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Lord Lucas: My Lords, if I may call my noble friend's attention to the time.

Lord Rees: My Lords, this Administration over a period of time has reduced taxation. It has abolished a number of taxes. I hope therefore that Mr. Blair's latest statement shows that there is some common ground between us. I hope that we may profit from the example of New Zealand and I hope that a low tax, simple environment may lead to genuinely user-friendly legislation. I hope that that is not too optimistic a note on which to end my overlong speech.

4.37 p.m.

Lord Simon of Glaisdale: My Lords, we are singularly fortunate that a Chancellor of the Exchequer of such distinguished service as the noble and learned Lord, Lord Howe, should focus our minds on this aspect of our fiscal system. We are also greatly indebted to the three reports to which he referred. Particularly, it was most encouraging to read the two models on which we might base a complete rewriting of our fiscal code over the next five years. I mention the three reports at the risk of impertinence after the contribution, referred to by the noble Lord, Lord Taverne, of the Institute for Fiscal Studies. It has been consistently useful, not least in its latest report.

There are two different types of legislation. One is designed for ordinary people. An example of that would be the recent Family Law Bill which has been before your Lordships. Whatever one may say about its thrust, it is well drafted and can be understood by the people it affects--the ordinary people in the streets. Then there is technical legislation, for which one can reasonably be required to have recourse to an expert. For patents, one goes to a patent agent; for landlords and tenants legislation, to a solicitor, and for the revenue statutes to a solicitor or accountant. However, there is no excuse for the complication and obscurity of much of our fiscal

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code. An accountant ought at least to be able to understand the provisions of a Bill at First Reading, yet there is no question but that he cannot do so at the moment. The legislation needs to be reconsidered and rewritten.

I shall not attempt to cover points made by noble Lords who preceded me. Many of them have had far more recent experience of Treasury and fiscal matters than I and I shall not be affronted if the Minister tells me that I am discussing a Jurassic fiscal code. I venture to agree with practically everything that has been said but I wish to submit three broader considerations for your Lordships, for what they are worth.

First, we use our fiscal code for economic engineering. That is permissible, but it almost inevitably leads to great complication because it needs fine tuning. Frequently, what is required to be done by the fiscal code could be done in other ways; for example, capital allowances by direct grant. One would have to interpolate some body like the University Grants Committee or the Arts Council to make the necessary adjustments. We are used to such machinery and I suggest that whenever the fiscal code is used to implement an economic policy or even to guide personal behaviour, one should find out whether there is a simpler method of achieving the same result.

The second consideration which I wish to point out is how profoundly I agree with what the noble and learned Lord, Lord Howe, said about the haste with which much of our fiscal legislation is prepared. It is almost always due to an excessive desire for secrecy. When I was a Treasury Minister, no one outside the Treasury was allowed to see a Finance Bill until it had been published. That was relaxed painfully, and the Law Officers were finally allowed to see it. The secrecy was unnecessary. Some things are highly secret, like Customs and Excise legislation, where a change in duty may lead to reticulation. But income tax and other matters concerning the Inland Revenue are not so secret and could well be widely discussed, particularly with a view to ensuring perspicuousness.

The third consideration which I suggest is that one-fifth of our fiscal legislation relates to anti-avoidance provisions. They are incredibly complicated. The reason is that the tax avoidance schemes are often complicated. With our tradition of fiscal equity, the Inland Revenue follows the convolutions through so as to hit precisely one scheme and no other. By that time, the provision is often quite incomprehensible.

I once had such a provision, and an accountant on the Back Benches pointed out that in certain remote circumstances, it would involve a double charge to tax. That was a challenge to the Inland Revenue, which proceeded to chase it further to ensure that there was no double charge to tax. It succeeded, but at the cost of complete incomprehensibility. When I was challenged as to its meaning, all I could do was to repeat what Sir John Simon, with his incomparably clear legal brain, said: "What the Inland Revenue intends to do by this is so-and-so. I don't see how it does it, but that is the way

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they tell me they will administer it. I hope you will allow it to pass on that basis". They did allow it and allowed me to pass it on that basis too.

We can sweep away the great bulk of the anti-avoidance provisions by a simple provision such as exists in the United States and Australia. Any transaction, the dominant purpose of which is the avoidance of tax, shall be void for that purpose, though valid for any other. The law is quite capable of dealing with a dominant purpose. I ask that the point be considered.

4.48 p.m.

Lord Cockfield: My Lords, the issues raised by my noble and learned friend Lord Howe and the report of the Tax Law Review Committee are of great importance. However, I wish to go further into the causes of the trouble than that report or my noble and learned friend's speech went. The report deals essentially with the effects and not with the causes. It deals with symptoms, not the disease itself. Although there is a great deal of merit in the relief of symptoms, there is much greater virtue in trying to tackle the causes.

My noble and learned friend kindly referred to the speech that I made in your Lordships' House nearly two years ago. On that rare occasion noble Lords were permitted by the usual channels to discuss the Finance Bill, and I analysed the reasons for the complexity of fiscal legislation. I do not propose going over the whole of that field again. But I want to make one comment which links back to those remarks.

