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Lord Dean of Beswick: My Lords, I am sorry to intervene at this late stage but the Chairman of Committees took almost 10 minutes to reply to a 10-minute speech of the noble and learned Lord, Lord Simon of Glaisdale. I briefly raised a point relating to the four-minute limit for speaking in the gap, which has not been answered. If we are to continue with time limited debates, will not those additional four-minute speeches wreck the programme and curtail the speaking time of noble Lords in winding up the debate?
Lord Boston of Faversham: My Lords, I was conscious that the noble Lord, Lord Dean, had intervened on that matter. I venture to suggest that he is right in saying that the programme could be wrecked. Indeed, difficulties can arise if noble Lords on the list of speakers take longer than the time limit expressed. Although the noble Lord, Lord Strathclyde, is always at pains to emphasise the point about time limits, I venture to suggest that his words need to be taken yet more seriously than they appear to be by some Members of your Lordships' House. Damage is caused to subsequent speakers if earlier speakers go over the time limit prescribed. I hope that that will provide some comfort to the noble Lord, Lord Dean, as regards his valid point. I commend the Motion to your Lordships.
Lord Howe of Aberavon rose to call attention to the opportunities, as well as to the case, for simpler and more user-friendly tax legislation, and to the proposals to that end recently made by the Institute for Fiscal Studies, the Inland Revenue and the Chancellor of the Exchequer; and to move for Papers.
The noble and learned Lord said: My Lords, perhaps I may first express my gratitude to my noble friends who have encouraged me in the formulation of today's Motion and supported its appearance on the Order Paper. I am also grateful to noble Lords on all sides of the House who have given notice of their intention to speak today.
We owe thanks to several generations of workers on this topic, starting with those who for a number of years have urged the strong case for reforming the whole process of law making as a general matter. For example, more than 20 years ago my noble friend Lord Renton presided over a distinguished committee on The Preparation of Legislation and has argued the cause ever since.
My noble friend Lord Rippon was more recently invited by the Hansard Society to produce a further report on Making the Law, again a general one. More particularly in this field there are those who have been pressing the case for improvement in fiscal legislation. Perhaps I may mention the Institute for Fiscal Studies
The other report relevant to the debate is that produced by the Inland Revenue as a result of an amendment to last year's Finance Bill by Timothy Smith. It required the Revenue to produce a report which appeared under the title The Path to Tax Simplification and which received the benediction of the Chancellor of the Exchequer.
My role in this general field I described at too great a length in the debate initiated by the noble Lord, Lord Nathan, almost two years ago. Suffice it to say--and I disclose some sense of guilt--that it is almost 20 years since as Shadow Chancellor I addressed the Addington Society and denounced what I called the:
It is not that I did not try, but I was certainly unable to mobilise the huge political will which was, and which will be, essential if we are to effect the fundamental changes that are needed. In one respect there has been helpful change since those days as evidenced by the documents to which I draw attention in today's debate. There is now a much stronger head of steam in support of the cause for change. The purpose of today's debate is to help turn that pressure into more solid progress.
The problem manifests itself in two ways: first, the surging volume of tax legislation and, secondly, its mounting unintelligibility or inaccessibility. There is all too often a tendency to justify the situation by saying that the problem is world-wide. Indeed, it is. During the past quarter of a century our tax law has grown from 2,000 to 6,000 pages. The Australians have doubled theirs in the past 10 years, and many other nations suffer the same fate. However, we cannot accept that growth with hand-wringing inevitability and do nothing about it. We do not have the option of doing nothing.
The problem falls into two halves: to improve the quality of legislation yet to be born; and if we are to achieve that, it is essential to improve the quality of that which already exists. That is a much longer and more difficult task.
Some people believe that we might achieve that by searching for a better, simpler tax policy. Of course, policy is relevant to the objective of simplification in the sense that policy makers should always have it in mind as a consideration. However, in a debate on the Finance Bill in April 1994 my noble friend Lord Cockfield, who was kind enough to include me among the Chancellors who from time to time had simplification as an objective, pointed out that the policy changes cannot be sufficient to achieve the cause of
But the objective of simplicity must always be a dominant consideration. We should not disregard it, but we cannot regard it as offering anything like the complete answer to the problem of simpler taxes. The most important factor is whether we believe it is possible at all to achieve improvement in the quality of our tax legislation. I am happy to say that all who have considered the question reply with a strong affirmative.
