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So we have too much tax, too much law and too little scrutiny. We need reform. Someone said earlier in the debate that they were worried that this House was getting involved in matters which should be the exclusive preserve of the House of Commons—which only managed to look at 1 per cent of the Bill—but why should the Chancellor, uniquely, unlike any other Secretary of State, have the right to as much legislative time as he wishes? Why should the Finance Bill provide him with a free ride to run every scheme or eye-catching initiative or idea that he thought of in his bath that morning? The reduction in the small companies’ corporation tax to 0 per cent has been referred to already. It was followed by more complexity to deal with the avoidance problems that were created, and we have ended up back where we started.
There has been a huge cost and huge uncertainty, and all because no one was able to stop the Chancellor introducing these measures without proper consideration. Why should he, uniquely, not be required to publish an economic impact statement of the effects of his proposed changes in taxation? For example, tax credits are heading towards a cost of £13 billion. We are not being told the extent of the fraud, but it is certainly more than £2 billion, and a large slice of that money goes to the top rate taxpayers about whom the noble Lord, Lord Rosser, is concerned. The Chancellor is dishing out money to people on £62,000 a year if they have a child under the age of one and taxing them at 41 per cent in the pound. Somewhere, a load of officials are responsible for churning this money. That cannot make sense.
Should we not consider how scrutiny could be improved? Perhaps the committee we have already established could be given stronger powers. Perhaps we need a joint committee of both Houses to look at the simplification of our tax system and the hobby horses that the Chancellor rides.
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I entirely agree with the noble Lord that we should congratulate the Chancellor on the birth of a son. That is very good news. I hope that he takes a very long period of paternity leave; if he is not in 11 Downing Street, that is very good news for British business and the economy, because he will not be thinking up new schemes and tweaks to add to next year’s Finance Bill.
Lord Haskel: My Lords, that is rather a cheap insult, if I may say so.
Lord Forsyth of Drumlean: My Lords, it was not intended as an insult. I have the highest regard for the Chancellor; I have known him more than 25 years, but I think he is an interfering, meddling Chancellor who has taken to 11 Downing Street a whole range of activities that should not be there. He has undermined the Treasury’s traditional function of ensuring value for money. He has raised taxation by nearly 5 per cent of GDP and has damaged our economy. I do not share the noble Lord’s rather glowing assessment of what the Chancellor has achieved. He inherited a very strong economy; he has squandered that legacy and, even using his own numbers, we now face great difficulties by 2008, when public expenditure growth will be slowed and demands in the public sector will not be met.
On trust funds, which are included in the Finance Bill, we have another example of ill-thought-out meddling. SIPPS is another. Neither was even mentioned in the Budget speech. The Chancellor was warned about the provisions on SIPPS to allow domestic property to be included, but he persisted, and then a few months before it was supposed to happen, he changed the scheme. That creates uncertainty and undermines confidence.
If the experience of my noble friend Lord Wakeham is anything to go by, and given the committee’s excellent report, much would be gained by having proper consultation about tax proposals and more provision for scrutiny by people who understand the implications of these policies.
The truth is that capital and business are highly mobile. If we do not create a country in which people feel that business will be supported and encouraged, business will go elsewhere, and with it will go the jobs and prosperity which our people are entitled to expect not to be undermined by ill-thought-out policies and by the centralisation and control which have become the hallmark of this Government.
7.34 pm
Lord Newby: My Lords, this has been the most extraordinarily wide-ranging debate. We have had a very erudite discussion of technical tax issues; we have also discussed the state of the economies of India and China, the demographics of retirement, nuclear power, environmental regulation, the Underground and the need for a dynamic model of the economy. I was so confused that I thought at one stage that the noble Lord, Lord Forsyth, was calling for a dynamic model of the Underground.
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I congratulate my noble friend Lord Burnett on his extremely impressive maiden speech, which the noble Lord, Lord Barnett, suggested might be an application to join the sub-committee of the Economic Affairs Committee dealing with the Finance Bill. I took it as an application to join the Lib Dem Treasury team and, as far as I am concerned, without consulting the Whip, I accept.