The guilty parties, if I may use such a phrase, in this field are successive Chancellors of the Exchequer and also the legal profession, particularly the judiciary. I shall come to the latter point in more detail in a moment. So far as Chancellors of the Exchequer are concerned, it is not simply a question of failure to simplify taxes; it is a penchant they have for introducing new complications. Almost every Budget has its list of what that very great Financial Secretary to the Treasury, Lord Lever of Manchester, described as "ripping little wheezes". Those are what in these days are called "tax shelters" designed to attract public attention and, no doubt, the plaudits of the business community and particularly of the financial services industry, in whose pockets for some strange reason the benefits of the tax relief almost always end up.

We should be much better if we had much lower rates of tax--I entirely agree with my noble friend Lord Rees--but no tax shelters. The two things go together. If there are a lot of tax shelters, there are high tax rates. What we want are no tax shelters and much lower tax rates.

I now turn to the question of the legal profession and the judiciary. One has to be very, very careful what one says here. As we know, the judges are a very sensitive lot, much given to criticising one another (if one studies the minor incident of the Scott Report) but somewhat adverse to people criticising them.

It is very well known that the standard of proof in criminal cases is very much higher than the standard of proof required in civil cases. That is not so much a

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matter of statute law as of judicial decision over a long period of time. Equally it is the case--I agree that they are not entirely ad idem--that the judiciary applies very, very stringent tests indeed to the interpretation of fiscal legislation. Indeed, in one of the leading cases on which I was brought up, the judgment of the learned judge concerned could well be regarded as incitement to tax avoidance. It is not surprising, if that is the attitude on the part of the judiciary, that there is then the growth of a prosperous tax avoidance industry. The effect of that is that the Inland Revenue in turn sets out to pre-empt what it thinks will be the activities of the tax avoidance industry, and then if it finds it has failed it comes along with even more complicated legislation. Somehow we have to break through that vicious circle. I shall be absolutely frank: I do not know how that is done.

I listened with great interest to the remarks of the noble and learned Lord, Lord Simon of Glaisdale. One of my earliest jobs when I was very young was cleaning up the excess profits duty of the 1914-18 war. That contained an anti-avoidance provision; so, indeed, did the excess profits tax of the 1939-45 war; so did the excess profits tax of the Korean War. I was involved in the administration of all three. I hate to say how old I am, but noble Lords can draw their own conclusions from my remarks. There can be provisions of that kind in times of war. First, people are prepared to tolerate them, and secondly, on the whole the standard of behaviour on the part of the kind of people who normally go in for tax avoidance is inhibited by public opinion. Incidentally, in both of the first two instances we had exactly the same sort of body as the noble and learned Lord suggested. I believe it was called the Board of Referees, which pontificated on whether or not the main purpose of the transaction was tax avoidance. A few years ago, in the Ramsay case, it looked as though the judiciary was taking a rather stronger line on purely artificial transactions, but I believe that has gradually been chipped away at in subsequent cases.

In the end, the attitude of the judiciary in this respect is a reflection of public opinion as it existed a generation or so ago. It has been said, and the quotation will be familiar to noble and learned Lords, that the law lags behind public opinion and public opinion lags behind the truth. In the present instance the time lags are very considerable. I believe that the general attitude in the country towards taxation is somewhat different to what it was, for example, at the time of the Civil War. I refer of course to the Civil War in which Oliver Cromwell and Charles Stuart were involved. The origin of that civil war rested on taxation considerations. The whole emphasis after those events was to cut down the power of the Crown to tax the citizen.

There has been a change in this quite extensive period, and people accept that there is a legitimate place for taxation and that it is not simply a question of the Crown getting money out of the citizen for purposes of which the citizen would not approve. Of course some governments take too much money, and for purposes that not everyone will support. But, as a general proposition, I believe there is a greater acceptance today that the state has a greater role than it had before the war, and certainly a greater role than it had before 1914.

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That is inevitably reflected in the level of taxation. But it is also affected by public opinion on the question of tax avoidance.

At the end of the day, this issue is capable of resolution only if there is a state of public opinion under which it is unacceptable. In those circumstances, a general anti-avoidance provision may take us some way further forward. But in the end, that can happen only if there is a change in the ethos and outlook of people in the country, of the legislature itself and particularly, at the end of the day, of the judiciary, whose job it is to enforce the standards by which we all have to live.

4.59 p.m.

Lord Boyd-Carpenter: My Lords, I have been taking part in financial debates in one House or the other since the year of grace 1951. I must say at once that, of all those debates over all those years, I have never heard one opened better than this one, introduced by my noble and learned friend Lord Howe of Aberavon. His speech was masterly, it gave a splendid set-off to the debate and it demonstrated a greater quality of understanding of the hideously complex issues with which we are concerned in these debates than any I have heard. The House has every reason to be greatly indebted to him.

I want to deal quickly with one or two particular aspects of the matter and first of all with the need for simpler and more friendly financial legislation. That is becoming more difficult because of the curious way in which the Inland Revenue appears to be handled.

