Mr.
Hands: The system that the Government propose and the
phasing out of the allowance above £100,000 will add immensely
to that complexity. The hon. Gentleman is right to say that there is
already a certain amount of complexity, but the amount of complexity
added by the proposals is entirely disproportionate to that which
already exists.
Those with
income subject to PAYE in and around some of the bands will be subject
to estimated PAYE codes, which will in many cases lead to under or
over-payments of tax and in-year requests for change and coding
notices, which will put further strain on the tax administrative
system. The result will be an increase in the need for form-filling,
the issue and processing of which, together with making the associated
payments, repayments or coding adjustments, will increase the
administrative burden and costs for many taxpayers and
HMRC. 12.30
pm
Mr.
Bone: Perhaps I should declare an interest as a fellow of
the Institute of Chartered Accountants in England and Wales, as clearly
this could be welcomed as a job creation scheme for accountants. I was
not aware of those facts, and my hon. Friend has helpfully brought them
to the Committee’s attention, but is it not just a stealth tax
whereby taxation on higher earners is increased without actually saying
that that is what it is? Are the Govt not trying to do that by the back
door?
Mr.
Hands: My hon. Friend is absolutely right. It is a more
stealthy way of raising yet more revenue from higher earners. I do not
wish to trespass on the major debate we are to have on clause 6, but I
think that he is quite right. He is also right that that will act as a
boon and incentive to many in the tax planning industry for additional
bands that should not be there.
I will
introduce two sets of comments from observers on the associated
payments, repayments and coding adjustments. The second is actually
from the Institute
of Chartered Accountants but the first is from the Chartered Institute
of Taxation, which, with regard to these proposals,
states: “We
consider that a more appropriate method would have been to lower the
threshold at which the 50% band is introduced or to set a rate between
40% and 50% for the band of income between £100,000 and
£150,000.” I
am not in a position to endorse that, but I would be interested to hear
the Minister’s response to the proposal. The CIT went on to
state: “HMRC/HM
Treasury (HMT) models could predict the level at which these would need
to be set to yield the same revenue as the current proposals, yet with
reduced administrative burdens for HMRC, tax agents and tax
payers.”
What consideration has
the Minister given to those suggestions?
The ICAEW
made more or less the same
point: “A
more straightforward option would be for personal allowances to be
given in full, but for the rate of tax applying to be higher over, say,
£100,000 of taxable income. This would have the benefit that
PAYE would then be able to deal effectively with bonuses etc so that
underpayments of tax would be less likely. Analysis will need to be
done to identify an appropriate rate of tax and there will be winners
and losers.”
What consideration has
the Minister given to that proposal? He has explained the rationale in
terms of his belief that those who have been and are earning more
should be paying more, but can he explain the rationale behind the
plethora of new marginal tax rates that he is creating? That seems to
breach the principle that everyone is entitled to receive a certain
amount of income on which they pay no tax, but it also seems to breach
the undertaking that the Minister gave personally, along with the
Government, not to make our tax code too complicated. That cumbersome
and complicated schedule of marginal tax rates will surely lead to
gross distortions in the system, so I would be grateful to hear what
studies have been done of that change with people
outside.
Mr.
Gauke: My hon. Friend will recall the 2007 Budget, in
which the then Chancellor, the current Prime Minister, proudly
announced that for the first time the UK would have only two rates of
tax on personal income, combining national insurance and income tax,
and a simplification process, having abolished the 10p rate. Now we
seem to have more bands than
ever.
Mr.
Hands: My hon. Friend is, of course, quite right. That is
yet another example of the Government’s economic and tax policy
unwinding disastrously over the past two years with the former
Chancellor, now as Prime Minister, continuing patterns of disastrous
stewardship of the finances.
My other
question is about what behavioural changes there will be. What
behavioural changes does the Minister predict will happen on the
overall tax take from those changes? At the moment, they seem to be
predicated entirely on no behavioural change, which was the point made
by the hon. Member for South Derbyshire in his intervention. How does
the Minister feel about jeopardising our long-treasured, progressive
system of taxation, where bands go up the more that one earns, and
introducing
this rollercoaster? What impact will that have on the message that the
Government are sending out to the people of this
country? Mr.
