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Mr. Jeremy Browne:
Does the hon. Gentleman share the concern held by me and the right hon. Member for Witney (Mr. Cameron) that there are far too many
quangos in Britain and that the cost is prohibitive? Does he worry that this extra quango is a step in the wrong direction?
Mr. Gauke: I am grateful to the hon. Gentleman. I shall turn in detail to the office of tax simplification, but I have to say that his intervention was as predictable as it was, perhaps, wrong-headed. Had he read the excellent speech that my right hon. Friend the Leader of the Opposition made yesterday, he would have seen that it set out the reasons why it is necessary and desirable to have some organisations that bring technical expertise to an area or provide a degree of transparency as to how matters are dealt with. Such matters are better dealt with outside government rather than inside government. I will make the case that the office of tax simplification meets all those criteria.
David Taylor: Is there not a flaw—perhaps two—in what the hon. Gentleman is saying? Competitive taxation is one of the concerns that are way down the list of those who are considering where to locate themselves as employees or the businesses that they may own or operate. Is it not the case that we must have a competitive corporate tax rate? How many countries would have the majority of their 100 largest companies, as we have in FTSE, paying no mainstream corporation tax? That suggests that we have a very competitive tax rate and tax regime, does it not?
Mr. Gauke: I think I know where the hon. Gentleman got that statistic from, and I am not sure that it is actually right. Perhaps the Minister could respond to that point. That example is often quoted, but my understanding is that it is not necessarily the case. It is right that we should have a competitive taxation system, and I am very pleased that the hon. Gentleman supports that objective. However, the concerns about whether our tax system is competitive are very strong. For example, let me quote the CBI report that was published last year. It says:
“The competitiveness of British business is increasingly compromised by the UK corporate tax system. Only a few years ago the UK was perceived to be one of the most competitive places in the world to do business, underpinned by one of the most competitive corporate tax systems. Today this advantage has been significantly eroded.”
Richard Lambert, chief executive of the CBI, has also described our tax system as a
“ball and chain round the ankle”
I could even quote the former head of the Prime Minister’s business council, who warned the Government to be “extremely careful” on tax policy. It is pretty clear what he meant when he stated:
“The consistency and the nature of (the tax policy) has been hugely attractive to overseas people and to companies. We mustn’t lose that competitiveness. It would be very bad for the UK (and) it would be hugely damaging for business.”
That head of the Prime Minister’s business council is now Lord Davies of Abersoch, the Government’s Trade Minister.
A KPMG survey of 50 of Britain’s largest businesses published in January 2009 revealed that the percentage actively considering moving their tax residence out of the United Kingdom jumped from 6 per cent. in 2007 to
14 per cent. in 2008. In fact, one of those businesses had already left the UK by 2008 so perhaps we should say 16 per cent. We have seen a number of companies relocate their tax residence out of the UK—WPP Group, Shire, and United Business Media, to name but three. Those cases were specifically to do with fear of the regime on the taxation of foreign profits.
It would be fair to say that since the KPMG survey the Government have come forward with proposals that we debated at some length in Committee, and there is some support for those proposals. We raised a number of concerns and, despite the support for the proposals, the concerns remain. KPMG went back to those companies that were actively considering moving their tax residence after the Government had proposed their reforms on the taxation of foreign profits and the fact remained that all but one of them were continuing to consider actively moving their tax residence. One was waiting to see how things developed. It remains a problem, notwithstanding the announcements that the Government have made on the taxation of foreign profits.
It is worth highlighting the World Economic Forum survey on global competitiveness, which addresses a number of issues including tax competitiveness, where the UK’s position fell from fourth in 1998 to 15th in 2003. New clause 6 addresses a number of aspects of competitiveness, one of which is rates. Corporation tax rates have not risen but have, in relative terms, become less competitive. Our corporation tax was the third lowest in the EU15 in 1997 and the sixth highest last year. We have a higher rate than the OECD average, which was not the case in 1997. We can consider the rate of income tax. Of course, at the higher rate level of 50p, we will now have one of the highest rates of income tax in the world, not one of the lowest.
There is also the issue of tax complexity. Those who debate such matters will be familiar with the fact that the UK now has the longest tax code in the world and that we have overtaken India in that respect. It is common in such debates to quote the exponential increase in the number of pages involved in tax textbooks. These are real problems that are frequently highlighted by professional organisations and business groups. I shall touch on that point again in a moment or so.
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There is also a lack of predictability that has affected the UK tax system, particularly in the past few years. In a run of Budgets and pre-Budget reports, announcements have been made that were not consulted on and poorly drafted legislation has been presented that has caused significant concern to business groups in the UK. The capital gains tax proposals in the 2007 PBR and the proposals on residence and domicile in last year’s Finance Bill are examples of that.