For many years I dealt with Inland Revenue offices in the town of Rugby, where I was an administrator, and in London where I lived mostly, and in Hampshire with a tax office close to me. It now appears that it is the policy of the Inland Revenue to move their offices very largely away from what I might describe as "inhabited areas" and put a considerable distance between a great many taxpayers and their offices.

Perhaps I may quote from my own experience. When I was chairman of Rugby Portland Cement, I dealt with the tax office in Rugby. Later I and my wife dealt with tax offices which are located, believe it or not, at Walsall and Bootle. I do not know how many noble Lords are familiar with those no doubt distinguished areas, but they are a very long way from those who live in the south of England.

I wonder whether my noble friend the Minister will say whether there is a deliberate policy of moving tax offices into remote parts of the country, with the consequence that proper, immediate contact with the tax office is much more difficult. If the tax office is in the same town or area in which one lives or works, many small points of difficulty can be easily resolved by a visit to the office and having a word with an official. But if the tax office is located, as in my case, hundreds of miles away, every issue, small or great, that one wants to take up with that office has to be dealt with either by prolonged and expensive telephone calls or by extended correspondence.

I wonder whether it is pure chance that I have been affected or whether it is the deliberate policy of the Revenue to move its offices out of the south of England

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in particular and install them in areas which are, no doubt, significant in themselves but are a considerable distance from where quite a large proportion of the population lives. It is important to get that point clear.

I turn to particular forms of taxation. I agree wholly with what was said earlier today; namely, that the best system of taxation is taxation at low rates with very few concessions. Once taxation is at a high rate and, to prevent causing hardship, it becomes necessary to allow a great many concessions, the whole system becomes infinitely more complicated. Can my noble friend the Minister say whether it is the policy of the Government to impose rates of taxation which are as low as possible, even though that may involve it being levied over a fairly wide area?

Here, I should like to comment on a tax which I believe is a thoroughly bad one; namely, VAT. VAT involves imposing an additional charge on a vast number of goods. In truth, it is inflationary because it inflates prices arbitrarily. It also operates in surprising areas. Some noble Lords may recall that a little time ago I raised in your Lordships' House the extraordinary business of VAT being imposed on repairs to old churches. If ever there is an area which would seem to be justifiably made free of tax, it must surely be work on old churches. When a small country parish, such as the one with which I am associated, has to repair its lovely but ancient little church and finds that, in addition to the building costs involved, it is also taxed on the money used for that purpose and the expense incurred, that seems to justify criticism of the tax system. I believe that VAT is a very bad tax. Its effects on the economy are very serious indeed.

It has been said earlier in the debate that the more there is a tax burden in one direction or another, the greater is the incentive to take steps to avoid it. Tax avoidance is a very serious matter. I know from my own experience at the Treasury that a great deal of energy has to be devoted to making sure that taxes are not avoided. But, the higher the rate of tax--whether it be VAT, income tax, surtax or whatever--the greater the incentive for taxpayers to avoid it and not, in that respect at any rate, to be taxpayers at all. Therefore, again I want to know the Government's policy in that direction.

Finally, if taxation is to be restrained, it is necessary that there should be economy in public administration. There are innumerable directions in which we all want to spend public money and know that spending public money will do good. But if we comply with those demands, we shall push tax rates up to dangerous heights.

In that context, in the moment that remains to me, I beg my noble friend the Minister to say that legal aid will be cut. In the past day or two there has been the example of a German who has undertaken litigation with a company in this country and who apparently has received £½ million in legal aid. As a taxpayer, I object to contributing to that amount of legal aid and in particular to assisting the efforts of a German to litigate against a British company.

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5.8 p.m.

Lord Ashburton: My Lords, not for the first time I find myself speaking in a debate in which, compared at any rate with the galaxy--if that is the appropriate collective noun--of former Treasury Ministers who make up such a large proportion of the speakers on this occasion, I am definitely a lay person, perhaps a lay Lord, albeit one with several decades of working experience of the two particular aspects of this matter that I want to raise. Since there are only two aspects, I hope to be brief. Given the fact that each speaker has 10 minutes, I may even under-run rather than over-run the time. I hope that one day it might even be possible to auction one's under-run to one of your Lordships who wishes to be more loquacious than he is allowed.

I cannot pretend that I have fully absorbed the detail of the Inland Revenue and IFS reports. But I have no difficulty in applauding their general tone and particularly the optimism about improvement which comes through in the report of the Inland Revenue. Some of the comparative examples of rewritten New Zealand and Australian tax legislation strike one forcefully as examples of what should be aimed at whenever possible.

In the course of my browsing I found one--perhaps other noble Lords also found it--rather pleasing double entendre. In paragraph 6.8 on page 22 of the Inland Revenue background paper, which is concerned with understandability of legislation, it says,

    "Many critics have argued that it is not easy for users to find their way around our present tax legislation".

Generally, it seems to me that rational people have to approve of simplification and thereby user-friendliness in every legitimate human activity. In the case of taxation there seem to me to be two principal reasons. First, a democratic one: it must be right that taxpayers as a whole accept the system of taxation as fair and rational. They cannot possibly do that wholeheartedly unless they have a reasonable understanding of it and indeed may well not accept it even if they do understand it.

