, however, ask something of high earners—who currently pay lower marginal rates than those who clean their offices— so that people on lower incomes could pay a lower marginal rate. Both the Conservatives and Labour are unable to match that commitment.

5.45 pm

Mr. Mark Field: Is not the problem with what the hon. Gentleman is suggesting the fact that that mobile wealth creation will leave these shores and go elsewhere? Although I fear that it does not fall within the context of the clause, a discussion of the benefits of globalisation is legitimate because far too many people in both the first world and developing countries are perhaps being left behind. Is not the reality of his policy that it would simply impoverish this country while we bought into the notion, to which most political people in this country and on other shores would subscribe, of globalisation as being a good?

Mr. Browne: I am grateful for that point, although we are slightly going round in circles.

There are many benefits of globalisation for which the case is not made sufficiently frequently. Not only is globalisation beneficial for many millions of people in this country—I believe in free trade, and in goods and services flowing around the world, because that generates prosperity—but it offers the best prospect for billions of people in China, India and other Asian countries to have levels of prosperity that they have not enjoyed previously. There is no other way in which they are likely to achieve those standards of living.

Next Section Index Home Page