Plain language law, law which is user friendly, is obtainable. The Tax Law Review Committee and the Inland Revenue agree on the key components: a clearer structure of what you are trying to do; much shorter sentences; and modern design, modern layout and headings that help the reader. Of course, simplification cannot be at the cost of clarity. You have to balance the two. But one cannot seek complete precision at the price of infinite prolixity.
The fact that one can make those improvements is clear from the examples contained in the appendices to the reports to which I have drawn the attention of the House. I suspect that I am not alone in preferring the more radical approach of the Tax Law Review Committee to that exemplified by the Inland Revenue. The Tax Law Review Committee's approach coincides with the style of the Special Committee of Tax Law Consultative Bodies which offers a sample of legislation--what it calls rent-a-room relief. The verdict of the writer in the periodical Taxation is one which I welcome. He described the TLRC's redraft of roll-over relief as "magnificent".
There is no dispute that plain language can bring huge benefits. It can bring about a reduction in compliance costs. It is estimated that the cost of compliance for Inland Revenue taxes alone amounts to some £4 billion per year. It can help us to ease the process of future policy reform if we enable future finance Bills to be simpler and clearer. But, if that is to be achieved, it will require a very substantial culture change for everyone involved in producing fiscal legislation. The TLRC emphasises that. There is no doubt that that culture must change.
We need to have and to enforce stricter rules to secure more advanced decision-making, fewer last minute scrambles. There should be no law making on the hoof; no Dangerous Dogs Acts. There should be--in two words--more time. We need more human resources, above all, in the engine rooms of parliamentary draftsmanship--in the Revenue departments as well as in the Office of Parliamentary Counsel.
But I must not be unfair, because parliamentary counsel need time to do their work properly and we do not often give it to them. They need their resources strengthened. And we have had much help from them for the TLRC and, in particular, from the presence there of Sir Peter Graham, who was First Parliamentary Counsel until 1994.
As I said previously, if the process is to work, it needs a senior Minister (or ministerial group) in overall long-term charge. Theoretically, the Prime Minister is responsible, but I dare say that he is too busy. The Attorney-General by himself is not strong enough. One needs to integrate and draw together the authority of the Leaders of both Houses, the Attorney and the Lord Chancellor.
Even then, we need to agree on what we are setting out to do. We need to commit ourselves to a rewrite, over a period of not more than five years, of all fiscal legislation. We should start with the taxation of income, as the TLRC suggests, and have a pilot scheme in that area. There is no reason why Customs and Excise should not look at its area too.
There are many key propositions which I believe need further consideration but to which at this stage we should give only provisional answers. Should we opt for what is called purposive legislation? More statements of purpose are desirable but I am doubtful whether the concept of "purposisation" should be "totemised" as an answer to the problem.
Should we consign more to secondary legislation? Up to a point maybe, but if we look at the way in which we handle secondary legislation at present, which the Rippon Committee described as "highly unsatisfactory", I am not confident that that would be the right way forward.
We must recognise that the process will involve more than mere consolidation. It should allow for the recommendation of at least minor changes. But those too will need parliamentary endorsement. Should we hand over the management of all the details to a new extra-parliamentary body? I confess to little enthusiasm for that because in my days as Minister for Trade and Consumer Affairs I established a body called the Consumer Protection Advisory Committee with the intention that that should do the same in the field of consumer affairs. One of its early chairmen was the noble Lord, Lord Borrie. It was by no means a success, but that was probably my fault rather than his.
But we do need institutional changes. Outside Parliament the planning work and the shaping of proposals must be done by a specialised body. I do not think that that should be a Royal Commission. It should not be as detached as the Law Commission. Rather, it
Finally, we need to concentrate on what changes are necessary in Parliament itself. In that context, there is a clear need for special legislative vehicles, special tax simplification Bills, and an equally clear need for a special track for the processing of such Bills. If we get that right, that may well pave the way to an acceptance of the notion of a regular annual Tax Management Bill as part of but distinct from the regular Finance Bill routine.
