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Finally, I urge the Government to react promptly to unforeseen anomalies which crop up and cause suffering. There have already been 50 amendments to the trusts section of the finance Bill and doubtless further problems will arise. It would be comforting to know that prompt action would be taken to prevent hardship.
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Before finishing, I ask the Minister to pay attention to the wise comments in the brilliant speech of my noble friend Lord Forsyth.
8 pm
Lord McKenzie of Luton: My Lords, I thank all who have spoken in today’s debate. I congratulate the noble Lord, Lord Burnett, on a truly impressive maiden speech. He spoke with authority, and I am sure he will enliven many of our future debates on not only finance but other matters. I note that he has already received a better offer from my noble friend Lord Barnett than has come my way to date. As we are congratulating people, I join my noble friend Lord Haskel in congratulating the Chancellor on the birth of his new son.
I have decided to scrap my prepared speech to try to get through as many of the points raised as I can in the 20 minutes allotted to me. I note the position that the noble Lord, Lord Wakeham, has outlined as regards the Joint Committee. He is aware of the Government’s stated position on that, but doubtless the Joint Committee will take account of his views. I acknowledge that the sub-committee has gone about its affairs constructively and on a non-partisan basis. It has not been about amending Finance Bills, although it has struggled to keep separate administration and the incidence of tax. Those are inevitably intertwined. The noble Lord’s position was supported by the noble Lords, Lord Barnett, Lord Sheldon, Lord Forsyth and Lord Newby. The noble Lord, Lord Northbrook, asked why he did not receive a formal written response. I believe that the tradition has been to deal with the matter in this debate. I am simply carrying on with that tradition.
The noble Lord, Lord Wakeham, and others, particularly the noble Lord, Lord Howard, talked about consultation and mentioned concerns over the lack of it on the inheritance tax proposals for trusts. The Government always consider the benefit of undertaking consultation and try to make as much room as possible for preparation ahead of changes to the tax regime. But it was not possible in this case because of the possibility of large-scale forestalling. I could go through the forestalling that was envisaged. Those with lots of spare capital could make very large-scale lifetime transfers into flexible interest in possession and A&M trusts. People who did not have a lot of spare capital could put substantial resources into trusts using insurance-based schemes, usually called discounted gift schemes. There were opportunities for large-scale forestalling, which is why the Government proceeded as they did. I pray in aid the consultation that has taken place on a whole range of tax issues: the new IHT applications to the new pension regime, particularly ASPs; the changes on the structured finance anti-avoidance rules; the rewrite on options in tax provision; and matters such as the new film industry release. Consultation is not always possible, but where it is, the Government seek to do it.
The noble Baroness, Lady Noakes, and the noble Lords, Lord Wakeham and Lord Forsyth, commented on the growing complexity of the system
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To address those issues will inevitably involve complexity, unless we allow that avoidance to continue. Businesses that want to engage in that avoidance have to run the risks of dealing with that complexity. The large majority of taxpayers who are not in that game are not affected by that complexity. I stress again that the Government have signalled their willingness to explore different approaches to tackling avoidance. For example, the capital loss targeted anti-avoidance rules announced in the PBR were welcomed by business and the professions for the approach of setting out broad principles and then consulting on the detail.
Noble Lords commented on effective tax rates and the position of the economy generally. The noble Baroness, Lady Noakes, mentioned the impact of regulation. The Government have undertaken the most radical and serious systematic reform of Britain’s regulatory system in recent history. It will deliver genuine reductions in the burden upon business without compromising necessary regulatory outcomes. The House will be aware that we published the draft Hampton code of practice which will entrench the Hampton enforcement principles in UK law. The code will require regulators to have regard to the Hampton enforcement principles when exercising their regulatory functions. That is what the Legislative and Regulatory Reform Bill, which is before your Lordships’ House, is all about. I identified HMRC’s progress towards tackling administrative burdens. The Government are undertaking the administrative burdens project, which will identify all regulations that impose an administrative burden on business, charities and the voluntary sector, and will calculate the cost of these. Targets to reduce them will be set later this year.
