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If we win the Division on the new clause, we can proceed to approve the rest of the Budget but before the tax changes come in the Government have to give us more than warm words—they have to give us some reassurances about the moves that they intend to make. Some of us have been told that that is pushing the nuclear button, and that if we win the Government will not be able to raise revenue after 6 o’clock tonight and
that tomorrow morning the currency will collapse—with all the horrors that would stem from that. It would be ludicrously irresponsible if the Government did not have a plan 2 ready. If the new clause is carried tonight, surely they will jump up and say, “Clause 1 and the tax-raising powers in the Budget are a matter of confidence and we are going to make you pass it this evening. We will not go into the night leaving this on the statute book.” Of course, they would get it more easily if they showed a little more humility than has perhaps been shown so far, by saying that they will also make moves to rectify the injustice of the 10p changes. There are those of us who feel in our bones that we have caused this injustice, that it is up to us to put it right, and that this is our last opportunity to do so before we face the electorate, and the Government underestimate our resolve if they think we should just let it go.
We all act for a multiplicity of reasons. Dr. Johnson said that the realisation that one is to be hanged in the morning “concentrates the mind wonderfully”, and we know that, come next May, we will have to face our executioners. They will decide whether we come freely back to this House, and that should concentrate minds of those on the Treasury Bench about our resolve.
I talked earlier about the golden thread that knits together all Labour Members—new, old or ordinary. That thread is the belief that we come to this place to protect and advance the interests of those who get least from life. The 10p proposal is a denial of all that we came into public life to achieve, and this is our last chance to rectify the situation before the general election.
Mr. Hoban: It is a pleasure to follow the right hon. Member for Birkenhead (Mr. Field), who spoke in his typically understated fashion but with great passion and strength of conviction. Everyone in the House will have listened to him very carefully.
Before I talk about new clause 1, I want to make brief mention of two other amendments in the group. Amendment 40 in my name is a fairly technical proposal about settlor-interested trusts, and I shall not detain the House long with it. The nature of the trust and the interest that the settlor has in it mean that both the trust and the settlor are liable to pay income tax on the trust’s income. The trust pays the tax at the higher rate, which is currently 40 per cent. but which will rise to 50 per cent. if the Government’s plans go through. In contrast, the settlor pays at his highest marginal rate—that is, the 20 or 40 per cent. that obtains at the moment, or the 50 per cent. that the Government propose.
However, the problem is that there appears to be double taxation of that income. HMRC provides a credit to the settlor for the total tax paid by the trustees. That offsets exactly the tax due for higher rate taxpayers but, where the offset is not exact because the settlor is a basic rate taxpayer or has unused allowance, the settlor is obliged to pay any excess over to the trust.
Before the trust regime was changed in 2006, the credit that I have described was provided as of right. Following the Finance Act 2006, it is now a concession and there is no obligation on HMRC to continue to provide it in the future. Therefore, the relief could be withdrawn at any time, and the first part of amendment 40 would ensure that it remained available. I do not think that the Government ever intended to create this uncertainty in the first place and the first part of the
amendment would put the legislation on a proper footing by making sure that the concession had the force of statute.
The second part of amendment 40 clarifies that, if a credit is given, a settlor cannot also claim tax liability from the trustees. At present, that can happen when trustees have still to pay the income tax due on trust income when the settlor files an income tax return. In those circumstances, there is nothing to credit from, so the settlor has to pay up and then claim back the sum directly back from the trust. It is difficult to explain how the trust eventually resolves its liabilities and I shall not go into fine detail now, but I believe that the amendment would solve that problem too.
Although amendment 40 addresses a gap in the trust law that is three-years-old, the changes proposed in clause 6 to the trust’s rate of tax have made the issue more pressing. The trust rate paid by the trustees and the marginal rate paid by the settlor are likely to differ when the Bill comes into effect next year. Most settlors will not earn enough income to pay income tax at the additional rate, so the onus will be on the trustees to make the settlor repay the difference under the current legislation. It is therefore all the more important to ensure that a settlor can rely upon HMRC’s concession in order to meet these payments. That is best achieved by providing a statutory basis for the concession.