There is a horrible jargon word in management speak--to "own". The various layers of management have to "own" corporate policy before they can effectively manage; taxpayers have to "own" the tax system before they will pay taxes happily and not spend excessive time trying to avoid payment. If your Lordships will forgive me, perhaps I can recount my daughter's experience. At the age of about 18, between school and university--I hope she is out of the tax net; this is around 20 years ago--she took a job at the Ideal Homes Exhibition. She came home waving around £45 in her hand and I said, rather facetiously, "I hope you are going to put aside some money to pay the tax on that". She turned round and said to me, "Daddy, what do you think you are talking about? I earned this!"

The second reason why simplification is desirable is that it should at least make some dent in the size of what is, in my view, an unnecessary industry. Fiscal advice employs an amazing number of highly paid professionals whose time could be redeployed. Given

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the present tax system, they could not be described as unproductive, but in any national calculation their time could be better otherwise employed.

I am well aware that it is not difficult to parade desirable simplifications without taking adequate account either of the knock-on effects or the need to replace the revenue which simplifications tend always to reduce. I doubt whether the noble Lord, Lord Cockfield, will remember, but he taught me a lot about how easy it was to ignore this side of changes when I discussed with him some ideas I had on the tax system in the late 1960s. I have always been grateful to him for opening my eyes.

The two aspects I should like to raise relate to CGT. Like the noble and learned Lord, Lord Brightman, I hope that this comes within the scope of the debate. In my view, CGT is not a satisfactory tax as it is now. However, it is too big a subject to embark on at this time except in one or two details.

CGT, at the taxpayer's marginal rate of up to 40 per cent. at the top, is a tax which can badly distort personal investment decisions. As a simple example--I know that one must be wary of simple examples--an individual buys a holding of shares for £1,000 and happily finds that, to his surprise, the price has quickly risen further than he feels is justified by the facts available to him to, let us say, £2,000. He would like to sell but that would involve him in paying somewhere between 25 and 40 per cent. of the gain in tax, leaving him with somewhere between £1,600 and £1,750 to reinvest.

Anyone who has tried to run investment portfolios for others, professionally or for himself, is aware that to find an alternative investment which will do as well from a base of £1,600 as the former will from £2,000, is something of which one dreams. To act on that belief takes a lot of confidence. There must be hundreds of thousands, possibly even more, of investment holdings which should rationally be switched but where the tax cost is such a heavy disincentive that they are left untouched.

I know that individuals can and, under the present tax regime probably should, invest through CGT-exempt vehicles such as investment or unit trusts. But the very existence of such vehicles seems to me to be clear evidence that CGT at present rates is too high and that switching investments should not be a taxable event as such. If there is one way of deterring individuals from bothering to understand and appreciate the workings of commercial undertakings, I can think of no better way than giving an incentive such as now exists to put all such decisions in the hands of a relatively small number of professional managers. I may be wrong, but I suspect that the raising of the base rate of CGT to 40 per cent. from the 30 per cent. rate then charged--already a heavy deterrent to switching--was probably intended as a simplification. In my view it remains as an awful warning of unintended disadvantageous side effects.

Simplification is bound to involve compromise. But I add my plea to that of the noble Lord, Lord Cockfield, and others that the best simplification that could possibly be introduced would be to lower drastically the rates at which taxes are levied and to reduce equally drastically the exceptions. In the specific case of CGT that would save an enormous amount of time and money.

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I know that there are problems galore in all of this and the question of how to tax those whose income is made by effectively trading in shares is one of the more obvious. If we can agree that income should legitimately be taxed, however it arises, but that switching of investments should be a legitimate non-taxable event as it is for investment and unit trusts, then the compromise should lead one to a low rate of tax without exceptions. Certainly any system which attempted to determine annually what proportion of an individual's investment profits had been spent rather than reinvested would be a nightmarish step directly away from simplification.

The second point on which I should like to touch briefly--I seem to be overrunning my time already--is the current resurrection of the argument that capital gains tax should be paid at a lower rate according to the length of time an investment has been held. That would undoubtedly be something of a simplification in that it would help to allow the abolition of index linking, though one must remark that the best way of abolishing index linking is by abolishing inflation. I hesitate to criticise any move which tends to lower tax rates. But long experience has taught me that the correlation between the time an investment has been held and the social worthiness of that investment is tenuous in the extreme. I was going to say "tends towards zero" when I realised that that would not stand up.

I know that the received wisdom is that long term is good and short term is bad; that speculation is undesirable and can be logically separated--I know not how--from investment which is desirable. But those views do not stand up to dispassionate examination. All investment involves speculative analysis of prospects and, in our heart of hearts, surely, we know that. The desirable thing, it seems to me, is that investment decisions should be well informed and rationally arrived at, not that they should be judged with the criterion of how long they are held.

Occasionally, a short-term sale of an investment is the right thing to do. The price of a share can run up against all expectation to a level where the only proper response is to sell it. By so doing the investor is actually doing good, by tending to reduce unrealistic pricing in the market and helping, in however small a way, to make the market more rational. The investor does not deserve to be criticised therefore nor taxed more heavily.