How do we address these fairly fundamental concerns? New clause 6 would require the Treasury to lay before Parliament an annual report on the impact on the competitiveness of the UK economy of measures in that year’s Finance Bill. It would also require tax rates, the complexity of the tax system and the relationship between HMRC and the taxpayer to be taken into consideration. The advantage is that that would force the Treasury to focus on the issue of tax competitiveness,
and enable Parliament to assess the Treasury’s performance in that area. It would also send a strong signal to international investors and businesses about the importance that we as an institution attach to tax competitiveness. The proposal regarding the relationship between HMRC and the taxpayer would also be important in that regard, as it would mean that we all focused on ensuring that Revenue and Customs provided a service to taxpayers that worked to the UK’s advantage.
New clause 3 focuses more specifically on the proposal to establish an office of tax simplification. It is an attempt to address the problem of tax complexity, but it would also help with tax predictability. The OTS recommendation is one of three in the report published last year by Lord Howe, the second being a proposal to establish a Joint Select Committee on taxation that would make use of the expertise in this House and the other place to scrutinise Finance Bills and draft legislation. The third element of the Howe report is a proposal for a new convention to the effect that any change to the law with a technical content should be set out no later than the PBR before a Finance Bill is introduced.
The OTS would also report to the proposed Joint Select Committee on taxation, very much as the National Audit Office reports to the Public Accounts Committee. The Howe report proposes that the OTS would be overseen by a steering committee appointed by the Chancellor. Its staff, in some respects like that of the tax law rewrite project, would be made up of a combination of people from HMRC, academics and representatives from the professional organisations and major firms, perhaps on secondment for a year or two.
The OTS’s role would be to examine such areas of fiscal law as seem to it appropriate and to put forward proposals for tax law. It would not express a position on rates or yield or make decisions on tax law—it is absolutely right that this House does that—but it would make recommendations.
Mr. Jeremy Browne: I hope that I have not missed this in the hon. Gentleman’s speech, but will he say what salary he would expect the head of the OTS to receive? Would that person work full time, or for only a few days a week?
Mr. Gauke: We have not made a decision about salary, and the hon. Gentleman would not expect us to have done so at this stage, but as I shall make clear in a moment, we believe that it would be an important role that would add considerably to the effectiveness and attractiveness of the UK tax system.
It might be worth making some comparisons with other organisations. I have referred already to the NAO, for whose work there is great respect across the House. The way that the NAO reports to the PAC is an example of the House of Commons working very effectively, and similarly Lord Howe proposes that the OTS would report to a further parliamentary Committee. Another comparison can be made with the tax law rewrite project which, as its name suggests, is an attempt to rewrite tax law in a way that is more accessible. We have debated it from time to time—I have debated it with the Financial Secretary—and there is widespread recognition of the professionalism with which the project has been undertaken. The OTS proposal is more ambitious and would require a different type of people but, like the tax law rewrite project, its staff would be made up of a combination of HMRC people, academics and professionals.
Another comparison could be drawn with the Law Commission, which plays a very useful role in making recommendations in technical areas and improving the quality of law as a whole. Indeed, it is worth pointing out that the Chartered Institute of Taxation has called for a long time for the establishment of a tax law commission, a body very similar to the OTS. Lord Howe did not go for that name but he could have done, as the commission would perform a similar role.
Setting up the OTS would have a number of advantages, the first and foremost of which is that it would be a force for making tax law simpler and less complex. An inevitable pressure is exerted by some Chancellors—let me put it that way—to complicate matters, to meddle and to tweak. I think that we can all think of a Chancellor or two who would fall into that category, but the proposed OTS would be a force against that.
The second advantage is that the OTS, in conjunction with the proposed Joint Select Committee, would involve more informed parliamentary scrutiny. Members of this House have to tackle highly technical matters, and the OTS would provide them with more information. It would also require a more deliberative process for making tax law: added to the work of the OTS, Lord Howe’s recommendation for a convention that technical matters are published in the PBR would mean that the process was more thorough. That would also provide greater predictability in our tax system, because likely reforms would be clearer at an earlier stage.
The next argument for the OTS is that it would allow the expertise that exists outside the HMRC and the Treasury to play a greater role. I do not mean to belittle the work that those bodies do, but there is an enormous amount of expertise in the professional organisations. Having served on the Committee of each of the last four Finance Bills, I am not convinced that the system gets the best out of that expertise. The proposal would involve more consultation and a greater opportunity for the input of that expertise at an earlier stage in the process, before it becomes a matter of Government climbdowns or political embarrassment for amendments to be accepted.
A related benefit would be a lowering of the barriers between HMRC and the professionals so that the system made it easier for people to spend time working for HMRC, time in private practice, then back to HMRC and so on. Closer co-operation between HMRC staff and those working for the major accounting firms would be welcomed.
The Howe report points in the direction of an improved method of making tax law, and consequently in the direction of improved tax law. At a time when there will be substantial pressures on the public purse and no scope for substantial tax cuts, to put it mildly, and at a time when the rhetoric that we hear from the Government about continuing investment suggests that there will be no cuts in public spending, as we sometimes hear from the Prime Minister, we will see substantial increases in taxes. If that is the case, the least we can do in the context of tax competitiveness is improve the way tax law is made. It is right that we as a party have taken that extremely seriously. We are grateful to Lord Howe for the efforts that he put into producing his report last year. We think the two new clauses are extremely valuable.