Rob Marris: As a matter of interest, on amendment 40 to which the hon. Gentleman has just been speaking, can he give an indication of how many such settlors and trustees he thinks there are in Birkenhead?
Mr. Hoban: I am not sure that I or the right hon. Member for Birkenhead (Mr. Field) know, or that the Treasury could tell us. Perhaps in his usual perceptive way the hon. Member for Wolverhampton, South-West (Rob Marris) is making a point about the incongruity of the amendment being tabled in this group. That is down to the selection made by Mr. Speaker, not by me. I am not totally unaware of the incongruity of the selection.
Mr. Frank Field: Did the hon. Gentleman notice that as Birkenhead was mentioned, the gods showed their displeasure at the fact that we had to have this debate?
Mr. Hoban: The right hon. Gentleman has not only tabled the new clause, but has managed to bring the weather on tap at the right time to provide a backdrop to the debate.
Amendment 37 raises the personal allowance to £10,000. I understand the attraction of that. It would take more people out of taxation. We are not averse to that concept. Indeed, our proposals earlier this year to increase the age-related allowance for pensioners by £2,000 demonstrates an interest in this area, but I am concerned about the potential cost, which I am sure the hon. Member for Taunton (Mr. Browne) will discuss at length. It sounds a potentially expensive way of providing relief to taxpayers.
The people who would benefit most from the hon. Gentleman’s amendment are those who pay the highest rate of tax, not those who pay the lowest rate. People at the highest rate of tax, who pay 40 per cent. at present, will benefit significantly. If the Government introduce
their planned 50 per cent. tax rate, those 50 per cent. taxpayers will receive the most benefit. I look forward to the hon. Gentleman’s arguments in support of the amendment.
New clause 1 is the most important clause that we will discuss on Report. The genesis of today’s debate lies in the 2007 Budget, where the cut in the basic rate of tax from 22p to 20p was funded through the abolition of the 10p rate. It is worth remembering the words of the then Chancellor, which explain why it took so long for people to recognise the issue to which that gave rise. In the Budget speech he said:
“Having put in place more focused ways of incentivising work and directly supporting children and pensioners at a cost of £3 billion a year, I can now return income tax to just two rates by removing the 10p band on non-savings income.”—[ Official Report, 21 March 2007; Vol. 458, c. 826.]
I suspect that when that was greeted with cheers from the Labour Benches, people assumed that, in effect, the zero per cent. rate would be extended up to the threshold for the 20p rate, rather than the tax being doubled from 10p to 20p. That is why many people were uncertain what the change meant in practice. In the Treasury Committee’s inquiry on the 2007 Budget, the Treasury official responsible for this area of policy was pressed and said that from the Treasury’s own statistics 5.3 million households would have lost out from the changes made in the 2007 Budget. However, the Prime Minister, when he was Chancellor, was quizzed by the Treasury Committee and denied that there would be any losers from the change.
Mr. Redwood: Does my hon. Friend think that one of the things that people find very difficult to understand is how the Government can find so much money to subsidise banks to pay colossal salaries to the people at the top of those loss-making publicly owned banks, but cannot find the money to compensate people on very low incomes?
Mr. Hoban: Many people ask themselves that question. We have provided significant taxpayer subsidies to those banks, but people then see another situation, such as the one under discussion, whereby the Government refuse to move and pay compensation to people who have lost out as a consequence of the 10p rate. That juxtaposition is very telling and forms part of the continuing anger about the 10p rate.