On the overall balance of tax and expenditure and the stability of the economy, the Minister repeated some of the Government’s past achievements, including the independence of the Bank of England, which took place some considerable time ago. Unfortunately, he said nothing about the one thing of substance that has happened since the Finance Bill was introduced in the Budget—the fundamental savings review. If the Prime Minister was to be taken at his word last autumn, this was to be a far-reaching assessment of the country’s spending priorities. I suspect that the document was rather a damp squib, but it contained, among other things, a rather extraordinary proposal for a four-year real-term freeze on Civil Service salaries. The Chancellor, for all his reputation for stability, has adopted in this respect, as in others, what might be called a stop-go-stop approach to public sector pay. That does not seem a sensible basis on which to proceed. I am sorry that we have not had a chance in this Session to debate that and the rest of the proposals in the fundamental savings review.
On the Finance Bill, I start with the report and status of the sub-committee of the Economic Affairs Committee and the extraordinary attack made on it by the Government in general and the Leader of the Commons in particular. They referred to the risks of intrusion on Commons financial privilege. Indeed, the Leader of the Commons referred to the sub-committee seeking to,
As the noble Lord, Lord Wakeham, straightforwardly set out, that is not the basis on which the sub-committee was established. Having served on it, I know that it is not the basis on which it operates. It is a shame that the Government cannot accept that here are people doing their best to improve the quality of legislation in a non-partisan way. Surely that should be the function of an upper Chamber, if it has one at all. It would not be so bad if we all felt that Finance Bills in general, particularly this one and the four previous ones, were documents of such perfection that they did not need further scrutiny.
The principal theme of the sub-committee over the four years of its life and of today’s debate has been the lack of adequate consultation on tax measures, which leads to unworkable proposals and unintended consequences. That, in turn, often leads to provisions being amended or withdrawn. The classic example last year was SIPPs. This year there has been the unsatisfactory treatment of trusts covered by inheritance tax. During the Bill’s passage through the Commons, what were widely seen by people who knew something about this as unworkable proposals led to such a spate of amendments that those who were trying to scrutinise it found it virtually impossible to do so because of the
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As a former Customs and Excise man, what I found particularly irritating about the Government’s justification of the way in which they dealt with these provisions was the idea that an element of forestalling might prevent consultation from taking place. This is not like provisions relating to excise duty, where, if you know that the duty is going up, you can take a lot out of bond and avoid taxation; it is not the same type of provision at all. It seems to me that the excuse, for that is what it was, of forestalling is a bit like those in trouble—including sometimes the Government—using the phrase “sub judice” to avoid discussing an issue that is vaguely in the legal machinery somewhere but is not actually sub judice at all.
I am sorry to raise a new subject so late in the day, but there is another area in which there has been inadequate scrutiny of this year’s Finance Bill and which is leading to unintended consequences. I refer to how the Government have tried to prevent the exploitation of tax relief by charities, or those who make donations to charities, in Clauses 54, 56 and 58. Clause 54, for example, limits the range of substantial donations to charity that benefit from tax exemption or relief. Charities are rightly worried that this clause could inadvertently catch unexceptional transactions when there has been no intention to evade or avoid tax. I welcome the Government’s view on what the charity bodies have proposed. As with tax avoidance issues, under their proposals the Government would provide advance clearance for proposed transactions or investments by charities. That would save a lot of difficulty and might mitigate some of the potential damage that could be caused.
Another aspect of this is in Clause 58, which limits the benefit that a donor gets from his donation to charity to £250. If a company gave £500,000 to a charity, the charity would say, “Thank you very much, you can come to our annual dinner and take a table”—which would cost significantly more than £250. Under the Bill, the tax benefit of the donation would be negated by what is virtually a minimal benefit. Having been involved personally in getting for a charity a significant corporate donation, I know how much senior executives expect, rightly, that minimal trade-off—if a charity has high-profile events that they and some of their colleagues might wish to attend, they expect to be invited. That is how it works. If the Government are too prescriptive in limiting that benefit, as they appear to be in the Bill, they run the risk of reducing the level of corporate charitable donations. I raise that at some length as an example of the unintended consequences of the Government’s proposals that has not been adequately dealt with in the Commons.
A third area of the Bill that had to be amended because it was unacceptable when subject to scrutiny was the announcement in the Budget of the shortening of the deadline for submitting online and paper tax returns, following a review by the noble Lord, Lord Carter. These proposals were criticised as impractical and, as a result, the noble Lord, Lord Carter, has revised his view, and the provisions will
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This all demonstrates that there are systemic problems in how we make tax legislation. Most noble Lords have referred to that in one sense or another. I have two suggestions. The first issue is dealt with in the Economic Affairs Committee report. We need to look in much more detail at the general anti-avoidance rule option, which would cut hundreds of pages from tax legislation and make things harder for the professional tax avoiders. There is discussion in the report of the need for pre-clearance procedure, which I agree would be necessary. However, I do not believe that it is impossible to devise a pre-transaction clearance system. I hope that HM Revenue and Customs will, as the report suggests, continue to give serious consideration to that.
