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Mr. Hammond:
They are quite close—[ Interruption.] They are on the same side of the country at least. The hon. Gentleman and I had a discussion earlier about
employee share incentives. The principle is clear, and it is eminently capable of being debated and decided by politicians, but if anybody thought that the resulting legislation was clear, they need only look at schedule 3. The technical wording needed to achieve what the politicians decree is immensely complex. We need to draw a distinction between the policy principles that politicians can—and must in a democratically accountable society—make, and the technical implementation of those principles, which is the stuff of experts.
Stewart Hosie: May I give the hon. Gentleman a better example? The 10p tax change may have implications for the 10p tax on savings income, and for the 10p rate on dividend income, which goes up to the basic allowance threshold. That appears in two or three tiny bullet points in an obscure table in the Budget book and does not even form part of the detailed Bill that we are scrutinising. That makes it all the more difficult to understand the implications for savings tax and dividend tax of the 10p tax change.
Mr. Hammond: The hon. Gentleman is right. I am sure that we could find hundreds, if not thousands, more examples in the Bill.
I do not intend to criticise anyone, and I should place on record that the Treasury Ministers who took part in Committee did an excellent job. They were well briefed and they answered questions as helpfully as they were able. I am sure, in the spirit of candour, that they would equally want to acknowledge that, in Committee, if I pulled from my pocket a question from a senior tax partner in a large firm of accountants, it occasionally caught them on the hop. I ask myself whether that is the most constructive way in which to scrutinise tax legislation.
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We are not experts in this place—we cannot be. People out there spend their entire lives dealing with tax, and not only that—they may spend their entire lives dealing with one tax, such as capital gains tax or the taxation of overseas domiciled residents. Sometimes, they deal with just a subsection of that subject. If we are to maximise the advantage that we can get from their embedded knowledge, we must, of course, try to involve them in the scrutiny process.
At the moment, the scrutiny of tax legislation operates in a bit of a fantasy world. The debate is conducted in Committee between politicians who are essentially lay people, in tax terms, as a proxy for a real but unseen debate between the experts at HMRC and the tax professionals. To some extent, that is a pragmatic arrangement. While the Bill was in Committee, HMRC held an away-day for tax experts. A number of questions were posed and some answers were given. The questions and the answers then found their way to members of the Committee. It is a kind of shadow process.
We ought to ask ourselves whether being a little more candid about our limitations would lead us to consider different scrutiny arrangements that could bring out of the shadows some of those people who contribute so much to the process but are unable to play a full part in it, whether they are independent experts or expert officials in HMRC. The Treasury Committee, of course, does an excellent job through its ability to call witnesses but there needs to be a legislative scrutiny arrangement as
well as the oversight role that that Select Committee performs. I do not think that Parliament should be at all ashamed of the difficulty that even highly intelligent and very diligent lay people might have in dealing with some complex technical legislative changes. Instead of trying to conceal the scrutiny deficit, we should acknowledge it and try to put in place the mechanisms to deal with it.
My noble Friend Lord Howe will tomorrow set out his ideas for addressing those concerns. I invite anyone who doubts the need to address them to look at the subject matter of the next group of amendments and to spend a little time reading schedule 3. I recommend inserted sections 169K and 169P as a starter—they are just a taster of the almost absurdly complex nature of tax legislation.
We need to create the necessary arrangements to institutionalise the drive towards the simplification of our tax system. As a first step, new clause 18 would require the Treasury each year to publish specific proposals for the simplification of the UK tax code. It would not require a mere rewriting to tidy up the language and the cross-referencing, but a substantive simplification of the system. New clause 18 would also provide for Standing Orders to make arrangements for the effective scrutiny of proposals brought forward by the Treasury in the report that is called for.
