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Again, the process was messy, with individual concessions painfully extracted and gracelessly awarded over a fairly long period. As the hon. Member for Taunton (Mr. Browne) has said, many technical but important issues were introduced only during the Committee stage. Indeed, the residence and domicile provisions, arguably the most complex, had to be timetabled for the very end of the Committees deliberations to give the Government more time in which to work out the detailed provisions.
Even today, as the hon. Gentleman said, we have before us a raft of new Government amendments to the clauses on residence and domicile. They will be debated today, and Opposition points about them will be put today to Ministers who cannot realistically be expected to consider them, digest the arguments, evaluate them and respond to them in the course of the debate. Unfortunately, however, there can be no further scrutiny
of a Finance Bill with no stages in the House of Lords. This is the path to bad legislation. I predict, with no fear of contradiction, that next years Finance Bill will contain provisions correcting, amending and clarifying the residence and domicile clauses in this Bill, precisely because many of the details have been introduced only at the very last moment.
The reaction of those affected has been predictable. Many have prepared to leave the United Kingdom, and some have already done so, but all of them, whether they have left or stayed, have had their confidence in the transparency and predictability of the United Kingdom tax regime shattered, and that will have significant long-term consequences for the United Kingdoms attractiveness as a place in which to do business. The same applies to capital gains tax. Some businesses were sold prematurely, and some, as I am sure the Economic Secretary knows, were transferred through artificial transactions designed to salvage the benefit of taper relief. But far more businesses were not sold, and the entrepreneurs who run them have lost their faith in the tax system on which they had relied in calculating the returns that they would earn.
That is serious not only because it reduces the attractiveness of the UK as a mature and stable place in which to do business, but because every time the Government undermine the incentive that they have given in earlier legislation, they significantly reduce the behaviour-influencing power of the Treasury. We all know that in all fields, including that of environmental taxation, the Treasury focuses, quite properly, on the ability to influence behaviour through the fiscal system.
I will introduce a new structure of capital gains tax which will explicitly reward long-term investment, and which is based on a downward taper and lower tax rates. It will encourage people to hold on to assets in the long term.
There is no doubt in my mind that the taper relief regime did underpin the creation of many new businesses, and did inspire the effort and sacrifice required to grow many others. Many businesses are built by people who have made a conscious decision to forgo the relative comfort of a highly paid job in a large corporation for the rather rockier path of building up their own smaller businesses, with all the risks that that implies, and all the pressures on their personal lives that anyone who has ever been in that position will understand only too well. The fact that many entrepreneurs who engaged in that process have been now been left stranded without the benefits that they had calculated has left a bitter taste in their mouths, and will make the next set of incentive proposals from Government significantly less effective in driving their behaviour.
Business hates nothing more than uncertainty. Uncertainty adds to the cost of doing business: it requires a risk premium to be factored into business return calculations. An unstable and unpredictable tax regime makes the UK less competitive, and clearly that is partly connected with the nature and instincts of the Government of the day. New Labour has demonstrated more clearly to business in its actions over the past eight months than any number of words could ever demonstrate that it does not understand how business works, that it does not understand the mentality of enterprise, and
that it is no friend of business and cannot be trusted with Britains business economy. But it is not only about political leadership. This is not only a party-political issue. The whole fiasco of the past eight months also says something about our process of tax law making.
Good government can be delivered by the happy chance of good governors operating in a chaotic system. However, business, and even citizens, would prefer not to rely on chance to deliver them good government through good politicians, but rather to institutionalise good government through structures and processes that ensure that even when they are afflicted by bad politicians who fail to appreciate the significance and, sometimes, the unintended consequences of their actions, those politicians will be constrained to behave in a way that minimises the damage. It is not only about putting better politicians in place, although we are very keen to do that; it is also about ensuring that the institutions and the structures are right.
