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The pattern of volatility recurs in Clauses 31 to 47, introducing a new regime for the film industry. The Chancellor introduced major changes to film tax in the Finance Acts 2000, 2002 and 2004-05, yet the relief still haemorrhaged a staggering £560 million from the Exchequer in the last financial year. I hope that his latest attempt to focus tax breaks more accurately on people making films will provide better value for money than these reliefs have provided to date. I am not sorry to see the back of Section 42 and Section 48 relief, but hope that we will not be faced with more changes to the film tax regime in the Finance Bill 2007. The continual cycle of change has produced huge uncertainty in the film industry and has jeopardised some important projects. For instance, I understand that the filming of the latest James Bond film has moved to the Czech Republic, so even the Government’s most famous civil servant has moved offshore, partly as a result of the instability caused by changes in the film tax regime.
Two more detailed but no less important areas are the changes to capital allowances and the home computer initiative. The Finance Bill announced an increase for one year only in the rate of first-year capital allowances for smaller businesses. This continues a pattern of small and temporary changes which the Institute of Chartered Accountants in England and Wales says have been,
The ICAEW states that incentives for businesses to invest need to be provided by large changes to capital allowances announced well in advance. It also says that when capital allowance rates are changed, such changes should hold for a significant time. Does the Minister agree with the institute on those recommendations?
The home computer initiative was announced with a great fanfare in 1999. It was repackaged in 2004 because not enough people were taking it up and was suddenly shut down in 2006 because too many people were using it. The HCI was supported by the home computer initiative alliance, the CBI and the TUC. The HCIA stated:
“HCI is a cornerstone of the Government’s digital strategy which sets out to make computing more universally accessible”.
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So, why abolish the scheme? This is another example of the Government confusing business, making it impossible to make long-term plans when tax breaks keep changing.
The Minister’s description of the trust tax changes conveniently ignores the hullabaloo that first greeted the proposals, together with a subsequent battle to amend them. My noble friend Lord Wakeham’s sub-committee, to its credit, covered this in detail, but had to go to print before the story was complete. From the Economic Affairs Select Committee’s report the following picture emerges: first, there was no detail in the Budget speech itself and detail only emerged in the Budget notes issued by HMRC. Secondly, the major IHT changes then announced provided that accumulation and maintenance trusts and IIP trusts would be charged in the same way as discretionary trusts unless they met much tighter conditions, with a 20 per cent entry charge and a 6 per cent periodic charge every 10 years, and an exit charge proportionate to the time elapsed since the last periodic charge.
My noble friend Lord Wakeham’s report continues:
“This announcement gave rise to a storm of protest in the newspapers from a wide range of representative bodies. The main points made related to the lack of consultation on IHT within the framework of the on-going consultations on the modernisation of the taxation of trusts; the impact which the changes would have on ordinary families who used trusts for social reasons and not for avoidance; and the large number of people who would ... have to review, and if appropriate alter, their will at a compliance cost which, it was said, would in total amount to very considerably more than the estimated Exchequer yield of the changes”.
Those changes were estimated at £15 million.
The accountants Smith and Williamson stated in their Budget commentary that these,
This will require much restructuring and seems to hit hardest on those planning for the future—for instance paying towards children’s education, protecting assets for young children and planning post a divorce.
With apologies to the House for going over the ground covered by the noble Lord, Lord Burnett, in his excellent maiden speech, the major additional change proposed originally by the Budget to accumulation and maintenance trusts was to effectively force them to distribute capital to children at 18 rather than 25. Another particularly sneaky change involved life-interest trusts where assets are left on a life interest for the deceased’s spouse. They would not be deemed to be comprised in the deceased spouse’s estate, which meant the spouse exemption would not be due.
Another serious issue that remains with regard to trusts is that if an individual takes out a life assurance policy in A&M or life interest form after the Budget deadline, I understand that, for the first time, the policyholder will have to pay inheritance tax at a rate of 6 per cent on the excess above the IHT threshold. Following Budget day, the accountancy and legal industries formed a coalition to argue for the changes to be reviewed. As a result of that pressure, the
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Despite the government climbdown, concerns remain. The Law Society has stated:
“We are concerned that existing trusts will still be adversely affected by the proposals—as will lifetime trusts such as those established on divorce; those set up by individuals facing diminishing capacity to deal with their affairs, such as people with early stage dementia; and grandparents wishing to help their grand-children”.