If we do not do that, our tax code will continue to grow exponentially, notwithstanding that it is already the longest in the world. It is now reaching the point where it is becoming self-defeating and self-perpetuating. Each new complex raft of legislation creates so many potential loopholes, avoidance mechanisms and technical difficulties that its intention is regularly undermined and often requires further rafts of legislation to plug the gaps, further lengthening and adding to the complexity of the tax code.
My noble Friend’s report will set out his proposals for institutionalising the drive for simplification of our tax system, not as a one-off exercise, but as a continuing embedded process. I am delighted to have had the opportunity to notify Parliament first of my noble Friend’s initiative, which he will announce tomorrow, and I hope that the Government might take note of that and follow its precedent in giving Parliament a bit of warning of some of the announcements that are coming up.
Finally, in order to deliver certainty to the system, we also need to address the growing discretion that is being given to HMRC officials in the interpretation of the law—that feature was particularly evident in the Bill. We need to create mechanisms that will allow taxpayers to obtain certainty about their tax position. Many other jurisdictions allow less discretion for officials but provide a clearer and more accessible pre-clearance regime that allows taxpayers to ascertain their tax position precisely. I am afraid that we are going in the wrong direction, with a limited pre-clearance regime and the exercise of an increasing amount of official discretion.
Right now, Britain faces an economic downturn and considerable uncertainty about our economic future. However, alongside a response to the short-term challenge—we need such a response from the Government—we need to think about the long-term competitiveness of the UK as a place to do business. As we come out of this economic slow-down and investment starts to multiply again in the global economy, investors who are casting their eye around the world to decide
where to make their marginal investment should see the UK as an attractive, stable predictable environment in which to deliver that investment. There is scope for a significant improvement to the UK tax environment without any tax cost to the Exchequer.
Clear and open processes, with proper engagement and consultation at every stage; a grown-up approach to tax law, including the abandonment of the fascination for rabbits being pulled out of hats in the penultimate paragraphs of Budget speeches; politicians recognising the limits of their technical capabilities and restructuring the scrutiny process accordingly; a serious institutionalised drive towards simplification of the system; and clear rules, with limited official discretion to give taxpayers certainty of their position—those are the key issues that we need to address if we are to maintain Britain’s competitive place in the global trading world.
In the short term, the scope for reductions in the overall burden of business taxation is likely to be limited due to the state of the public finances, so, when the economic recovery begins, we must seek other routes to improve Britain's competitiveness and attractiveness as an investment and business expansion location. The agenda will send a signal to business that UK plc wants to begin the long process of rebuilding its reputation as a mature, stable and attractive location for business—a reputation that, I am afraid, the Government rather casually placed in jeopardy in their darkest hour last November— [ Interruption. ] The hon. Member for Taunton thinks that that was not their darkest hour; perhaps the darkest hour is yet to come.
The message must be that our tax system is too important for the stability and prosperity of our country to be used as a platform for political posturing. There must be no more short-term stunts to wrong-foot political opponents and no more un-signalled changes. Stable—I might dare to say boring—is good when it comes to business taxation. We are clear where we stand on the issue. We have a long-term commitment to transparency, scrutiny, simplification and certainty in our tax system.
New clauses 17 and 18 will make a start. Tomorrow, my noble Friend Lord Howe will offer detailed suggestions of his own as to how we might achieve some of the other objectives that I have mentioned. We will scrutinise his report carefully, and although it is a report to the Conservative party, we will be publishing it, so I invite the Government to scrutinise it as well. My noble Friend is an extremely experienced politician who has huge experience of simplifying and rationalising the UK tax system from when he inherited a top marginal tax rate of 98 per cent. from the Labour Government in 1979.
I hope that the Government will take note of our initiative. They must surely have understood by now the risks of playing games with the tax system and the damage, including self-inflicted damage, that it can do. If they do not take up our agenda, the country, and especially the business community, will know that the next Conservative Government will do so. A reputation for fiscal stability and business-friendliness is hard-won over a long period, as I think even the Prime Minister will remember, but it can be blown away in the space of a few months, as we have seen since the pre-Budget report.