There is a sentence in the report that is very Delphically and subtly drafted, and which sums up an aspiration in which I have no faith. It says:
“HMRC's vision that a decline in the growth of complex legislation might come about at some point as a result of the tax avoidance industry going into a decline following behavioural change on the part of taxpayers is attractive”.
It is attractive but not wholly plausible—nor, I must say to the noble Lord, Lord Forsyth, do I believe that a fairer and simpler tax structure would in itself lead to a withering of the tax avoidance business. That is wishful thinking. So a general anti-avoidance rule should be looked at more seriously.
The second change that I would suggest is to split the Finance Bill into a Bill that looks at tax rates, thresholds and incidence and a tax reform Bill that deals with everything else. This is not a new idea, and the Treasury always objects to it on the basis that you cannot split tax raising and other measures. But there have been plenty of examples given this evening of sections of the current Finance Bill that clearly have nothing to do with tax rates at all. All those issues and provisions dealing with the management of the tax system need careful pre-legislative scrutiny if they are not to run into the kind of risks that noble Lords across the House have described in respect of specific areas in which the Government have run into difficulties. Unless we do something like that, in my view we shall not get a significant improvement.
The Economic Affairs Committee report shows what can be achieved by careful consideration and, in effect, post-publication scrutiny of aspects of tax administration. That principle should now be extended to all aspects of the management and administration of our tax system.
7.47 pm
Lord Howard of Rising: My Lords, I congratulate the noble Lord, Lord Burnett, on his very good and entertaining maiden speech. I congratulate the noble Lord, Lord Wakeham, on his committee’s excellent
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I thank the noble Lord, Lord McKenzie, for introducing the Bill, to which my noble friend Lady Noakes responded in her customary impeccable style. As usual, she focused on the essential points. In spite of what the noble Lord, Lord Barnett, said, I think that my noble friend was, as she always is, extremely constructive. Her comments reflect the Government’s wish to appropriate an ever greater portion of the national wealth, which is then spent without, unfortunately, introducing the reforms that are so badly needed and to which she referred.
The more Government impose taxes, the more people will try to avoid them, either by adjusting their affairs or by moving to a different tax jurisdiction, as my noble friend Lord Trenchard pointed out in his excellent speech. Business individuals nowadays are international and will move to the most friendly tax environment. As our economy evolves from manufacturing to service industries, it is ever easier to cross frontiers. It is no accident that Google and many other major companies have recently located to Ireland. For Britain to stay prosperous, it must continue to attract and keep the creators of wealth, both corporate and individual. The noble Lord, Lord Marlesford, made some most relevant comments on this subject.
The various anti-avoidance measures to which my noble friend Lady Noakes referred and which take up so much of this year’s finance Bill tackle the symptoms and not the cause of the problem. There is an increasing weight of evidence that avoidance is a result of higher and ever more complex taxes, which are a massive stimulus to the avoidance industry. I urge the Government to look at this, together with the evidence available from other countries such as Ireland, the United States of America, Australia and others, which demonstrate a considerable improvement in revenues from lower taxes, as my noble friend Lord Forsyth pointed out so ably.
A singularly important point which my noble friend Lady Noakes raised was to expose the shame of ceding sovereignty on tax matters to Europe. As she said, tax is not a matter of Community competence. I would welcome hearing what the Minister has to say about that.
I turn to the matter of trusts, about which there has been so much discussion in recent weeks, and to which some of your Lordships have referred this afternoon. I must declare an interest as a beneficiary, trustee and settlor of trusts. Many of the points I wish to raise today have already been mentioned by your Lordships, so I will try not to waste time by repeating the same things. The first question is, as my noble friend Lord Wakeham mentioned earlier, why have the Government introduced this measure? I am not alone in finding it difficult to understand or fathom the reason. There has been much discussion and speculation, but no real conclusion. It has become apparent that the original statement, repeated by the Minister, on the impact of the changes—that only 6 per cent would be affected—was wrong. The
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As my noble friend Lord Trenchard and others have pointed out, the new regime was brought in without consultation, even though consultation on minor changes to the income tax and capital gains tax treatment had been going on for two years. The excuse explained by the Minister was a fear of forestalling. For a set of changes that, per the Red Book, are planned to raise £15 million a year, this is a weak excuse. My noble friend Lord Wakeham also made some most pertinent comments on that. It is always possible to announce new rules that will apply from a date and to consult properly on the detail—for example, the considerable tranche of capital loss anti-avoidance measures in the Bill. Had the professional bodies been consulted, they would have pointed out, despite what the Minister said, that trusts, particularly “interest in possession” trusts, are used principally to protect assets and people, and not for tax avoidance. The noble Lord, Lord Northbrook, spoke eloquently on that.