As I said, a graduated CGT may well be a simplification and better than nothing. But I fear that some people kid themselves and would happily kid the public at large that there is some moral merit in holding investments for a long time. Though it is not relevant to the present debate, I am equally unhappy that the word "stakeholder" is in danger of being used in the same way as "long term". They sound good, but do not necessarily stand up to dispassionate analysis. Roll on simplification; but caveat simplificator.

5.19 p.m.

Lord Hayhoe: My Lords, having served as one of his Ministers of State in the Treasury when my noble and learned friend Lord Howe of Aberavon was Chancellor, I am delighted to support him again today. Our debate

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is about simpler and more user-friendly tax legislation, and rightly we concentrate today on tax. But the general principles have much wider application. Indeed, my noble and learned friend referred not only to the report of the Institute of Fiscal Studies but to the Hansard Society Commission chaired by my noble friend Lord Rippon of Hexham, in which I had some hand because in those days I was chairman of the Hansard Society and persuaded him to serve. There was also the seminal report from the committee of my noble friend Lord Renton in 1975 and before that the Heap Report in 1970. So there has been a long run of these reports. The Hansard Society Commission report stated:

    "The Heap Report was followed by other critical studies. In 1972 the Stow Hill Committee ... recommended solutions to the problems outlined in the Heap Report. In 1973, following further comments by a Procedure Committee of the House of Commons, the Renton Committee was appointed by the Lord President of the Council 'to review the form in which Public Bills are drafted'; it reported in 1975, making 81 detailed and technical recommendations for change. The sorry fact is that despite these critical but constructive reports almost nothing has been done to improve the situation".

Some improvements had been made. The revenue departments had consulted more widely, as my noble and learned friend Lord Howe said. The draft clauses of significant parts of tax legislation had been published during the early 1980s, as described by my noble friend Lord Rees. But the major reform for which all of us have been waiting so long has at long last been given real impetus and prominence in the Inland Revenue's plans for tax simplification which were published last December. I am delighted to give a warm welcome to those proposals.

As is made clear in those reports, there is scope for simplifying the language of the law. The examples given in the report of the Institute of Fiscal Studies and in the appendices to the Inland Revenue report are striking. How could anyone not want to see this kind of change being made? There is also scope for improving and simplifying the policy content of tax legislation. I shall not repeat many of the comments that have been made except to note that recently in the United States the fashionable thing was Mr. Forbes and his flat tax, which was designed to do away with many of the complexities. It seems to have had a fairly limited life and has gone into the ground, though it may be resurrected for the Republican platform for this year's presidential election.

I am delighted that the Inland Revenue report makes it clear that both aspects are now to be addressed. One recognises that much of the complexity of the law arises from the pursuit of fairness, and the elimination of present complexities will almost certainly give rise to greater inequalities and inequities in the way taxes fall. A proper balance has to be struck and no doubt this will be extremely difficult to achieve. The Inland Revenue's plans and proposals deserve every encouragement. They are in tune with the plans for self-assessment. If one thinks just of self-assessment of capital gains and what we have heard of today, simplification on that front will be helpful for those people who are making gains of more than £6,000 a year, because under that figure a blanket opt-out or relief is available under existing provisions. I hope that real progress will be made on

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the re-writing programme set out in the Inland Revenue report--re-writing over about five years most of the primary legislation on Inland Revenue taxes in simpler and more user-friendly language which will be easier for everyone to understand. What a delightful and welcome prospect that is.

I want to say a few words about explanatory memoranda. The Institute of Fiscal Studies and the Hansard Society Commission argued for a much greater use of explanatory memoranda. The Inland Revenue report concludes rather more cautiously, but certainly not discouragingly, that progress could be made on that front. I agree that there would be implications for other areas of UK legislation. One has only to look at some of the complexities concerning local government finance or our social services to realise that explanatory memoranda would have a part to play.

I should like to see a much wider use of explanatory memoranda. I agree with the noble Lord, Lord Taverne, that it is more sensible for reference to be made at a later stage to explanatory memoranda than to what appears in Hansard. I remember only too well my first intervention as a new Minister at the Treasury on the Finance Bill in the very early hours of the morning on a subject about which I knew absolutely nothing but on which I had a marvellously thick book of briefing from the Inland Revenue. I appropriately read out the response to some detailed points that had been made by one of the Opposition spokesmen who stood up afterwards to say how well I had dealt with the point he had raised and welcomed my first intervention in Finance Bill Committees. However, I discovered from my private office afterwards that I had read out the wrong reply to the amendment. Clearly, it made not the slightest bit of difference but it underlines the point that with some of the very complex provisions of Finance Bills very few of those speaking on them really understand the detail. I therefore welcome very much what is being proposed.

I was disappointed by the Government's response to our debate on "the legislative process" which was initiated by the noble Lord, Lord Nathan, in December 1994. I am now greatly encouraged by the Inland Revenue's plan, The Path to Tax Simplification. I wish it well.

Finally, I endorse and commend two of the final points made by my noble and learned friend Lord Howe of Aberavon. He spoke of using the Special Standing Committee procedure on matters of tax legislation and also of the possible future role of this House perhaps in a joint committee of that kind. I think that such a combination, together with the efforts that are now to be made by the Inland Revenue with the support of the Government and the Chancellor, could lead to a considerable advance in the simplification of our tax legislation. It is something surely that in all parts of the House we would warmly welcome.