So what have we learned from all thisthe non-dom and CGT fiascos, and the disintegration of the pre-Budget report and the 2008 Budget? First, let me again quote the Treasury Committee. Surprise announcements designed to
pull a political rabbit from a hat
are simply not appropriate or responsible, certainly in the case of business taxation but also, I would argue, more generally in the case of taxation announcements. Businesses and investors will punish not Governmentsand that is the problem: if they had a vote and punished Governments, it would be finebut nations that allow their Governments to deliver unsatisfactory tax surprises in this way.
Secondly, we have learned that tone is very important. Much of the reaction over residence and domicile was fuelled less by the substance than by the hostile tone of the announcement, and the failure of the politicians in charge of it to appreciate the damaging message that HMRC was sending. Ironically, it was left largely to Opposition politicians to run around the City trying to soothe nerves as we sought to persuade the Government of the need for change, and to persuade those who, in many cases, are critical to the wealth and prosperity of our economy that they should just sit on their hands a little longer while we saw what could be achieved in terms of getting the Government to change their mind.
Thirdly, the finality of the proposals at the time when they were announced took business aback and shocked it. All complicated issues of this nature should be published in draft for proper consideration and consultation, for the avoidance of political embarrassmentas I hope the Economic Secretary will now clearly recogniseas well as for better management of the economy.
What we have seen over the past eight months is no way to go about tax reform. The succession of hastily cobbled together announcements, climbdowns, confrontations and U-turns deliver the very opposite of the stable environment that businesses and individuals need so that they can understand the tax implications of their decisions and plan accordingly.
Lest it appear that I am having a go at the current Chancellor, let me be clear that the puppet master behind him is the real target of my comments. This climate of chaos, confusion and policy reversal was not developed only in the past nine months. For years,
Finance Bills have contained measures closing loopholes or reversing incentives created by their predecessors. In March 2004, the then Chancellor closed a tax loophole for the self-employed that he had created only two years previously. He introduced the zero rate of corporation tax for small companies and then changed that virtually every year before he eventually abolished it. In 2003, he announced that residential property would be permitted in self-invested personal pension plans. The industry spent millions of pounds gearing up for the change, and many individuals set about rearranging their retirement plans. The Government robustly rejected advice that came from all parts of the House, including their own Back Benches, that the proposals to include residential property in SIPPs would lead to a disaster, yet at the eleventh hour the decision was reversed, leaving tens of thousands of businesses and taxpayers out of pocket, having to pick up a bill for the Governments incompetence. The capital gains tax taper relief regime has fared only slightly better, lasting nine years before being consigned to the scrapheap, having only months before been held up as the symbol of the Governments supposedly business-friendly agenda.
The lack of direction, the dithering over policy and the meddling in successive Budgets in an attempt to correct defective earlier legislation, smacks of political and fiscal opportunism, and points to the absence of a coherent underlying philosophy for our tax systemor, if there is such a coherent underlying philosophy, a failure to communicate it to the people who invest in the British economy. British taxpayers and the investors who pour billions of pounds into our economy deserve better. We must never forgetI hope the Economic Secretary never does forget thisthat in the globalising economy of the 21st century, businesses, and, increasingly, skilled individuals, have a choice about where to locate, and also about where they choose to pay their taxes.
It is clear that Britain cannot win this global contest by offering the lowest rates of tax, as it is faced with competition from emerging economies with a far less developed social and physical infrastructure. To try to do so would put at risk the high-quality public services to which the British people are rightly and understandably attached. However, we must recognise the competitive threat. Traditionally, the advantage to the taxpayer of a higher tax and more mature jurisdiction has been greater certainty, stability and transparency in the taxation system as well as a generally stronger social and physical infrastructure. If Britain is to remain in the competition to attract businesses and high earners while operating a higher cost tax regime than many emerging economies in competing locations, we must at the very minimum offer the stability and certainty that is so valuable to such organisations and people, and for which we are, effectively, with our higher tax rates, asking them to pay. We must be under no illusion that a combination of higher tax levels and the kind of capricious decision making that we have seen over the past eight months will quickly relegate UK plc to the sidelines of this global competition.