The experience of both Houses now, although still quite limited, very strongly supports the case for handling such legislation by means of a Special Standing Committee. The House of Commons Procedure Committee recommended that frequently for that House, and in this House that has been recommended by the committee presided over by my noble friend Lord Jellicoe. In both Houses it has been relatively little used so far.
The Law Commission produced a report in November 1994, Parliamentary Procedures and the Law Commission. It asked why the Special Standing Committee procedure had been used so seldom when in both Houses it has been regarded by those who have tried it as a great success. My right honourable and learned friend Sir Patrick Mayhew, for example, has commended it very enthusiastically more than once.
Finally, one must consider the relationship between the two Houses on this matter. Can there be a role for your Lordships' House in this field, notwithstanding the fact that Bills will concern either money or supply, on which we are precluded from making amendments? The Tax Law Review Committee answers that by saying no, but I believe that it would be a great pity so to conclude when one sees the outstanding role played by this House in connection with Law Commission Bills and thinks of the presence in this House of fiscal experts ranging from Law Lords like the noble and learned Lords, Lord Nolan and Lord Simon of Glaisdale, to my noble friends Lord Cockfield, Lord Rees, Lord Boyd-Carpenter and Lord Hayhoe, who are to speak later.
If this House is to have a role in that field, does it make sense to have separate Special Standing Committees? It is difficult to believe that it would be useful for outside experts to be involved in giving
I have closed on probably the most important procedural question, at least so far as concerns this House. Those are some of the questions on which my colleagues and I on the Tax Law Review Committee will concentrate in the preparation of our final report and on which I believe the authorities in the Treasury, in the Inland Revenue and in both Houses should now be focusing their attention. It would perhaps be suitable for all of them to bring their reports to a conclusion together, ahead of the probable date of the forthcoming general election so that early practical arrangements can be put in place for a new Parliament by a freshly elected (or, as I should hope, a freshly re-elected) government. My Lords, I beg to move for Papers.
Lord Taverne: My Lords, as usual, I find myself in almost complete harmony with the noble and learned Lord, Lord Howe of Aberavon. We have co-operated on a number of reports in the past and, once again, on the question of tax reform, we find that we are very much at one. I too very much welcome the reports that we are debating. I find that the report of the Inland Revenue is a very positive document, especially on the central issue of the rewriting of tax law. However, I want to concentrate on the report of the Tax Law Reform Committee issued by the Inland Revenue.
First, perhaps I may tell the House that I take special personal pleasure in the quality of the reports produced by the Institute for Fiscal Studies. I very much appreciated the friendly remarks made after my maiden speech by the noble and learned Lord, Lord Simon of Glaisdale. Certainly, looking back on the vagaries of my career, what gives me the most sense of satisfaction is the fact that I played some part in the setting up of the Institute for Fiscal Studies. After I left the institute it really started to prosper and it now goes from strength to strength.
I approach the discussion of this kind of issue with great humility because I am by no means an expert on the technicalities of tax. It takes a very brave critic to question the judgment of the very learned members of the Tax Law Review Committee or, indeed, to take on or tangle with the Inland Revenue on technical issues. I should like to make a few comments. First, I want to echo what the noble and learned Lord, Lord Howe, said on the importance of the issue. It is indeed of very considerable economic importance. Tax compliance alone, for which the noble and learned Lord gave figures, amounts to over 1 per cent. of GDP. It is not just a question of the cost; it is also a question of justice.
We may not be entitled to expect complete certainty in tax law. Perhaps sometimes we err too much in our devotion to the search for certainty which is a very illusive concept and that search often leads to unduly complex legislation. If we are not entitled to expect certainty, we are entitled to expect the lack of total incomprehensibility. An example was given in the report of the Tax Law Review Committee. At page 33, the report cites one part of the National Insurance Act 1946 which I believe is worth reading to your Lordships:
How can we avoid that nonsense? How can we improve the law and achieve a greater degree of comprehensibility? There are two main recommendations made in the interim report from the Tax Law Review Committee. The first is greater use of explanatory memoranda. That certainly seems to me to have a great deal to commend it. It is much more satisfactory than finding out the purpose of a particular piece of legislation by referring to Hansard. It may be that there is a very clear explanation in the speech of the Minister introducing a particular tax measure, but it has not been outside the experience of the other place that the Minister does not altogether understand the tax law that he is introducing. All right, the brief is probably written for him or her by the Inland Revenue or Customs and Excise, but odd comments may be made in the course of the speech, there may be answers to questions, there may be a political spin given to it; indeed, there may be all sorts of reasons why Hansard is not necessarily a very accurate guide.