Noble Lords referred to the competitiveness of the tax system and the economy, particularly in the light of the regulation which I have just dealt with. The
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I think that noble Lords settled on describing the economy as sub-optimal. I reject that. On GDP per capita we are now ranked second in the G7, rising from fifth in 1997, overtaking our European competitors Germany and France. From 1997 to 2005, UK GDP expanded by about 25 per cent; this compares with 8 per cent in Japan, 13 per cent in Germany, 13 per cent in Italy and 22 per cent in France. There are encouraging signs that the economy has gained momentum in recent months. GDP rose at its fastest level since mid-2004 in the first quarter of 2006. Business investment rose at its strongest since the third quarter of 2004, and manufacturing output is rising, up 1 per cent in the three months to May. Retail service growth has picked up, and business surveys suggest further gains in activity. The UK is enjoying its longest period of sustained low inflation since 1960, and employment is close to record levels, with 28.9 million people in work.
If we live in an environment where companies are queuing up to move out of the UK, and a burden of regulation and tax is bearing down on business in an unacceptable way, why do a number of surveys point to exactly the opposite? The Word Economic Forum global competitiveness report of 2005 ranked the UK higher than any other European country. In October 2005, London was named the best European city to locate a business for the 16th successive year. The UNCTAD world investment report put the UK among the top three recipients of foreign direct investment for seven of the past 11 years. Between 1997 and 2004, the UK has seen $519 billion of inward investment flows, and it was the highest recipient of inward foreign direct investment in 2005. The World Bank study Doing Business in 2006 ranked the UK business conditions as the best in the EU and ninth in the world. The Heritage Foundation 2006 index of economic freedom placed the UK fifth out of 161 countries in terms of economic freedom and described the UK as the best place in Europe to open a business. Those are other people’s views of how this economy is based and what this Government have achieved.
The noble Baroness raised detailed points on some specific issues. She rightly said that PFI is being looked at. She again referred to the Network Rail
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The sustainable investment rule has been complied with to date, and I am not aware that the Chancellor is seeking to amend it. As in so many instances, it has been suggested that the golden rule and the sustainable investment rule are about to be broken, and that has not happened. In so far as changing the economic cycle is concerned, you must follow the data. If the ONS revises the statistics, what do you do? Do you ignore that, when they have been independently revised? Issues of growth are perpetually revised for a whole raft of reasons; that happens in every sophisticated country, and we have just followed that route.
The noble Baroness, Lady Noakes, the noble Lord, Lord Northbrook, and maybe others, asked about real estate investment trusts and in particular about why listing on AIM is not permitted under the new rules. A company whose shares are trading on AIM is subject to a lighter regulatory touch with lower minimum standards of corporate governance and transparency than companies with shares on the official list of the London Stock Exchange. One of the Government’s main objectives is to create investment opportunities open to small investors, who deserve the levels of regulation, transparency and corporate governance created by a recognised stock exchange.
Baroness Noakes: My Lords, is the Minister saying that small investors should not invest via AIM at all? Is that the Government’s view?
Lord McKenzie of Luton: No, my Lords, I am not saying that. AIM has been successful. We are saying that, for real estate investment trusts, the degree of transparency and regulation in governance is not sufficient for what we are seeking to achieve at this stage.
A number of noble Lords mentioned the withdrawal of the exemption on computer equipment that was introduced in 1999. The Government made clear that the exemption would be kept under review to ensure that it met its objectives. Evidence suggests that, while it has provided greater access for many employees, it has also been misused. Employees have been able to buy computers out of their pre-tax income, but in some instances have been offered games consoles and MP3 players as part of the package.
So far as the Marks & Spencer judgment and group relief are concerned, the Government welcome the ECJ judgment, which takes into account the concerns expressed by the UK and several other member states. The judgment means that the UK’s existing system of group relief can be preserved. The European court’s role is to interpret the European treaty, not to set national rules on tax. We, like all member states, have a veto on European legislative proposals relating to tax, which the Government have taken care to propose.