There are many who will suffer—for example, those getting divorced. Where this is concerned, trusts are used as practical management devices and are nothing to do with tax avoidance. Trusts are used to ensure that funds are properly protected. They are normally directed to keep the ex-spouse and then the children of the marriage, rather than going to the ex-spouse’s new family. That will now be subject to tax. The noble Lord, Lord Burnett, gave us an excellent example of why that is wrong. Are the Government saying that all divorces are to be on a “clean break” basis, or else the family faces a double penalty—the divorce and the inheritance tax hits on the property in trust?
The Government propose to keep privileged tax treatment for trusts for the disabled. Unfortunately, the definition of “disabled” for these purposes is too restrictive. It does not include many people who would want to set up trusts for themselves; for example, those who suffer from gambling, drug addiction or alcohol addiction. New trusts set up by those who do not fall within the definition of disabled will suffer the tax charges. Why is this necessary? What avoidance are the Government seeking to tackle, when such trust property would in any event remain in the estate of the self-settlor and be subject to inheritance tax when he or she dies?
In future, unless they fall within the narrow definition of disabled, people who recover damages as a result of claims for personal injury, criminal injuries compensation and so on, where the sums of money are placed in trust for their benefit, will suffer a tax. The amount of damages received will have been calculated to take into account the recipient’s living expenses, care and medical needs, but not the tax charge that may now arise. If a tax charge now results, it will deplete funds set aside for the person’s care. That may increase the need to resort to the state for additional support.
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What is clear is that even the amended proposals will do the most harm not to the rich minority referred to, but to many people of relatively modest means whose wealth has been increased by the inflation in the monetary value of their houses to a level where these proposed taxes will bite. They will have few, if any, other assets. They do not have great wealth; they have a home. That means that they will be unfairly penalised if, for any number of perfectly good reasons, they wish their main asset to be held in a trust. It is a perfectly valid wish to preserve the family home, or indeed any other form of family wealth, by passing it to another generation. That is quite possible without a tax penalty, providing that it is an outright gift and the donor survives for seven years. Why should there be a tax penalty for passing the same wealth via a trust, where the difference is that there is provision to prevent foolish dissipation of wealth? Even the very ordinary use of insurance policies written in trust is now penalised. The Government might well have stopped what they see as tax avoidance, but only at a price borne by ordinary, prudent families who try to ensure that their dependants do not have to submit themselves to means-tested benefits. Are the Government prepared to talk to the insurance industry about changes in a future finance Bill which would permit prudent family provision?
In the other place, the Paymaster General explained why trusts should be taxed, as can be seen in the Official Report of Commons Standing Committee A of 13 June at cols. 606-07. She set out a series of steps by which inheritance tax could be avoided by the use of trusts and explained that therefore trusts should be taxed. But these same steps could be taken by the use of outright gifts, and there would be no tax penalty, provided that the donor lived seven years. The justification given for taxing trusts was that the original donor—the grandparents, in the example—could, from the grave, still retain control over the assets. That would not be so in the case of an outright gift.
That is an amazing statement. In the overwhelming majority of cases, these trusts will have been created not for tax purposes, but for the sake of good and sensible money management. Are the Government really saying that prudence is an undesirable objective and should be taxed, but that if money is given outright with no provision for future good management—so that it can easily be frittered away—it is a better way to do things? The idea is so extraordinary that one wonders if there is an ulterior motive. Is this the first of a two-pronged attack, and the next move will be against potentially exempt transfers, as outright gifts are known? Will the Minister confirm that there is no plan to tax potentially exempt transfers or to extend the length of time the donor has to survive? It is important and fair that people in this country, as well as the businesses to which the Minister referred, have a stable tax environment in which to plan and conduct their affairs.
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