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Noble Lords will be aware that the Government have lodged an appeal against the recent ruling of the Information Commissioner that the public have a right to know what forecasts the Treasury used when it decided on its pensions tax raid. As is now universally acknowledged, the tax raid’s effects took money out of pension schemes and damaged the stock market. I estimated a year ago that the cumulative effects of the Government’s action had cost our pension schemes £166 billion. It is very right that the thinking behind the Government’s decision should be made public. A year ago, on 19 July 2005, the Minister told your Lordships’ House that claims
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The noble Lord subsequently wrote to me on 5 August last year—I was grateful to him for that—saying:
“If, in one year, companies paid zero dividends and reinvested all their profits in the business, then presumably this would increase the future returns to existing shareholders, thereby increasing share prices”.
We must look forward to the Government’s belated explanation for their action when, as it certainly should, the Information Tribunal overrules the Treasury’s appeal, although I can understand the Government’s reluctance to admit their astonishing failure to understand the relationship between dividend levels and share prices.
It is the Government’s fault that Britain’s 100 leading companies have a pensions black hole of £150 billion, as revealed by a study for the actuarial profession’s pensions board. The Budget does nothing to restore incentives to save. It does nothing to alleviate the growing perception of the UK as a difficult place in which to do business and one with a massively complex taxation system. The Chancellor claims that he has brought stability to the economy, but the evidence is that he has brought uncertainty and volatility. Examples of that include his introduction and abolition of the home computer initiative and his introduction and abolition of the 0 per cent band of corporation tax.
My honourable friend Mrs Theresa Villiers has said in another place that she strongly opposes the Government’s hare-brained proposal to bring forward the filing dates for tax returns to September. I hope that the Minister will confirm that this does not mean that the Government intend now or in the future to accelerate the payment dates for income tax: four months’ acceleration would represent a further significant increase in tax. The Government’s projections predict that income tax will raise £144.7 billion during the 2006-07 tax year, representing an increase of 109 per cent on the £69 billion raised in 1996-97. This huge increase in income tax is mirrored by the 125 per cent rise in inheritance tax paid since 1997. The number of people caught by the higher tax rate of 40 per cent has increased from 2.1 million in 1997 to 3.4 million last year. Forty per cent may not be as high a top tax rate as many other countries have, but it bites at a much lower level. It may not be all bad, but the Government cannot deny that we are slipping badly against our international competitors by many measures.
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7.07 pm
Lord Rosser: My Lords, I will not go down the road travelled by the noble Baroness, Lady Noakes, in commenting on the Budget, except to say that we continue to have low interest rates, low inflation and near record numbers in employment, on top of the longest uninterrupted period of growth on record, as my noble friend Lord McKenzie said. However, it is always a pleasure to listen to those who gave us high interest rates, high unemployment, high house repossessions and run down public services telling us how bad things are today.
I wish to comment on two aspects of the Select Committee’s report on the Finance Bill 2006; namely, tax avoidance and missing trader intra-Community fraud, which is sometimes known as carousel fraud. New tax avoidance disclosure rules were introduced in 2004 to check the growth in complex and contrived tax avoidance schemes. As has been said, the rules appear to have had some effect, although tax avoidance schemes using employment-related securities and financial products have continued to be an issue requiring attention.
The Association of Chartered Certified Accountants told the Select Committee that:
- “now firms have a much higher moral code when it comes to tax issues and tax planning and they seek not to indulge in certain types of tax planning areas where they perhaps otherwise would have done in the past”.
Another witness from Revenue and Customs told of a banker who had said that his bank had been wrong-footed for the third time as a result of schemes being blocked following disclosure under the disclosure rules. Consequently, his board was likely to decide not to get involved in aggressive tax avoidance any more. It seems that integrity can be enhanced by legislation and Treasury rules, even if for some it is integrity through gritted teeth.
The anticipated revenue yield from anti-avoidance measures alone from all the disclosures made since 2004 is expected to be more than £1.5 billion in the current financial year and more than £2 billion in the next financial year. However, the disclosure rules are also intended to protect revenue, and Revenue and Customs stopped a scheme which would have exploited tax statutes to the tune of up to £4 billion and would have wiped out substantially the tax liability of banks and other financial institutions using it.