Britain faces the challenges of a global economic slow-down, and in the longer term, perhaps even more challengingly, a shift in the balance of economic power
from the established industrial nations to the emerging economies of the world. That shift is already under way, and I suggest that it is irreversible. We in Britain can ill afford such profligacy with our pro-business credentials if we wish to preserve the prosperity of our citizens and protect our tax base so that we can continue to enjoy high-quality public services.
The process of rebuilding confidence in the UK’s fiscal process will be slow and painful. It had better start now. I commend new clauses 17 and 18 to the House.
Mr. Jeremy Browne: It is a privilege to follow what felt like a Reithian lecture, certainly in its length and to some extent in its content. I agreed with large parts of what the hon. Member for Runnymede and Weybridge (Mr. Hammond) said, some of which was not particularly partisan and may even assist the House in its future deliberations. There were other parts about which I had some reservations, but should the Conservatives choose to press either new clause 17 or new clause 18 to a Division, my party will support them. The former would require the Government to report annually on the technical tax content of each Finance Bill, and the latter would require annual reporting on how the Government intended to simplify taxation.
We have already had quite a lengthy debate, if I can call it that, and I shall not speak for long because I know that others wish to dwell on other matters later. I wish to make a couple of brief points to follow those made by the hon. Gentleman. First, there is virtue in simplification. A lot of people are intimidated by the tax system—certainly if they are trying to file their own tax return, but even if they are using accountants to help them. There is merit in simplicity, and one of the problems has been that when the Government have tried to target tax breaks on different sections of the economy or categories of individual, they have introduced excessive complexity. Even when they have made a virtue of simplification, as they have sought to do in recent Budget statements, they have then had to unpick that simplification to rectify political controversies. Nevertheless, there is virtue in pursuing simplification as an objective.
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The hon. Gentleman accused the Government of introducing stealth taxes, which is of course true. He talked about the discrediting of environmental taxation, and we will come to that subject this afternoon when we discuss the retrospective introduction of vehicle excise duty increases. It is only fair to say in passing that Chancellors of all political persuasions have sought to place the tax burden in areas where they thought the public would notice its effects least. It is an irony of sorts that Lord Howe of Aberavon is being asked to report to the Conservative party. People will remember him for many reasons, one of which is that he was the Chancellor who increased VAT from 9 to 15 per cent.
One of Lord Howe’s successors, Lord Lamont, who taught the current leader of the Conservative party all that he knows about the matter, further increased VAT from 15 to 17.5 per cent. He made that tax-neutral change to VAT so that he could reduce the newly introduced council tax. I think it is fair to say—everybody accepted it at the time—that he calculated that people
would be grateful for the cut in their council tax more than they would notice the increase in their VAT, which after all is not normally itemised with each purchase. It was a straightforward calculation by the then Conservative Chancellor that he could introduce revenue-neutral proposals that would bring greater stealth to the system.
Of course, there are now people across the country who pay more as a result. It is very noticeable when one buys something expensive such as a new car. The difference between the VAT rate of 9 per cent. when the Conservatives came into government and the rate of 17.5 per cent.—almost double—when they left government means that a hefty amount is added to the overall bill.
Mr. Philip Hammond: I must defend my noble Friend Lord Howe. I do not know how old the hon. Gentleman was back in 1979, but I suspect that he was not much focused on VAT. There was a deliberate and conscious shift from direct to indirect taxes, but that had to be done because the top marginal rate of direct income tax was 98 per cent. It was not done in a stealthy way, and I assure the hon. Gentleman that it was not unnoticed by the population.