Mr. John Baron (Billericay) (Con):
May I suggest to my hon. Friend that the threat in respect of corporate tax rates comes not only from emerging markets? British companies are moving to other European Union countriesShire Pharmaceuticals is one such suggested companywith lower tax thresholds. That directly threatens
job prospects in this country. The threat, therefore, comes not only from emerging markets because tax base comparisons across the EU are also relevant.
Mr. Hammond: My hon. Friend is absolutely right. He may have been involved in similar discussions to those that I have with many FTSE 500 companies. Most of them have not taken the decision to relocate their tax domicile, but manyperhaps mostof them feel that they are obliged, in the interests of their shareholders, to investigate the options available to them. Just a few months ago I was told by one of the leading firms of accountants that without exception every one of its FTSE 100 clients had asked it for a report on the alternative tax domicile options available to them, because they are conscious that while managements might have preferencesmanagement may prefer to live in leafy parts of the home counties, or play golf on certain courses, or enjoy the cultural attractions of Londonincreasingly investors, who are global institutions, are asserting their right to have their interests held paramount in the decisions that corporations make. We have to be conscious of that. I hopein fact I am surethat the Economic Secretary is conscious every waking hour that corporations, driven by global investors who have no sentiment whatever about domicile, look at these issues in a cold, hard light, and look to locate to the place that offers them the lowest tax rates and the greatest overall advantages.
After a decade of Labour government, Britain is a less attractive place to do business than it was, because business taxes are too high and our tax system is too complicated. Thanks to this Government, we now have the longest tax code of any major economywe overtook India with the Finance Act 2007and it is expanding the fastest, with the Government, increasingly buffeted by events, endlessly changing and complicating the system in response to short-term political events and budgetary pressures. Unfortunately, the objective of a simpler, fairer, more competitive tax system has been sacrificed to the Treasurys insatiable hunger for cash and unquenchable instinct to micro-manage. Announcement after announcement has been billed as a simplification or as being in the interests of fairness, but turn out to be nothing more than a crude tax grab. Time after time, the rhetoric of the Budget speech is at odds with the reality revealed by even a cursory analysis of the small print of the Budget documentation. We have had many examples of tax initiatives that start life under the green bannerthey are introduced under the pretence of being green taxesbut which on closer inspection are simply revenue-raising measures. They discredit taxpayers notion of green taxes. On top of all that, there is also, of course, the endless stream of stealth taxes. That phrase did not exist 11 years ago, but it has now passed into everyday language and can be found printed almost every day of the week in one newspaper or another.
There is no sense of strategy or direction. The long-term objective to introduce a 10p starting rate of tax was abandoned for short-term political advantage. Sending a clear signal to business that enterprise will be rewarded through a dedicated lower rate of capital gains tax was also dumped. Both were scrapped without a word of explanation or advance warning. After five or six years of dithering on non-doms, with the problem conveniently lobbed into the long grass, and uncertainty pervading,
there was a bungled legislative proposal. Now, there is more uncertainty on income splitting and foreign profits as the Government duck those difficult decisions.
Uncertainty and complexity both impose a burden on business just as surely as do taxes themselves, but at least taxes benefit the Treasury. Uncertainty and complexity reduce UK competitiveness, increase the costs of managing the tax system and offer absolutely no offsetting benefits at all, unless we consider the employment of accountants to be an offsetting benefit.
So what is to be done? To help us to answer that question, the shadow Chancellor set up a tax reform commission, which reported at the end of 2006. Following on from that work, he established a working party, led by Lord Howe of Aberavon, a former distinguished Chancellor of the Exchequer, to take forward the tax recommendations that the commission made in the narrow area of reform of the making of tax law. There are five key issues. First, we need to improve the clarity and transparency of the process of tax law making. Secondly, we need to introduce clear advance signposting of the direction of future changes, especially in business taxation, so that businesses can prepare and the behaviour-influencing capacity of the tax system is maximised.