Bone: It is a great pleasure to serve under your
chairmanship, Mr. Atkinson. We are seeing a clear change in
Government policy here. The stealth tax is still present—they
are trying to get it through the back door. It is an attempt to tax
higher earners, going away from the Tony Blair philosophy that swept
Labour into power. Now the Government believe in tax-and-spend, while
the Conservatives believe in lower taxation and responsible spending.
That is good for the election that is on the horizon.
I remember
last year, in every debate, whoever was Chancellor stood up and said,
“We believe in making a simple tax system. We want to remove
complications and have as few rates as possible.” What we now
have is a complete and utter reversal, which I think is a mistake.
Honesty would have been the better policy—not fiddling with
personal allowances but simply putting the tax rate up on higher
earners, if that was what the Government believed was right. Then we
can have a proper debate. The days of stealth taxes should be
over.
Dr.
Pugh: I have a few brief comments. Regarding the points
made by the Government about complexity, hon. Members will recall that
the Liberal Democrats’ proposal was targeted at those people
earning £100,000 and more. It was abandoned at a celebrated
occasion at a party conference, when we made what was called the green
tax switch. The Government have a different way of doing it—they
have a less severe redistribution in their proposal than in ours. The
reasons why the Lib Dems modified their position are the very issues
that I would like the Minister to address now.
It has been
suggested that if we introduce such a proposal, people who are in the
unfortunate category of earning £100,000, looking with envy at
the people who earn £98,000, will simply find a way to take
their reward via other means such as capital gains. It was also argued,
when we changed our position apropos the higher tax band, that some of
the gains in redistribution would ultimately be somewhat spurious. Some
of the reductions in social inequity that would follow were probably
more imagined than real. Will the Minister familiarise me with his
thinking about those proposals in terms of their effects on tax
avoidance and people taking their reward in different ways? The
Minister may well acknowledge a genuine redistribution urge here, but
what does he think the proposals will do to low
incomes?
Mr.
Timms: I do not agree with Opposition Members’
characterisation of the measure. Regarding complexity, as I said in my
earlier remarks, the threshold for income tax and national insurance
will, under the proposals that I have set out, including some of those
in the Bill, be fully aligned for individuals for the first time. Some
of the steps in the table read out by the hon. Member for Hammersmith
and Fulham will be removed. The only parts of his table that are
affected by the measure that we are discussing now are right at the top
end of the income range. As I have underlined, only 2 per cent. of
people—those on the highest incomes—will be affected. The
full allowance will still be available for 98 per cent.
of taxpayers. The 2 per cent. whom we are talking about are already
required to complete self-assessment forms. Hence, there will be no
additional form-filling for them—it will all be done through the
form that they already have to
complete.
Mr.
Hands: Surely the Minister must realise that anybody who
is likely to be earning between £100,000and £112,950 is
likely to change their behaviour as a result of these changes. At the
weekend, in The Sunday Times there was an article entitled
“Five ways to turn income into capital gains”. That is
precisely the sort of thing that I think will lead to behavioural
change, which he claims will be
avoided.
Mr.
Timms: I will come on to the question of behavioural
change in a moment. The hon. Gentleman’s charge was that people
would have to fill in more forms and I am simply pointing out to him
that that is not the case. They already complete a self-assessment
form. That is all that is required for the calculation to be
successfully completed, so there will not be any more forms for them to
fill in.
Mr.
Hands: Surely there will be more forms to be filled in if
a mistake has been made, which is quite likely to happen. People will
have to resubmit their tax returns, on the basis that mistakes are far
more likely with this very complicated
structure.
Mr.
Timms: There is no basis for that assertion at all. People
will complete their self-assessment form in the way that they do now.
They will state their income and the calculation will be made. There is
no reason at all why this change will alter the accuracy with which
people complete their forms.
There
is a clear case on fairness grounds for this change, which I touched on
in my earlier remarks. At the moment, a taxpayer gets relief from their
personal allowance at the highest rate of tax that they pay. That means
that a basic rate taxpayer gets the benefit of £1,295 and a
higher-rate taxpayer gets the benefit of twice that sum, which is
£2,590. It is entirely right, at a time when all of us
acknowledge that fiscal consolidation is required, that people at the
high end of the income range should contribute somewhat
more.
Mr.