Further evidence to the committee revealed the existence of a tax avoidance scheme referred to as platinum sponge. Platinum sponge is platinum in suspension, which is normally volatile and thus might be regarded as something not normally tradable. The intention was that platinum sponge would get round the tax rules which tax assets awarded in place of cash only if those assets are tradable. Thanks to the work of the Select Committee, we now know that a lot of platinum sponge is held in bank vaults in Jersey, and huge amounts are held at Schipol airport. Platinum sponge is one example of a form of remuneration designed to defer payment of PAYE and relieve employers of the obligation to account for national insurance contributions. As regards deferment, some
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Another section of the report refers to missing trader intra-Community fraud, or carousel fraud. As has been said, it is the largest single source of fraudulent VAT losses for the UK Exchequer. Losses for 2004-05 from VAT carousel fraud have been estimated at up £1.9 billion, but it is widely accepted that fraudulent trading has grown dramatically in the past year or so, and one newspaper suggested just over two months ago that losses are probably running at up to £5 billion a year and rising fast. However, according to an article published the day before yesterday in the same newspaper, Revenue and Customs now thinks that carousel fraudsters carried out a record £7.4 billion of imports and exports in the first quarter of the year, up from its original estimate of £5.5 billion. That figure represents attempted fraud as opposed to the actual successful theft of VAT, but nevertheless could mean, according to the newspaper’s estimates, losses to the Exchequer of over £10 billion this year, or £20,000 a minute.
There are provisions in the Finance Bill that seek to address this problem, which is theft on a grand scale. According to the Select Committee, the projected yield from these provisions is £100 million in the current financial year and £500 million in 2007-08. Whether they will be effective remains to be seen, and that assumes they can be introduced quickly. While in respect of the intended change in accounting procedure, the reverse charge—a temporary derogation from the European Union to cover those goods most frequently used in this fraud—could be agreed fairly soon, a permanent change in the EU’s VAT system to address the problem fully, and requiring the agreement of all the member states of the Council, would take some time to achieve. It would be helpful if, when he replies, my noble friend could say what the current projected yield is from the provisions in the Bill directed against carousel fraud in view of the very recent dramatic increase in such fraudulent trading, which apparently does not even have to involve physically moving goods. In view of the billions of pounds’ worth of theft from the Exchequer seemingly now involved, the figure of a £500 million yield set out in the Select Committee report hardly indicates that the provisions will address the problem.
It would be helpful if my noble friend could say what the Government regard as the permanent solution to this problem and whether it would or would not involve harmonisation of VAT rates across the European Union. Perhaps my noble friend could also explain why the fraudsters would not simply switch to other commodities if a temporary derogation to introduce reverse charging for transactions involving goods such as phones and computer chips was agreed by the European Commission. Do we have sufficient staff engaged in combating this fraud? I appreciate that there has been an increase, but if we are still at the stage that each
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No one can accuse the Select Committee of ignoring the serious issues of tax avoidance and VAT theft, and the report is supportive of both the Treasury and Revenue and Customs in their efforts to clamp down on the perpetrators. There is of course a key difference between the two activities since VAT theft is a criminal offence. However, both activities are similar in that they are designed to reduce the amount of money that should be available to the Government of the day to provide the level of public services our society demands and expects. The shortfall resulting from these activities is made up either by other less-well-off citizens paying more in tax or through a lower level of service provision than should have been possible. VAT theft through carousel fraud is a criminal activity, while tax avoidance—certainly on a large and planned scale—is morally wrong since it also has a direct adverse effect on weaker members of the community.
Yet we see little attempt to draw attention to what is going on and who is doing it. We have headlines, quite fairly, about levels of benefit fraud and adverse reports about some in receipt of benefits. However, when it comes to white collar fraud or the activities of those who operate in the grey area of tax avoidance, by comparison we hear very little, even though the sums of money involved are often huge. Perhaps the reality is that for too many of those who own and decide what will and will not be reported prominently in our newspapers and on our radio and television stations, cheating or beating Revenue and Customs on a big scale, and thus society as a whole, is not really regarded as a serious crime or morally unacceptable, but rather a clever game played by people with similar lifestyles and income levels to themselves.