5.29 p.m.

Lord Shaw of Northstead: My Lords, I thank my noble and learned friend for initiating this debate today, a debate which is a valuable start to what must be a fairly long process. I was interested to hear my noble

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friend Lord Hayhoe admit that in his first appearance on a Finance Bill Committee he read the wrong brief at a very late hour. As I suspect that I was probably chairman of that committee I hope that I was not guilty of allowing him to talk out of order. Be that as it may, it shows the need for simplification so that even Ministers may have a chance to understand what they are saying.

The Path to Tax Simplification discloses the quite horrifying figures of increases in the total amount of tax law in the 18 years between 1952 and 1970. What was, in 1952, 1,076 pages, in the next 18 years became 3,119 pages: in the past seven years it has become 3,483 pages.

We must all welcome the initiative taken by the Chancellor of the Exchequer to try to simplify the tax legislation for the benefit of businesses and taxpayers generally. Reform is not going to be easy, as I believe nearly every speaker this afternoon has said. It certainly will not be quick. It is forecast that a complete rewrite will take around five years. I am not surprised, but this massive task is only worth undertaking if it is to be done thoroughly and with full consultation.

The Inland Revenue has, most welcomely, already made a start in its document The Path to Tax Simplification, which happily concludes--to fortify the thoughts of most of us this afternoon--that it is satisfied that a rewrite is technically feasible and that its benefits will substantially outweigh the cost--a note of optimism not usually shown by the Inland Revenue.

Today we are not, of course, discussing taxation policy, but rather the language and form in which taxation law is written and presented. As the Tax Law Review Committee tells us on page 5 of its report,

    "Frequently, you cannot see even the broad outline of the picture without solving the puzzle. To this extent the legislation is written in an impenetrable style with no way in ... But sometimes the puzzle is insoluble and the legislation is then incomprehensible".

The difficulties in understanding tax legislation arise partly in its wording and layout and partly also in the pattern of its intent, for every aspect of a subject is sought to be covered. It has not been good enough, and nor will it ever be in my view, to lay down the law simply as a general principle or intention. The detail has had to be spelt out. Consequently, as Bennion is quoted as arguing in the TLRC report,

    "in the UK we prefer to be ruled by a democratic legislature which passes Acts after full, public debate and which weighs and argues over almost every word in almost every Act".

Frankly, too often, this is simply not true. I have served on a number of Finance Bill Committees both as a Back-Bencher and as chairman. Too often, the more complicated the clauses, the less difficulty the Government have had in getting them through. I say immediately that I make one notable exception. When I first became an MP in 1960, the noble and learned Lord, Lord Simon of Glaisdale--I hope that I may say "my noble and learned friend" because he was a constituent of mine for a number of years--played a leading part in the preparation of the 1960 Act. That Bill contained some very complicated clauses on anti-avoidance. I have looked them up. They were widely debated, but clarity was not an obvious result.

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I do not in any way blame my noble and learned friend for that. The Treasury had clearly looked at them and put the brief firmly on his knees so that he would have to deal with them.

Anti-avoidance is a matter which has not been looked at yet, as we have been told, but in fact it will be looked at as something entirely separate. I am sure that that is right. It is a field where specialists in the Inland Revenue battle with taxation specialists in the private sector. Sometimes a lack of clarity results in uncertainty, and that in itself may, it is hoped, deter attempts at avoidance. But sometimes, as has been said this afternoon, a lack of clarity is the result of a lack of clear instructions to the legal draftsman. All that raises the question as to whether notes and explanations attached to legislation should be encouraged.

The modern custom of providing Notes on Clauses has been very successful. It has been helpful not only to committee members, but also to the poor old committee chairman who, in another place, has to have a good understanding of what is the subject of debate to keep the debate in order. I believe that such notes, or other notes made in some other way, along with ministerial comments made during the passage of Bills, should be available to the courts should litigation arise at a future date. I say that because those notes and the explanations given by Ministers must have been a part of the reasoning by which Parliament passed the legislation in the first place.

The TLRC report suggests that there should be a project team drawn from various disciplines. Chapter 7 states,

    "The main function of the rewrite would be to improve the clarity, comprehensibility and accessibility of the legislation".
I entirely agree with that, and I entirely agree that the resultant Bill would be a Finance Bill and therefore that it would not go before a Committee of your Lordships' House. Nonetheless, the report suggests that any such rewritten proposals should be referred to a specially created independent review body, which would report on the proposed legislation prior to its introduction into Parliament. Such a review body, it says, would be comprised of tax practitioners and hence represent a formalised consultation.

Whether the rewrite is done by a project team, as described by the TLRC, or by the Inland Revenue, I accept that outside consultations must take place and since the objective is not to raise money, but

    "to improve the clarity, comprehensibility and accessibility of the legislation",
we should seriously consider ourselves being involved at some stage in the consultation process. It must be borne in mind that the results of this rewrite are bound to have a significant effect on legislation far wider than financial legislation. Indeed, why are we having this debate today if we have not a proper and valid interest in what is being proposed? I believe that our interest should be maintained throughout the period of the rewrite and our views made available to the review body.