Todd: I entirely accept my right hon. Friend’s
argument about fairness. However, I must admit that I have been puzzled
about the mechanisms that have been chosen, which are likely to
incentivise behavioural change in a group of people who are well able
to pay for advice to maximise the benefit of that change. What
calculation has the Treasury done on the net revenue that will be lost
as a result of this proposal from people simply altering their
behaviour, such as topping up—admittedly, only
temporarily—their pensions, putting money into venture capital
trusts, or using a variety of mechanisms that would achieve the outcome
that they
desire?
Mr.
Timms: First, an assessment has been made and the figures
in the Red Book take account of anticipated behavioural changes. I
noticed that the Institute for Fiscal Studies described those
assumptions as being not unreasonable; they are sensible assessments of
the kind of changes that will be required.
However, I
would caution my hon. Friend on one point. Sometimes there is a
suggestion in these discussions that, in reality, we cannot increase
the tax paid by people on high incomes. That is not the point that he
made, but it is sometimes suggested that, if there is to be fiscal
consolidation, the practical reality is that the additional
contributions have to come from those on lower incomes. That is not his
position, or my position, but I think that it is very important that we
resist that view and that we proceed with measures such as this one,
which require, as I have already set out, an additional contribution in
tax from the 2 per cent. of highest earners in the
country.
Mr.
Hands: The Minister is being generous in giving way. He
can correct me if I am wrong, but I do not think that I have seen
anywhere an assessment of the phasing-out of the allowances. I am sure
that he is right that there have been assessments. I think that the
issue was debated by the Treasury Committee, to assess the impact on
behavioural changes caused by the 50p tax rate. However, I do not think
that I have seen anywhere in the Red Book an assessment of the changes
to the phasing-out of the allowances. Therefore, if such an assessment
is in the Red Book, can he tell us what the numbers
are?
Mr.
Timms: Yes. The assessment was done for both measures
together, rather than for each measure separately. So the figures apply
to both measures.
12.45
pm
Mr.
Hands: Surely the Minister must realise that there are two
very separate issues here. They are the 50p tax rate for those earning
more than £150,000 and the changes in the allowances, which will
make behaviour very susceptible to these very small changes in income.
For example, people may get a bonus towards the end of the year. which
might take them from £95,000 to £115,000. But the
behavioural change there will be very different from that of someone
who is currently on £250,000 and considering whether to leave
the country. Those are two different things and I should be grateful to
hear what separation he has made of those two
considerations.
Mr.
Timms: The hon. Gentleman is right, of course. There are
different issues and there will be a number of kinds of behaviour.
There has been talk of people going for capital gains. There will be a
variety of different behavioural responses that people will perfectly
appropriately pursue. My point was that the figures, such as those
discussed in the Treasury Committee, relate to that variety as a whole.
That is the basis on which the assessment has been made. I have no
doubt that the individual steps were looked at when that assessment was
put together, but the figures that have been set out relate to the
measures as a
whole.
Dr.
Pugh: Is the Minister able—not necessarily
now—to tell us what the fiscal benefits of this measure are and
what they would have been if anticipated behavioural change had not
been read into that? What benefit will this achieve for the Treasury
and what allowance is being made for people’s behavioural
change?
Mr.
Timms: As we heard, this was discussed at the Treasury
Committee. If one looks at the theoretical take from the measures in
the clause, the scorecard revenue that we expect to receive is 36 per
cent. of that total theoretical revenue. That has been fully taken into
account in the Red
Book. I
understand the point about a high marginal rate over a portion of
income, but the measure that the clause set outs is the right way to
seek a contribution to consolidation from this group of taxpayers. It
is relatively straightforward to implement. It ensures that taxpayers
with incomes in this income bracket pay a maximum of £2,590
towards fiscal consolidation and it minimises the behavioural impact
too. As I said earlier, the taper will operate on exactly the same
principles as the familiar taper for age-related allowances. All those
affected will be within the self-assessment regimes already. I do not
agree that having another rate for income tax between 40 and 50 per
cent. would have been better. Doing this through the personal allowance
tapering and using a mechanism that is already familiar in the tax
system is the appropriate way to
go. Fiscal
consolidation is always difficult. Those who are asked to contribute
more in the future than in the past will, understandably, have some
regrets. But those whose income is at the highest end of the income
spectrum have seen their incomes rise the fastest over the past decade.
So it is absolutely fair to ask them to contribute rather
more.
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