Accordingly, our party tabled a large number of amendments on Report to address those concerns, all of which the Government ignored.
I will leave the last word on the subject to the report of the sub-committee chaired by my noble friend Lord Wakeham. It states:
“As regards the IHT treatment of trusts, we are firmly in favour of consultation, which we believe to be necessary if clarity, certainty and simplicity are to be achieved, but there was none in respect of the IHT trust provisions. We did not hear evidence to show why measures to counter forestalling could not have been taken which would have enabled consultation to have taken place. The measures were announced in a low key way and lacked clarity about the Government's objectives. This led to considerable uncertainty about the impact of the provisions and to an exceptionally wide range of estimates of the numbers of people likely to be affected and the costs of having to review their wills.
We accept that, to the extent that there has been significant avoidance using A&M and IIP trusts, the Government is fully entitled to tackle it. But the measures proposed in the Finance Bill also impact on a wide range of trusts which are used as part of the responsible stewardship of family assets without an avoidance motive, making them less certain and more complex and costly. As the Government did not make clear what it was trying to achieve, we remain uncertain whether the policy of neutrality towards trusts has been altered or whether the impact of these changes on ordinary family business needs further consideration and the remedies used to counter avoidance need to be more closely targeted ... We believe that the way in which this whole matter has been handled is not the way in which tax changes should be made”.
In conclusion, that once again shows the Government altering a perfectly good structure, in the form of accumulation and maintenance trusts, which a Labour Government introduced. As paragraph 180 of the report reminds us, and as the noble Lord, Lord Barnett, will remember, they were first introduced in 1975. I am sure that he will agree: by all means clamp down on avoidance, but not at the expense of innocent victims who have set up trusts for bona fide reasons.
6.43 pm
Lord Haskel: My Lords, I shall speak about the Finance Bill less from the point of view of tax or economic affairs—I was not a member of the sub-committee, but I join the noble Lord, Lord Northbrook, in congratulating it on its report—and more from that of business, which is where the Bill affects most people—at work.
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I support the Bill because it continues the Labour management of the economy which, as my noble friends Lord Barnett and Lord Sheldon, said, has been so right for business over recent years. For me, perhaps the most important element of that is the Government's attitude towards private enterprise—no, not the difference between public and private. The difference is that, during the past few years, we have seen that a Labour Government support private enterprise, whereas Tories try to protect it. We are now able to judge the difference.
Let me explain. Private enterprise creates income and wealth. It creates jobs. It offers choice to consumers and workers and drives innovation and growth. It creates the opportunity for people to better themselves and their families through effort and enterprise. It creates new routes for social mobility and rewards initiative, contribution and hard work.
On that, I think that we all agree. The Tory way was to protect private enterprise from interference—interference from imports, from competition, from regulation and from Europe. Those who pay for that are the consumers, in higher prices. Society pays through lack of opportunity and businesses themselves suffer because there is less need to change. Yet to be profitable and successful, companies need economic stability. In his opening remarks, my noble friend explained how we delivered low interest rates and low inflation. Business needs access to skilled and flexible personnel, so the Government delivered skills training and tripled the number of apprenticeships. Business needs new technology, so the Government doubled investment in basic science and prepared a 10-year plan. My noble friend told us about the research and development credit scheme, which contributes to that.
So we broke down the protective trade barriers and, instead of walking away from Europe, we engaged with our European Union partners. This is one reason why the City of London is so successful in the European Union. That openness provided the City with the scale, scope and challenge for it to be efficient and innovative. Yet the Conservative Party is still looking for alliances with anti-European conservatives in the mistaken belief that that will protect our economy.