A clear explanatory memorandum or memoranda for different clauses is a much more satisfactory guide and a most important one. It is an important democratic principle that legislation should be interpreted in the way in which the Government, as sanctioned by Parliament, intended.
However, much the most important recommendation--indeed, the absolute centre of the reforms--is that the primary legislation of tax should be rewritten in a simple way. I was delighted to see that the Inland Revenue has accepted that task and that it reckons, perhaps to my surprise, that it could be done within five years. We should remember why that is so important. Again, perhaps I may quote from a section of the committee's report where it deals with the fact that tax legislation tends to be built on previous legislation. Paragraph 3.6 at page 18 says:
The only regret that I have from the report--and which, as I understand it, is now to be remedied--is the fact that it does not mention the very important way in which we can improve the scrutiny of legislation. Obviously we want to get away from elaborate schedules. Sometimes it is the fault of politicians that so much goes into a schedule. I remember one occasion when the Chancellor said, "I want a short Bill", but the Inland Revenue said, "Yes, but we have to get this and that in". So the temptation arose and the question was put, "Can we not put it in the schedule?" There is very little scrutiny of a schedule and often very little understanding of it. In fact, it has always been the case that schedules have not necessarily been scrutinised.
Some noble Lords may know the apocryphal story of the town clerk in Birmingham in the 19th century, when divorce was only possible by an Act of Parliament, who was, unfortunately, unhappily married. It so happened that he was responsible for drafting a very complex local water Bill. When the legislation was finally passed into the law there, hidden away in the corner of its schedule, were the words, "The Town Clerk's marriage is hereby dissolved".
The question is: how can we effect better scrutiny? As the noble and learned Lord, Lord Howe, said, part of the problem is time. Indeed, the pressure on time can be very considerable. I remember that the pressure of time on one occasion was such when I was in the Treasury that we found ourselves debating highly technical provisions in the early hours of the morning. At that stage, two Ministers were in charge of the Bill. My colleague was the late Lord Harold Lever. One of the Members of the Opposition asked, not unreasonably, "Can we know which of the two Ministers is answering the debate, so at least one of the two can wake up?". Well, it was true that both of us were asleep, but it was in fact Lord Lever's particular debate. Never has my admiration for that learned and witty man been greater than it was then. He jumped up, straight out of deep sleep, and said to his opponent, "The Hon. Member would no more be justified in inferring from the fact that our eyes are closed that we are asleep, than we would be in inferring from the fact that his eyes are open that he is awake".
It is of supreme importance that we have proper scrutiny. The answer must be a permanent Standing Committee to look at tax. That committee could have three functions of great importance. First, it could look at the technical changes. The point is often made that it is sometimes difficult to distinguish between technical changes and the mainstream kind of policy changes contained in finance Bills. It may sometimes be difficult to distinguish, in which case it should be kept in the main body of the Bill. However, there are other occasions when it is clear that changes are technical. They should be considered by a Standing Committee.
Secondly, such a Standing Committee could also look at the periodical reports from the review of legislation being carried out by the Inland Revenue--the re-write of the primary tax legislation. Thirdly, it could look at
Lord Brightman: My Lords, I would like to take the opportunity provided by this very useful debate to address one point only, and that is the urgent need for the simplification of the capital gains tax system for the benefit of the ordinary investor. I trust that in doing so I am speaking within the intention of the debate, notwithstanding that I am descending from the general to the particular.
As your Lordships will know, in essence, the tax is this: if the sale price of a share exceeds the purchase price, you deduct one from the other, and that is a capital gain which is taxable above a certain level. Nothing could be simpler or easier.