Occasionally the guard slips and a revealing article appears tucked away in the financial columns. A few days ago the financial editor of the London Evening Standard produced one of his articles knocking the Government. However, within the article he made these comments about investment bankers; the words are his, not mine:
“They are grossly overpaid and often so arrogant they think they are worth the money. They don’t offer much to society and far less than they pretend to the economy because much of what they do adds little or no value—transferring wealth rather than creating it. Their talent for inventing new financial products and structures consists for the most part of devising ways for companies and professional investors to do things which would probably be illegal, and certainly outside their permitted competences, if the companies sought to do them directly”.
The financial services and commercial sectors are of course a major asset and source of strength and prosperity to Britain, but they do have their less acceptable face. Those with wealth, influence and standing in whatever walk of life play a key role in setting the standards and markers for society as a whole, and an overwhelming majority of them are worthy role models. However, the Select Committee’s report shows that serious tax avoidance is still alive
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A message from a minority of greed and avoiding obligations to the society in which they live and work at the expense of the rest of the community is hardly one of leadership or standard setting. The role of Revenue and Customs in helping to check and contain at least some of the excesses of the minority concerned is one I hope my noble friend endorses and encourages, since the work of HMRC also has an impact on the kind of society in which we live and the values it upholds.
7.18 pm
Lord Forsyth of Drumlean: My Lords, I thought that sentiments of the kind expressed by the noble Lord had died out long ago with new Labour. It is refreshing to hear the politics of envy alive in this House of all places. I thought his attempt to link VAT fraud with tax avoidance was quite disgraceful. Company directors are under a duty to maximise revenues for their shareholders for investment in the future of the company and it is perfectly sensible for a finance director to structure his tax affairs in such a way as to pay the minimum of tax within the law. However, where I did have some sympathy with the noble Lord was in his clear frustration at the range of new schemes emerging on the back of attempts by the Chancellor to restrict tax avoidance. Surely the lesson is obvious: we do not need complexity upon complexity; we need a fairer and more broadly based tax system, a simpler one which cannot be exploited so that people pay what is clearly due within the law.
I took the trouble to have a look at the Finance Bill. I am not sure whether the Minister has read all of it, but I suspect probably not. I also suspect that his officials in the Box will have read only those sections that relate to them. It is 506 pages long in two volumes. I asked him earlier how much of the Bill had been discussed and debated in the other place, and he told me that I could look at Hansard like everyone else. I hope that he might be able to answer that question when winding-up the debate because I know that his officials have been following the Bill throughout the course of its parliamentary progress and should know the answer. I have done a similar exercise for last year’s Finance Bill and I can tell him what the numbers are for that. It was much shorter—only 481 pages. That compares to Finance Bills when the Conservatives were in office which were about 157 pages. So Finance Bills are now three times as long. In the case of last year’s Finance Bill, less
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The most important measure in the Finance Bill 2005 was the Chancellor’s raid on North Sea oil taxes. That was not done through the Finance Bill at all but through a statutory instrument which was not even debated in the House of Commons. It strikes me as quite extraordinary that we have this vastly complex new legislation being brought forward and it is not even discussed. Add to that the points that have been made by noble Lords earlier in the debate about the failure to consult on measures—or even to mention some of the most important ones in the Budget speech—and we have a catastrophic failure on the part of the Executive and Parliament properly to administer tax law. The House of Commons is simply not doing its job.
In the days when the noble Lord, Lord Barnett, was Treasury Secretary the Finance Bill was taken on the Floor of the House of Commons and given much greater scrutiny and consideration, but now we have a Finance Bill which is immensely complicated. Indeed, even if the House of Commons was prepared to do its job, and even if it had the expertise to do the job, the timetable imposed by the myth that income tax has got to be renewed annually and is not permanent means that there is no time for proper scrutiny.
Lord Barnett: My Lords, unfortunately the noble Lord was not in his place when I answered his point about the 500 pages. I pointed out that under all Governments and all Oppositions, Finance Bills are never properly debated; only the sexy party-political bits. That is why they are constantly getting bigger.