5.30 pm
Rob Marris: Does the hon. Gentleman share the puzzlement of many of us, whereby one reason given for the abolition of the 10p rate was simplification of the tax system—the move to the two rates? He just quoted the then Chancellor on that point, but in that very Budget a 10 per cent. rate was retained for certain low savings income, and in this year’s Finance Bill there is incredible complexity in terms of higher rate taxpayers. So, we now have—off the top of my head—about six rates of income tax, not the supposedly simple two rates.
Mr. Hoban:
The hon. Gentleman makes an important point. Part of the challenge was for the Government to justify why they moved from the previous three-rate income tax system to the two-rate system, and simplification
seemed a convenient explanation at the time. [ Interruption. ] The hon. Member for Taunton asks, “Who spotted this?” May I remind him not only that his party identified it, but that we did? In a press release on Budget day 2007, we said:
“In his”—
“stealthiest taxes yet, he has paid for his 2p cut in income tax by abolishing the 10p rate”.
I therefore want to lay that myth to rest for the hon. Gentleman and save him having to repeat it again during his remarks.
Let me remind the House of the losers from the 2007 Budget. There were some 2.2 million single, childless working people who did not get the working tax credit because they earned more than £12,500 a year but less than £18,000, or because they worked fewer than 30 hours a week or because they were too young. They lost on average £125 a year per family. There were 1.2 million two-earner, childless couples who might not have qualified for working tax credits, who failed to take it up or who lost out from the Budget’s other changes. Their maximum loss was £464 a year.
There were 7.7 million two-earner couples with children, and they lost twice through the income tax and national insurance charges but gained only once from the child tax credit and working tax credit reforms. There were people who did not work and lost out because of tax on their benefits. There were 4 million one-earner, childless couples, earning in a range of £17,000 to £18,500, who lost out because they were not compensated.
There were, as the hon. Member for Stoke-on-Trent, Central (Mark Fisher) said, 300,000 women, aged between 60 and 64 years old, who did not get tax credits but were too young to be compensated by the rise in the pensioner tax allowance. Indeed, in the days after the 2007 Budget, the first letter that I received from a constituent complaining about the measure was written by a lady who fell into that category. She clearly had read well the small print of the Budget and identified that she was in the group that would lose out.
The average loss per family is about £145. They can be characterised as families who are on low incomes but who fall outside the tax credits safety net; as early retirees; and as people on incapacity benefit. They were caught out by the complexity of a tax and benefit system that the Government created; they were people who lost out from the measure; and they were some of the most vulnerable in society. It was, to reverse a phrase so beloved of the Prime Minister, a tax rise for the many and not the few.
Despite the warnings on Budget day, and despite the evidence that was given to the Treasury Committee at the time, it is fair to say that the issue was a slow-burner. The scale of the losses came into focus only as the implementation date got closer, and, understandably and rightly, people were angry that the Government had not been clear about the scale. That triggered a significant wave of anger across the country that was reflected in the views expressed on both sides of the House. That is why the Chancellor came to the House on 13 May, part of the way through the Crewe and Nantwich by-election, to announce measures that would offer compensation to some of those affected by the abolition of the 10p rate. In his statement, the Chancellor said that the changes
“will mean that 22 million people on low and middle incomes will gain an additional £120 this year. It will mean that 4.2 million households will receive as much, or more than, they originally lost. The remaining 1.1 million households will see their loss at least halved. In other words, 80 per cent. of households are fully compensated, with the remaining 20 per cent. compensated by at least half.”—[ Official Report, 13 May 2008; Vol. 475, c. 1202.]
Mr. Timms: The hon. Gentleman is giving us an interesting historical discourse on the events of the past couple of years. However, the House is interested to know about the measures that his party favours to raise the incomes of the 500,000 households that we are discussing.
Mr. Hoban: That obligation rests with the Minister— he is in government—not the Opposition. We look to him to bring forward proposals to deal with the issue. The Government created the problem, and they need to solve it. They need to live up to the promise that they made in the House.
The Chief Secretary to the Treasury (Mr. Liam Byrne): Quickly.