The complication arises from the fact that a gain is taxable however many years it took for that gain to mature, up to a total of 16 years; that is to say, from March 1982 to the present day if the share has been held for that length of time, or from the date of purchase if it was bought after March 1982. But money has fallen in value by over 80 per cent. since March 1982. Consequently, it has been recognised that it would be unfair to tax a gain which has resulted only from the fall in the value of money and not from any real increase in the value of the share. There has therefore been built into the capital gains tax legislation what is called an indexation allowance. It is here that the complication starts.
To calculate a taxable gain you have to take five steps, which I must regretfully explain to your Lordships in order to sustain my plea for a simpler tax structure. Step one: you deduct the retail prices index at March 1982, or at the later date of purchase, from the RPI at the date of sale in order to obtain an adjusted RPI. Step two: divide the adjusted RPI by the RPI at the date of purchase in order to obtain a re-adjusted RPI. Step three: you multiply the cost price of the investment by the readjusted RPI in order to obtain the indexation allowance. Step four: you add the indexation allowance to the actual cost price in order to obtain the adjusted cost price. Step five: you deduct the adjusted cost price from the sale price and there is your taxable gain.
However, that is not the end of the agony. It is only the beginning. If rights issues have been made during the time that the share has been held, the same exercise has to be gone through for every such issue, because there will be a different RPI at the date of the rights issue from that which prevailed at the date of the purchase of the share.
Of course, what happens in practice is that the investor throws up his hands in horror and passes everything over to his accountant at £100 an hour, or whatever is the going rate for an accountant. To me, the case seems overwhelming for another look at capital gains tax in order to avoid these horrors.
If capital gains tax on ordinary Stock Exchange investments were limited to gains made, for example, over the past two years, there would be no need whatever for any indexation allowance because there will have been no, or very little, inflation; or investments held for more than two years could be taken out of the charge to tax altogether.
I do not know how much money is yielded by capital gains tax--perhaps we may be told--or whether it would cost very much to apply a two-year time limit. But I do know that the present system produces a very great deal of wholly unproductive work for tax experts which adds nothing whatever to the prosperity of this country.
Lord Rees: My Lords, first of all may I express my gratitude to my noble and learned friend Lord Howe of Aberavon for enabling us to debate this important subject. I offer my apologies that, due to a long-standing prior engagement, I may not be able to stay until the end of the debate.
In common with my noble and learned friend, I express suitable contrition, I hope, because, as the table to the Revenue's paper shows, I cannot pretend that during the period that he and I laboured at the Treasury, along with my noble friend Lord Cockfield, who I hope is going to enlighten us further on this particular subject, tax legislation became less voluminous, less complex or more user-friendly. We did our best in a modest way, but the time and the pressure of events perhaps disabled us from doing as much as we would have liked.
It must be common ground between both sides of the Chamber that the system is absurdly complex, absurdly voluminous, difficult to understand and expensive to administer, both for the taxpayer and, indeed, for the Government. However, I do not believe the problem to be just a question of more skilful draftsmanship.
We all know the charming aspiration of Oliver Cromwell to simplify and reduce legislation to one small book. I believe that merely shows that, while a very capable soldier and a very capable administrator, he had
I am full of admiration for the part of the paper which, under the presidency of my noble and learned friend, the Institute for Fiscal Studies has produced for us to work on and which I have read with great profit. It has attempted to re-draft roll-over relief and post-cessation expenditure relief. Certainly, even I can see that it is expressed in words of greater clarity and greater elegance, but I am not really capable of judging how successful it may have been. Perhaps some noble and learned Lords will be able to enlighten us on that with their keen judicial minds and greater experience of construing such measures.
The point I want to make is that clarity is certainly one objective, but, as my noble and learned friend conceded in his opening remarks, certainty is another. I do not know whether such attempts to redraft in elegant and clear language will actually stand the test of close scrutiny by the courts and the keen eyes of accountants and members of the legal profession. I suspect that it will be found to be bristling with difficulties in the actual application.