Thirdly, we need to restore proper parliamentary scrutiny of tax legislation proposals. Fourthly, we need to institutionalise a simplification agenda, to try to ensure that the process of reducing the complexity and length of Britains tax code is not dependent on the whim of individual incumbents of the Treasury Bench, but is built into the system. I am not talking about rewriting law just to make it read more easily or to improve the cross-referencing, but about a substantive simplification. Finally, we need to focus on certainty, because that is the No. 1, No. 2 and No. 3 demand of business. Of course businesses would like tax to be lower, regulation to be lessened and the system to be simplified, but anyone who has ever talked to them about the issue will know that above all they want a system that is stable and predictable. They might like to see significant changes to make the system simpler, but I am sure that they would prefer a guarantee that there will be no changes to the system to make it predictable, because that is their No. 1 demand.
New clause 17 addresses the issue of transparency of process, which is so important to delivering this agenda. Britain is fortunate in that it already has a two-stage budgeting process, which, if it were used sensibly, would offer the opportunity to bring a degree of stability and certainty into the tax law-making system. The pre-Budget report can be used to signal the intentions for the following Budget and new clause 17 would require that all technical changes to tax legislation were published at the time of the pre-Budget report. It would also make provision for Standing Orders to deal with the question of how such technical changes should be scrutinised ahead of the Budget.
The Chairman of the Treasury Committee, during the course of yesterdays debate, made an impassioned plea to the Financial Secretary for discipline in the way that the pre-Budget report and Budget statements are used. It was a plea for a reversion to the proper purpose of those two reportsand incidentally an implicit plea to the Government not to be tempted down the road of
ad hoc tax changes outside the proper structures, as they have been in the face of political pressure and under the weight of their own errors in the abolition of the 10p tax band this year. We on the Conservative Benches endorse that call by the Chairman and, when Lord Howes report is published tomorrow, he will go further in setting out his views on how to improve the presentation, scrutiny and delivery of our tax law.
We also need clarity of future intentions. Business decisions are made not so much on current tax rates, but on the basis of known future tax rates. Investment returns depend on the tax regime that an investment will face at the point when it matures and begins to produce profits. Clear signalling can be a positive support for investment and a major influence on behaviour, not only removing the negative of uncertainty, but introducing an advance awareness of intended business-favourable changes, thus stimulating the very supply-side response that such changes are almost always designed to achieve.
The third aspect is scrutiny. Nobody who has ever sat on a Finance Bill Committee, or wandered inadvertently into a Finance Bill Report stage debate, will doubt that the mechanism we have for detailed scrutiny of what is often highly complex and technical legislation is inadequate. To be bluntand I hope that the Financial Secretary will not mind if I say thisMinisters, who are not tax experts or even accountants, stand in front of a Committee and read out a brief whose technical implications they may not fully understand. Members of the Committee ask questions often fed in by expertsof which, to be honest, they may have only a limited understanding.
Mr. Browne: I never make petty party political pointsonly wise observations. I agree with the hon. Gentlemans observations, but I would caution against saying that only education experts know about education legislation, or only health experts know about health legislation, or only military experts know enough about defence legislation. That would mean that politicians were redundant, but we have an important role in deciding priorities and making real choices. The issue is not only expertise, because there is a political aspect to the process.
Mr. Hammond: The hon. Gentleman makes a good point and he prompts me to draw that distinction. I did say earlier in my speech that I thought that what had gone wrong with the non-doms legislation was that the basic idea from the politicians had been hijacked by the civil servants and burdened with various bolt-on goodies to the extent that political common sense then told the politicians that it would not fly. We need to have a sensible and serious debate that distinguishes between the strategic policy decisions that have to be made and the scrutiny of detailed, technical legislation. For example, the hon. Member for Aberdeen
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