Lord Forsyth of Drumlean: My Lords, I am most grateful to the noble Lord. I apologise. I had a guest and I had to leave the Chamber. I missed his speech but I look forward to reading it tomorrow. I have apologised to my noble friend Lady Noakes for the same thing.
I am sorry, but that will simply not wash. In the 1980s, the Finance Bill was 157 pages; it is now nearly 600 pages. I do not know whether the noble Lord has looked at this Bill but, for example, there are pages and pages which are all about trying to close the loopholes on film partnerships. Part of the answer might be not to have special schemes for making films at all, but to broaden the tax base and lower the rates. Then we would not need all this complexity in the system and we would not have all these highly paid people in the City going around telling people that they really want to invest in the next issue of “Coronation Street” in order to avoid tax. The problem arises from the complexity of the system.
We have a Chancellor who is a meddler; he is a controller who wishes to do everything from No. 11 Downing Street. Not only is he not content with interfering with the tax system but he has now decided to become part of the welfare system, so we have the Chancellor of the Exchequer and the Treasury now involved in disbursing benefits. That is something which the noble Lord, Lord Barnett,
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The Chancellor has added to the complexity and that is why I very much welcome the establishment of the Select Committee on Economic Affairs and the excellent report produced by the noble Lord, Lord Wakeham. Far from saying this House should have less of a role in these matters, it needs to have more of a role because—although it is perhaps not evident to some Members of the House of Commons—there is a good deal of expertise in this House which could perhaps help to avoid some of the difficulties.
I think the noble Lord, Lord Barnett, argued that the Bills are bigger now because there are more non-sexy bits, but Tolly’s tax manual has also doubled in size since 1997; it is now 9,000 pages as opposed to 4,500 pages. It is not only both Houses of Parliament which are struggling with this but also the Inland Revenue. The Inland Revenue’s administration costs have gone up from £1.6 billion in 1997 to £2.8 billion today. That is an increase of £1.2 billion. The total cost of administering all this is nearly one penny on income tax.
Complexity matters because it adds to the compliance costs for business and individuals. Uncertainty also matters. When noble Lords make speeches such as the one made by the noble Lord, Lord Rosser, people start to wonder where the line lies. What is going to happen tomorrow? Can we rely on this Government not to use administrative means to extract tax which is not due? If people think that this country has become that kind of place to do business, they will go to Holland or other countries which have learnt the lessons. That is the real damage. It is vital to competitiveness that the tax burden is low and that the system is transparent, stable and has simplicity.
A number of references have been made to the Chancellor removing rates and creating new ones and adding to the complexity. He has increased the burden of tax from 38.9 per cent of GDP in 1996 to 42.2 per cent in 2006. That is an extra £40 billion; that is £1,600 per household. This extra burden of taxation has to be paid for, and it is paid for in a reduction of growth in the economy. Every pound that the Chancellor takes costs more than a pound to obtain. Therefore, if a pound is not taken in tax, more than a pound’s value is added to the economy overall. Only the Chancellor thinks that he can pay the administrative costs of taking the money out of the pockets of people and then spend it more efficiently than they can in the market place. He should reread Gladstone on the benefits of allowing money to fructify in the pockets of the people.
The sadness of all this is that other countries have learnt from our experience. When my noble friend Lord Wakeham was in the Treasury and my noble friend Lord Lawson was busily dismantling the high barriers to competitiveness and reducing taxation, other EU countries saw that it worked and they have reduced the burden of tax. My noble friend Lord Trenchard has explained what that has meant in terms
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Does the noble Lord, Lord Prosser, realise that the top 5 per cent of earners account for 51 per cent of income tax receipts? Were we to reduce the top rate of tax—heigh-ho—the revenues would go up. How do I know that? Because it happens in every other country of the world where they do this, including ourselves in the 1980s. The lowest 50 per cent account for 11 per cent of receipts. The experience is clear: why is it that we have a Treasury which is so insistent on maintaining a fixed-model view of the economy? We need a dynamic model of the economy so that the Treasury can forecast the real impact of tax changes. If the Treasury is not prepared to do it, someone should follow the excellent advice from the TaxPayers’ Alliance and set up a unit so that we can have an analysis of the effects of tax in a dynamic way. People do not understand that reducing tax will increase revenues for the reasons I have indicated.
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