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5.37 p.m.

Baroness Seear: My Lords, as the noble and learned Lord, Lord Howe of Aberavon, mentioned in opening this debate, I am, very much to my surprise, a member of the Tax Law Review Committee. I sit on this committee in a state of considerable trepidation as I am surrounded by persons who are extremely experienced and expert in the field. They are judges, accountants of the highest calibre and legal advisers, and a very formidable body it is. However, it includes two or three chosen ignoramuses--I speak for myself; the others are not ignoramuses, of course--who have no such qualifications. I assume that we are there in order to look at what is being considered from a political point of view, because several of the members are MPs--and that is why I made the qualification that I did a moment ago. But we look at the issues even more from the point of view of what we would now have to call the person on the Clapham bus, because if there is any legislation which directly affects every citizen in the country it is tax legislation. It affects them in the most sensitive place, namely their pockets, and therefore it is important that the ordinary taxpayer's point of view should be considered when changes in the tax system are being discussed.

From the point of view of the taxpayer--even more importantly with the coming into force of self-assessment--the three matters that must govern all tax legislation and reviews of tax legislation are clarity, certainty and democratic control. Nobody can possibly disagree that the present legislation is almost impossible to understand. I am reinforced in that by the fact that the most eminent of the people who sit on this committee from time to time confess that they do not understand it and that it takes them an interminable time--which is wasted time--to find their way through the present legislation. There is no question but that it needs to be clarified.

One welcomes the decision to try to rewrite the tax legislation in plain English. Those of us who are concerned with trying to write plain English know that this is no easy task. To write about an extremely complicated matter in plain English and to make it accurate at the same time is very difficult. Five years is not too long for such an undertaking. As I listen to the discussions in the committee, it occurs to me from time to time that in the desire to achieve clarity, accuracy and therefore certainty may be sacrificed. Certainty is vitally important. Before people embark on any expenditure, or any activity, they want to know what the tax liability will be. They must be able to find out within the legislation how tax will impinge upon them.

While I very much welcome the determination to rewrite the legislation in plain English, I enter the caveat that there is a considerable risk that in so doing we may lose certainty, which is important from the point of view of every taxpayer in this country. There is a tendency in the discussions to believe that everything will be fine if one gets it more or less right. That description of the discussions is perhaps a little unkind, but I do not believe that that is good enough from the point of view of the taxpayer. It has to be exactly right. The overworked expression, "The devil is in the detail",

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applies pre-eminently to tax. One may well be caught out in a plan on which one embarks because of a detail of taxation that has not been entirely clear. Much as the rewriting of the legislation in plain English is to be welcomed, the need to get it absolutely accurate must not in any circumstances be sacrificed.

A suggestion has been made--which has been accepted only in modified form--that the legislation should be written in purposive terms and that the detail should be left to regulations. Here the parliamentarian in me is very much stirred. Noble Lords have often complained about the tendency in modern legislation to leave matters of importance to regulations. Your Lordships' House has been extremely vigorous in ensuring that that does not happen more than it absolutely must. But I suggest that in the field of taxation this practice may be particularly dangerous if regulations are not subject to detailed and rigorous scrutiny.

It has been suggested that a Special Standing Committee should be set up to go through the regulations and vet them and that they should come back to Parliament for final sanction. That democratic sanction is very important. We must be on our guard against making it simply a rubber stamp. It has already been suggested by the noble Lord, Lord Shaw, that that is too much the case at the present time. The reform will be very imperfect if that continues. After all, the basis of Parliament is that there is no taxation without representation. If our representatives do not have a real input into the scrutiny and an opportunity to object, however good the committee may be that has gone through it, we shall not achieve what we should achieve and the safeguards for the taxpayer will not be adequate.

5.45 p.m.

Viscount Chandos: My Lords, I should like to join in thanking the noble and learned Lord, Lord Howe of Aberavon, for initiating this important and interesting debate. His role extends to the presidency of the Tax Law Review Committee, whose interim report has been the kernel of this afternoon's debate. Both in his speech and in his foreword to the interim report, the noble and learned Lord has demonstrated his knowledge of the subject, commitment to reform and his customary frankness in admitting lack of progress in this direction in all the years that he was (in the words of his noble friend Lord Cockfield) one of the guilty parties.

The noble and learned Lord might have said that he had wrestled for too long with the obstacles to the production of a comprehensible, efficient and modern framework for tax legislation. But on this side of the House, we might derive two conclusions from the admissions of the noble and learned Lord. First, over the past 17 years the Conservative Government have not slayed all of the dragons--not even the right ones--and may have shied away from the dragons with the longest tails and most toxic breath.

Secondly, in a more bipartisan spirit, the task of reforming both the existing body of tax legislation and the future legislative process is a formidable one. The noble and learned Lord's speech and recommendations

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are a positive and valuable contribution to building the momentum that has been absent in the past, alongside the Inland Revenue's uncharacteristically positive document and the excellent interim report of the Institute of Fiscal Studies, whose work over the past 20-odd years is something of which the noble Lord, Lord Taverne, can be justifiably proud--awake or asleep! The increased recognition on the Government's part of the deficiencies in the status quo, and the cautious start now being made to address this, are also welcome; but inevitably the burden of taking this forward will in large part fall, along with so much else, on the next government.