The fact is that all that was achieved in the face of strong opposition from noble Lords opposite in the name of not interfering with wealth generation—and, according to the noble Baroness, Lady Noakes, because there is too much regulation. Much new regulation happens not because of a wish to interfere but because, as the noble Lord, Lord Marlesford, implied, we are becoming aware of more and more things about work and society. We are becoming more aware of how health and other hazards prevent people from being more productive. Good businesses are rarely poor employers because they are concerned about health and safety and workers' rights. They are becoming more aware of the importance of the environment and sustainability. Indeed, we now know that a healthy and sustainable environment and a healthy economy go together.
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For most businesses, the ultimate goal is to create long-term value for shareholders. That is not achieved by behaving in a way which is socially or environmentally unacceptable or unethical. Indeed, the best-run companies find areas where shareholders’ long-term interests overlap with those of society.
But what about regulation of markets? Some say that it kills free enterprise. Does it? We now know that business can operate successfully only within the accepted norms of the society in which it works. Those norms vary from market to market. There are much tighter rules for selling pensions and banking services than there are for selling clothing. Instead of condemning regulation of markets wholesale, as some tend to do, our careful regulation of each individual market has helped private enterprise by dealing with market failure and encouraging more variety. That has helped business to grow. Indeed, environmental regulation has created a whole new market for environmental products. Amazingly, that is an area where we now see business and the environmental non-governmental organisations working together.
Yes, our policies of supporting private enterprise instead of protecting it have produced one or two surprises. The absence of economic volatility has enabled private enterprise to take on higher levels of debt. As a result of credit being available in greater quantities and on better terms than ever before, sooner or later some borrowers will get into trouble. The noble Lord, Lord Marlesford, reminded us that much low-tech manufacturing has gone elsewhere. He spoke also of higher tech manufacturing, which is staying here and growing. That is very much service-based, and the Treasury must review the way that it labels some activities as manufacturing and others as services. The output of the part of a manufacturing company engaged in research, consultancy or technical assistance is often categorised as a service. Yet without offering these services, modern manufacturing companies would lose their customers. This is how they stay at the leading edge.
The noble Baroness, Lady Noakes, pointed out that unemployment is growing, but the number of people in work is at its highest point for 10 years. At the moment, the number of people entering the labour market is slightly larger than the number of jobs being created. This may be due to immigration or to people coming off invalidity benefit, but private enterprise is helped by keeping the growth in balance, as the Government are doing. My point is that it is this engagement with business, support for private enterprise and the acknowledgment that society has moved on that has created the economic dynamism in this country, rather than the so-called free-market paradise which the Tories seek to protect. This is what has created our economy.
The noble Baroness spoke of economic decline. I agree with my noble friends Lord Barnett and Lord Sheldon that, in recent years, thanks to private enterprise, Britain has been growing faster for longer than any of the G7 leading industrial nations—the Minister gave us the numbers in his opening remarks.
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Much has been said this evening about the Chancellor of the Exchequer. Perhaps we would all like to unite in congratulating him on the birth of a son this morning.
6.52 pm
Viscount Trenchard: My Lords, I, too, thank the Minister for giving us this opportunity to debate the Finance Bill today. I look forward to hearing his comments on those who think that the existence of the House of Lords Economic Affairs Committee somehow trespasses on the territory of another place.
The Bill is, as usual, much too long and does nothing to simplify the complexity of our tax system after 10 Budget speeches by the present Chancellor of the Exchequer. There is little to help the country to develop the productivity and competitiveness required to operate successfully in the international economy today, still less to compete effectively with powerful new global players such as India and China. As my noble friend Lady Noakes has stated, we welcome the overdue introduction of a framework for real estate investment trusts. However, I ask the Minister to tell your Lordships why those trusts cannot be listed on the alternative investment market, which would seem to be well suited to provide liquidity for investors in such an instrument. I agree with my noble friend Lord Northbrook on this issue. I, too, congratulate the noble Lord, Lord Burnett, on his excellent maiden speech. I hesitate to talk about interests in possession trusts and accumulation in maintenance trusts, about which the noble Lord clearly knows a great deal more.
The Minister referred to the criticism by the respected and generally measured Economic Affairs Committee that the Government completely failed to consult or to issue any detailed statement of their intention retrospectively to tax such trusts—I agree with my noble friend Lord Wakeham that that was a pity—and said that it had been impossible to consult because of the risk of forestalling. However, the Government have had to introduce 50 amendments to Schedule 20. If they had known that they would have to do so, would they really still not have consulted in advance? In any event, they have given a grace period of two years to make changes to the terms of certain trusts to mitigate unforeseen tax liabilities.