Mr. Hoban: I do not need to move on quickly, because the onus lies with the Government, not the Opposition, to solve the problem now. The Government have had plenty of time to think about the issue, and they should not be looking to us for ideas to get them out of their hole.
Mr. Drew: May I help the hon. Gentleman—and, indeed, the Government? One of the ways in which we could bridge the financial gap is through much more effective measures to deal with tax avoidance. Would the official Opposition be interested in that?
Mr. Hoban: The issue is not about finding the money to pay for the compensation, but about finding a way to compensate people who have lost out as a consequence of what has happened.
After the Chancellor’s statement, a number of people were still losing out as a result of the measure. In its report on the 10p rate, the Treasury Committee said:
“There is a pressing need for the Government to seriously examine ways in which these remaining households can be compensated...The Government should set out proposals to achieve this by the time of the 2008 Pre-Budget Report.”
The fact that that group of people were still not fully compensated caused continued anxiety across the House about how the issue was to be resolved.
Mark Fisher: Does the hon. Gentleman share my view that one of the things making it impossible for the Government to find a solution is the fact that they are in denial? They do not recognise that they have caused a problem and say that they cannot identify the people who are losing out. I look forward to hearing from Treasury Ministers; I hope that we hear them say this evening, “Yes, we admit that there is a problem and that there are losers. These are the people, and this is how we will solve the situation.”
Mr. Hoban:
The challenge is that the Government already recognise that there is a problem. I noticed earlier that the right hon. Member for Liverpool, Wavertree (Jane Kennedy) was in her seat. Let me remind the
House about what she said last year, when she was the Financial Secretary, in response to an intervention from the right hon. Member for Birkenhead; She recognised that there was a continuing problem and said:
“I want to reassure him that we will return to this issue in the pre-Budget report, as the Chancellor has said, not only in front of the Select Committee but elsewhere. He will bring forward concrete proposals, and they will be implementable as soon as possible.”—[ Official Report, 1 July 2008; Vol. 478, c. 741.]
I thought that a very clear commitment, and I think that the right hon. Gentleman and a number of other Labour Members did too. It was on the basis of the right hon. Lady’s reassurance that the hon. Member for North-West Leicestershire (David Taylor) withdrew his new clause at the time.
So a year ago, a clear commitment was given by the then Financial Secretary—and by the Chancellor elsewhere—to compensate the 1.1 million households that had not been fully compensated. The clear message was that that would happen in the pre-Budget report. The pre-Budget report, of course, has come and gone without the package having been put in place, and that is why we are debating it today. There was an exchange of views between the Financial Secretary and the right hon. Member for Birkenhead about the number of people who had lost out through the scrapping of the 10p rate. The IFS estimates that 0.9 million people are still worse off by more than £1 a week as a consequence.
We are here to press the Government to come forward with proposals that will compensate those who were not fully compensated as a result of the proposals announced in May last year. The Government cannot cast aside lightly, and without any consequence, the commitments made in last year’s debate and by the Chancellor. Having started this process in 2007, having denied that there were losers despite the evidence, having made a concession under pressure last year, and having defused a revolt on Report of the Finance Bill in 2008 by committing to act in the pre-Budget report and yet failing to do so, it is time for the Government to be held to account by Parliament.
This is not a partisan issue—it is about the House asserting itself and forcing the Executive to live up to the promises that they made to this legislature last year. It is time for the Government to redeem the promise that they made. They have had time to reflect on how to compensate the people who were not fully compensated last year, and to bring forward measures to help those people; in failing to do so, they have broken their promise to the House. We now have the chance, by supporting new clause 1, to force the Government to keep to their promise not only to Members of this House but to the people who have lost out as a consequence of the scrapping of the 10p rate.
Mark Fisher: It is a pleasure to follow the hon. Member for Fareham (Mr. Hoban). I, too, want to concentrate my remarks on new clause 1.
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