I now turn to how the legislation might be improved. There is, of course, a keen debate, which again my noble and learned friend has touched on, as to whether it is possible to confine legislation, or primary legislation, to the statement of general principles, leaving the application to the good sense of the courts. This, of course, is the historic basis on which the corpus of fiscal legislation was built up. The doctrine of judicial precedent has enabled all sorts of amendments, amplifications and enlargements to be grafted on. I entirely accept what the noble Lord, Lord Taverne, has said, that perhaps it is a rickety and rather complex structure. That is not entirely due to the doctrine of judicial precedent but because of additions over the years. Like so many British institutions it is developing, but in this case it has not developed into something simpler, but has taken a rather more complex direction. The objection to the statement of principle approach to draftsmanship is that it does not enable the taxpayer to know with certainty what his position may be against any new piece of legislation that is introduced. My only answer to that is that it is questionable how far the taxpayer or his advisers are any more certain nowadays when legislation runs to an infinite number of clauses and an infinite number of pages.
Against that background, I hope that I played some modest role in stimulating the helpful innovation--this has been an innovation over the past decade or so--of the publication of explanatory memoranda. They are certainly a guide to comprehension of the basic thrust of the legislation. However, I am not certain how far they really assist, when it comes to litigation, to the construction of fiscal Acts before the courts. Equally, I applaud the greater use--I believe the courts are moving much more towards this--of permitting travaux preparatoires on the Continental basis. That is an increasing tendency which I applaud.
I turn now to the process of legislation itself. Again I believe that my noble and learned friend, and I to a lesser degree, can claim some credit for the increased introduction of Green Papers and draft clauses produced in advance of the finance legislation itself. This may have made a significant contribution to informed debate. As I have said, I think that the current administration can claim some credit for that.
As regards the legislative process itself, one of the important factors is that there should be an opportunity for a slower, more leisurely, and more considered review of the legislation after it has been published. It should be considered in a less adversarial and less highly charged forum. I have spent too much of my life in another place in the pitched battles over finance Bills that have dragged on through the afternoons and nights of the summer months.
I wonder whether it would not be possible after a finance Bill has been published, and after the Second Reading has taken place in another place, that it should be consigned to a Select Committee with liberty to call evidence. Of course it is objected that this would be a time consuming procedure, but now that the Budget is introduced in an earlier part of the parliamentary year and has become an autumnal rather than a spring rite, I hope that time might be available for that approach. Obviously I am not suggesting that the underlying policy should be subject to such scrutiny but at least the detail of fiscal legislation would be given a more detailed and a more leisurely scrutiny. I certainly warm to the suggestion which my noble and learned friend made that such a Select Committee might even be a Select Committee of both Houses. There is a precedent although it may not be an exact one. I think of the Consolidation Committee on which I sat many years ago, and which was composed of Members from both Houses. I hope that that suggestion may be given a little more consideration.
In the same vein, I wonder whether governments could learn to exercise a slightly greater self-restraint in their fiscal legislation. Is there any need for the annual legislative orgy which finance Bills have become? I am not saying that this is a fault confined to any one party. Of course rates may need to be fixed annually, but I wonder whether the more technical aspects--I know all the difficulties of distinguishing between what I call the more political and the more technical aspects of finance Bills, but it is possible in many cases to draw that distinction--could be confined to technical finance Bills or even to secondary legislation, provided that it is susceptible of amendment.
I now turn to the background to fiscal legislation because I believe it is impossible to divorce the complexity and the mild absurdity of the present fiscal structure. It derives from the complexity of modern life both in the private and the commercial spheres. There is also the international context. Taxation, although naturally the responsibility and concern of domestic legislatures, impinges on transactions that straddle many frontiers. There is the need to reconcile measures, for example, of dividend taxation, with similar measures overseas, the need to consider double taxation, and all those other aspects of our tax structures. Then, again,
I shall not today in the time available touch on the question of tax avoidance. I notice that the Institute for Fiscal Studies has for the moment put that aside, but there is a case for considering whether a simpler, fairer, lower rate tax system--I shall mention a precedent for that--might lead to a different relationship between the taxpayer and the Revenue. However, it will take time to reverse attitudes. I am well aware that even after the fairly impressive reductions in direct taxation which have been put through in this country, there will still be a tendency to tax avoidance. I turn now to the overseas examples. There is a helpful--
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