As the result of a successful campaign by my right honourable and honourable friends in another place and by the Law Society and a number of other professional bodies, the Government have been forced to abandon many of the more aggressive retrospective proposals originally included in the Bill. However, the other provisions affecting the creation of new lifetime trusts and the disqualification of grandparents as creators of new trusts remain. The Chancellor has, by these provisions, created a new wealth tax. Even after his climbdown, he has created a system whereby there
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As my noble friend Lady Noakes stated, the UK’s position has declined from the fourth most competitive country in the world in 1997 to the 13th today. If UK plc were properly accountable to its shareholders, the Government would surely have had to resign by now. The Chancellor has inexorably raised both corporate and individual taxes, repeatedly breaking his false promises not to do so. We have lost most of the comparatively competitive and attractive corporation tax position that we enjoyed when this Government came to power. The Government have massively increased public sector spending but to little beneficial effect, as much of the new investment has been wasted on the creation of unnecessary administrative posts and ill fated, expensive projects such as the disastrous new IT system for the National Health Service.
London is now regarded as a very expensive and relatively less attractive centre for major international companies to maintain their European headquarters. The capital’s infrastructure remains very poor despite the massive revenues from the congestion charge and the sky-high Underground fares already accruing to the Greater London Authority, which clearly sees itself as a kind of second Exchequer. It is shameful that London Underground announces to the world that a good service is running on all, or certain, lines as if it expects approbation merely for providing the very expensive service that it is contracted to provide. It costs £3 in London to travel within one zone on the London Underground for a one-trip cash ticket, compared with the equivalent of 80p in Tokyo and £1 in Brussels to travel anywhere by underground railway or bus for up to an hour. In Tokyo last week, I heard that NHK—the Japan Broadcasting Corporation—has decided to relocate its European headquarters from London to Paris, despite London’s unrivalled position as by far the most important news and information centre in the European time zone. The reason for such a surprising move is that London has become too expensive. In her excellent maiden speech
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“While we remain broadly competitive with the rest of Europe on taxation, the gap with the euro-zone is closing. In 1993, the tax burden as a percentage of GDP was 8 per cent lower than Europe, whereas by last year that advantage had fallen to 3 per cent”.—[Official Report, 8/6/06; col. 1402.]
This Budget has done nothing to alleviate the rising costs of locating businesses in this country. The British Chambers of Commerce has shown that the total cost of regulation has risen by nearly a half since 1998, and this excludes the cost of the national minimum wage. As for the public finances that devour an ever-increasing proportion of GDP, the Chancellor argues that we continue to meet his golden rule. But he has lost all credibility because of his repeated retrospective reclassification of what expenditure counts as investment and his convenient revision of the start date of the current economic cycle in order to include the years 1997 to 1999, during which he had to follow the previous Conservative Government’s financial plans.
These reclassifications and revisions have enabled the Chancellor to manipulate the figures so as to be able to claim that he has met his golden rule. His record of accurate prediction of the Government’s borrowing needs is, to put it mildly, unimpressive. In 2001, he predicted that he would have to borrow just £12 billion in 2005-06. In the event, he has borrowed £112 billion. A CBI study shows that government consumption is rising as business investment falls. The tax take has risen from 34.7 per cent of GDP in 1996 to a projected level of 38.5 per cent for 2008, whereas every one of our G7 competitors cut taxes between 1996 and 2004.
Besides the damaging increases in personal and corporate taxation, and the crippling accretion of new regulatory burdens, the Government will stand condemned by history for the damage that they have done to our once excellent occupational pension schemes, which were the envy of the world when Mr Brown moved into No. 11 Downing Street. I make no apology for returning to the Government’s early misguided and bad decision to abolish the dividend tax credits previously and logically received by pension funds and charities. Although the Government still refuse to admit that they made a serious and damaging mistake with the introduction of that measure in 1997—its first and worst stealth tax—the effects of that catastrophic decision continue to become clearer.
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