Mr. Browne: I take the hon. Gentleman’s point, and I was not preoccupied with VAT in 1979, mercifully. Oddly, here we are 29 years later and I am still paying the VAT that the Conservatives introduced every time I buy something that is not exempt from it. To be fair, the hon. Gentleman might have been talking to one of his hon. Friends when I said that Lord Lamont used an increase in VAT to fund a reduction in council tax. It is fair to say, and everyone will acknowledge, that he was trying to reduce an unpopular tax by increasing one that was less visible to the public. I am not making a particularly major point, just saying in passing that the desire to tax people in the way that they are least likely to notice is not unique to Labour Governments. It has been a feature of Governments of all parties.
The hon. Gentleman made some interesting comments about the process of scrutiny of Finance Bills. It is certainly true—any Member who does not acknowledge this is either a tax expert or not being entirely frank—that some of the deliberations that we are asked to undertake would more appropriately be resolved by people with expertise in the matter. A greater role can definitely be played by people beyond this Chamber who can add their expertise. My only cautionary note, as I said in an intervention on him, is that I am always guarded about people thinking that all tax matters can be resolved by “experts”. I know that he acknowledged that point. One tends to find that experts come up with all kinds of solutions, but often their cumulative solutions do not add up to an overall solution that the public find as agreeable as they would expect if they asked the experts to usurp the role of the politicians, about whom they are less confident but who can weigh up the solutions.
Anyone who has led a council will know that some officials are adept at proposing strings of savings and economies to keep down council tax, but that a politician’s eye is needed to spot which recommendations are likely to be popular and which will cause a party to lose control of the authority. The same is true of national Government: there will always be a political aspect to the process, regardless of how many experts are deployed.
Given the length of the speech made by the hon. Member for Runnymede and Weybridge, it was unlikely that he would not touch on my final point, but it has become especially topical in the past day—or even year—or two. The Treasury Select Committee has said that the current Prime Minister liked to pull rabbits out of the hat when he was Chancellor. No one is going to accuse the present Chancellor of displaying similar showman-like qualities, but his predecessor was keen to do so in his Budgets.
When the PBR was introduced as part of the annual set of major Government announcements in this House, we assumed that its purpose was to inform the main Budget. Instead, it has become a sort of secondary, lower-status Budget in its own right. It can be used to introduce tax changes, but the element of consultation is far less of a feature than many wanted it to be.
Ironically, the consequences have been bad for the Government. The current Prime Minister introduced the PBR, but he has been the one most damaged by his tactics in the House. The abolition of the 10p tax rate is one example, but others include the inheritance tax scheme—and there are not many hon. Members who do not think that was rushed through for party political reasons, with inadequate deliberation—and the proposals for non-doms and capital gains tax. Later this afternoon, we will talk about the retrospective element of vehicle excise duty, which is yet another policy of whose dangers the Government and Labour Back Benchers seem to have become aware only after it was announced. It would have been in their interests to consider all those matters in greater detail beforehand.
For all those reasons, new clauses 17 and 18 have merit. This discussion has been interesting and wide ranging, and we look forward to hearing the Minister’s response.
The Economic Secretary to the Treasury (Kitty Ussher): This has been a wide-ranging and useful debate. I congratulate the hon. Member for Runnymede and Weybridge (Mr. Hammond) on speaking for exactly an hour, although my experience in the Finance Bill Committee tells me that he has managed the feat before. My congratulations also go to the hon. Member for Taunton (Mr. Browne), on not matching that record.
In the interests of making progress, I shall not touch on all the topics that have been raised, my excuse being that some will be discussed in connection with later groups of amendments. New clauses 17 and 18 propose that the Treasury publish each year, not later than the PBR, a report containing information about the technical content of any tax changes, aside from rate changes, that it proposes to include in the following year’s Finance Bill, as well as its proposals for the simplification of the UK’s tax code.
The Government use the PBR and the Budget to set out decisions on the tax system. We are committed to a fair and efficient tax system that supports business, individuals and sound public finances. We are also clear about the process: in the Finance Act 1998, we set it out in the code for fiscal stability that the PBR should be consultative in nature and include, so far as reasonably practicable, proposals for any significant changes in fiscal policy under consideration for introduction in the Budget.
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