The importance of action to improve the clarity and consistency of tax legislation cannot be over-estimated. This has been recognised by my honourable friend the Shadow Chief Secretary, notably in his speech in May of last year. The interim report points out in Section 1.29 that the estimated burden of the present inefficiencies and inadequacies amounts to £10 billion, of which as much as £7 billion falls directly on the taxpayer as compliance costs. That is even higher than the £4 billion suggested by the noble and learned Lord, Lord Howe.

In terms of fairness and equity--a subject stressed by the noble Lord, Lord Taverne--the complexity and opaqueness of the present position unduly penalises the less well-off. Sophisticated professional advice of the kind needed to navigate through these murky waters inevitably is affordable by and hence available to, only the wealthier individuals and larger companies. Above all, the overwhelming complexity which arises from faults in the underlying policies, overlaid with the effect of excessively detailed drafting to create intended clarity, comprehensiveness and certainty, produces a system in which action taken on both a macro and a micro-economic basis can become so distorted that the intended effect can be blunted or negated, while setting off a whole series of after-shocks and knock-ons in unexpected areas.

Although the main thrust of today's debate and of the interim review--and even more so, that of the Inland Revenue's report--is in the area of language, and the form of tax legislation, it is, as other noble Lords, particularly the noble and learned Lord, Lord Brightman, and the noble Lord, Lord Cockfield, have argued, unavoidable that the substance of tax policy has to be considered at the same time.

The analysis in the interim report of the implications of operating under common law rather than the civil law which prevails elsewhere in much of Europe is, speaking as a very unlearned Lord, illuminating; the consequences of building, higgledy-piggledy, uneven brick by odd-shaped flint, on a 19th century structure, as highlighted by the noble Lord, Lord Taverne, are only too clearly demonstrated; but we must ask at the same time whether the fundamental tax policies of the past 17 years--or even of the past 150 years--have sought to emphasise simplicity and efficiency whenever possible?

Of course the world has become more complex, none more so in the areas of foreign exchange and financial instruments, wherein some of the most fiendishly

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difficult and incomprehensible tax legislation has been introduced in recent years. The proposed rewriting of existing legislation will in time reveal how much of that legislative complexity was necessary.

But what is already clear is that, despite the Government's regular pronouncements on removing special tax allowances and the like (the noble and learned Lord, Lord Howe, laid claim to that while he was Chancellor) we have been presented with a continuing stream of special schemes--"ripping little wheezes"--with the consequential increase in legislative complexity on the one hand, and economic distortions on the other: Business Start Up Schemes changed to Business Enterprise Schemes, which changed to Enterprise Investment Schemes, with hundreds of clauses of legislation over 15 years. The legislative effect has been burdensome and the economic effect--well, my Lords, the Exchequer has financed fine wine, classic cars, residential property, but precious few productive businesses, certainly in comparison to the tax revenue forgone.

These Benches therefore wholeheartedly support the noble Lord, Lord Cockfield, in his advocacy of lower taxes and no tax shelters, with the important condition that the lower taxation is fairly applied, not concentrated upon those who currently benefit from the tax shelters which abound.

I return to the narrower but vital issue of tax legislation and the related parliamentary procedure and scrutiny. We on these Benches also give our strong support to the key recommendations of the Tax Law Review Committee, in terms of plain language, the use of explanatory memoranda, and a rewrite of existing legislation, starting with that relating to the taxation of income.

Even if the Minister's own understanding of tax and other complex issues is such that Hansard's record of his contributions will be a model of clarity and usefulness, I most strongly support the general advocacy by the noble Lord, Lord Taverne, of explanatory memoranda, in preference to the deliberations of the Minister's less clear-headed colleagues.

On these Benches, we look forward to the accelerating progress of tax simplification--form and substance alike--under the strong direction of the Minister and his colleagues--and of their successors.

5.54 p.m.

The Minister of State, Department of Social Security (Lord Mackay of Ardbrecknish): My Lords, we have had a most interesting debate. I stand to sum it up with trepidation. It seems to me that I come at the end of what could be described as a stream of penitent Chancellors, Chief Secretaries, Financial Secretaries and Ministers of State at the Treasury attempting to explain why they did not do what they thought they ought to do when they held office. It has been a kind of mea culpa all afternoon. I felt at one stage that I should perhaps rush to the Bishops' Bench and absolve them all from their responsibilities for that.

There is appropriateness in the day chosen by my noble and learned friend Lord Howe of Aberavon, because the other place is this day dealing with the

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Report stage of the Finance Bill. Sometime within the next few weeks your Lordships will have an opportunity, I suspect, to have a Second Reading debate on the Finance Bill when it wends its way to us. I do not believe that I should be saying anything too controversial if I doubt whether it will be a good example of clarity when I come to explain to your Lordships some of the parts of the Finance Bill.

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