Rob Marris: Can the hon. Gentleman say a little more about the philosophical underpinnings of tax simplification? It is all very well talking about getting rid of complexities through simplifications. When one does so, one gets rid of subtleties and discretion, so one is likely to end up with a system more akin to rough justice. Because of the complexities of people’s lives, particularly their tax lives, there is likely to be a backlash against that, as we have seen tonight on the 10p issue, which was supposedly designed to get rid of complexities.
Mr. Gauke: The hon. Gentleman makes a good point in the context of the 10p rate. I fear that there are times when the argument for tax simplification has been damaged by that measure and the reforms to capital gains tax. If I were in a more partisan mood, which I rarely am with the hon. Gentleman, I would say that when the Government talk about tax simplification, the taxpayer should count the spoons. I recognise the hon. Gentleman’s point, and I recognise that simplicity in the tax system is one, but not the only, objective of an effective tax system. It is not the only thing that matters.
We have a real problem. The point is made by professional groups time and again, and it is one of the reasons why our proposals on the office of tax simplification have been so warmly welcomed by the Institute of Chartered Accountants, the Chartered Institute of Taxation, the Association of Chartered Certified Accountants, the CBI, the British Chambers of Commerce and the Institute of Directors. There is widespread support for the proposals because the balance has not been struck in the past few years.
Mr. Binley: I am listening to my hon. Friend’s comments with great interest and welcome the proposal. Does he recognise that for many small businesses, the whole complicated tax system falls proportionally much more heavily on them than on many larger businesses? Does he recognise that the simplification will be a great aid to many small and medium-sized enterprises that are struggling to survive, let alone progress and make massive profits?
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Mr. Gauke: Indeed. My hon. Friend is a strong and eloquent advocate of the interests of small businesses and I am grateful for his intervention. He is right that small businesses have greater difficulties with complexity when they cannot afford the infrastructure of tax advice. Small businesses also suffer most from difficulties with administration of the tax system. By and large, I tend to find that the smaller the business, the more concerns they have about the way in which HMRC works. Larger businesses tend to have more positive views about the way in which HMRC works with them than do smaller businesses.
Rob Marris: Drawing together his response to my intervention and to that from the hon. Member for Northampton, South (Mr. Binley), do I take it that if it were pressed to a vote, the hon. Member for South-West Hertfordshire (Mr. Gauke) would vote against amendment 36, a tax measure proposed by the Liberal Democrats which would favour very small companies, but would lead to greater complexity in the tax system?
Mr. Gauke:
We look forward to hearing the arguments made in favour of that amendment by the hon. Member for Taunton (Mr. Browne). My concerns about it are
more to do with affordability than complexity. There are better examples of complexity in the system that need to be addressed than whether or not there is an additional rate.
New clause 4 returns to a debate held at the very end of the Committee stage as a consequence of a new clause tabled by the hon. Member for Taunton. It was always our intention to raise this in the Committee of the whole House because it affects a number of constituencies. It relates to the taxation of furnished holiday lettings. Let me put that briefly in context. Until the late 1970s the provision of holiday accommodation was regarded rather informally by the Inland Revenue as a business activity for tax purposes. Consequently, there was favourable income tax and capital gains tax treatment of it.
The Inland Revenue changed this practice in the early 1980s and started to treat the activity as an investment, rather than a business. There was considerable disquiet, and in 1984 furnished holiday lettings were formally treated as a business activity for tax purposes. This year the beneficial treatment of furnished holiday lettings is being extended to properties in the European economic area, but it was announced in the Red Book that the Government intend to abolish the furnished holiday letting rules next year and owners will need to prove that they are running a trade in order for it to be treated as a business activity. We had only a brief opportunity to debate the matter in Committee, and I thought it might be helpful to return to it and perhaps press the Minister, who made some helpful and conciliatory remarks in the Committee of the whole House. I should like to take this opportunity to press him again.
The concern expressed to us is that a number of properties that are currently let out as furnished holiday lettings will be sold before April 2010 to benefit from the advantageous capital gains tax regime. Some may think that there are advantages in doing so, given that such properties tend to be located in attractive rural parts of the country where locals often find it difficult to secure affordable housing. However, we are hearing that many of those homes are likely to be sold to second-home owners, who will use the cottages only occasionally. As a consequence, the properties will not be in use as often; there will be fewer visitors to the countryside; and there is the potential for significant damage to the rural economy. The situation will become more difficult for those currently owning furnished holiday lettings and for holidaymakers wanting to rent out a holiday home in the UK. In rural areas that are popular with tourists, there is particular concern that the measure will have a major impact on their economy. I note that there is particular concern in Devon and Cornwall, where there are some 62,000 furnished holiday lets. They could be substantially affected.
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