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The noble Lord, Lord Burnett, raised a number of issues about trusts. I will try to deal with some of them, and we will follow up those that I am not able to cover in the time available. I think he said that it should be possible for those who are not parents to put assets into trusts for minors, irrespective of their relationship. People can still put money into trusts for children; this will just fall in the mainstream IHT rules for trusts.
A number of noble Lords suggested that the definition of a disabled person is too narrow. The definition in the Bill is in line with that adopted for trust modernisation. It caters for mental and physical incapacity and is deliberately focused on cases where the disabled person faces very substantial difficulties in handling their financial affairs. It is not intended as a relief for disability as such, so we do not think that a broader definition is appropriate. It was suggested that life insurance protection policies should be outside the regime. Protection policies can be valuable property, and it would be wrong in principle to disregard them for inheritance tax purposes.
My noble friend Lord Barnett focused on MTIC fraud, which, as all noble Lords have identified, is extremely serious. He asked about the measures being put in place and how effective they would be. The goods subject to the reverse charge, which we have sought to get subject to the derogation, should apply to over 90 per cent of the goods affected by MTIC fraud at the moment—chips, mobile phones and so on. The UK plays an active role in collaborating with European partners in improving the EU’s ability to counter fraud.
The noble Lord, Lord Marlesford, raised issues about the sustainable investment rule. Again, the Government have met that to date. In 11 of the 18 years of Conservative Government, net debt was above 40 per cent. This Government’s record is very good in comparison.
It was suggested that there was no mention of the IHT proposals. Noble Lords will see a reference to them at page 118 of the Red Book, paragraph 5.102.
Interest rates were mentioned, but the Government do not comment on that; it is the job of the MPC. One thing that the noble Lord said that sent shivers down my spine concerned whether the winter fuel allowance should be taxed. Given that I received a letter the week before last suggesting that I might be eligible later this year, I was greatly concerned.
The noble Lord, Lord Marlesford, talked about productivity and economic growth. The UK is making progress in boosting productivity compared to past performance. Over the first half of the current economic cycle, actual trend productivity growth was 2.59 per cent a year, compared to 2.04 per cent over the previous economic cycle. Latest data suggest that the output-per-worker gap with Germany has closed and the UK now leads Japan by over 11 percentage points. The gap with France has approximately been halved since 1995.
It was suggested that forecasts were subject to major errors, but the record shows that errors since 1997 have been fewer and smaller than in the previous period.
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The noble Lord, Lord Sheldon, asked about the process of derogation, for which we have applied. The commissioner has to agree, after which a process involving other member states eventually goes to ECOFIN—because all member states need to give their approval. We are hopeful of speedy progress, given that our European partners are aware of how seriously we view the issue, which has an impact on them, too.
That is not the only matter that we are looking at. In addition to the 2003 provisions there are risk-based controls designed to identify and prevent bogus businesses from registering for VAT, fast-track deregistration for those who enter the VAT system and trade fraudulently, international co-operation and frontier activity, including the use of scanning technology to better identify goods involved in fraud, and others.
My noble friend Lord Haskel spoke with conviction and experience about how the Government have supported private enterprise. We have done that, not least by creating economic stability under which businesses can flourish. But we have been discussing specific measures in the Bill regarding qualifying costs for R&D tax credits, the temporary increase in personal allowances for small enterprises—the fact that that is temporary does not necessarily mean that it will not have an impact—the new film tax credit and others.
The noble Lord, Lord Northbrook, mentioned real estate investment trusts. I have dealt with AIMs. No reference was made to the trust changes in the Budget, as can be seen in the Red Book.
The new film tax reliefs represent a well targeted replacement for the old system that deliver generous levels of support, targeted directly at film-makers, representing better value for money for UK taxpayers.
The noble Viscount, Lord Trenchard, mentioned AIMs. The Government do not believe that all trusts are set up to avoid tax. We recognise that they are used to deal with a range of family circumstances. But that is a separate question from the tax regime that should apply to them. Trust assets for 18 year-olds do not prevent accumulation to the age of 25. I am bound to say that we have rather more faith in young people than perhaps the noble Viscount has. I looked at our debates on the Company Law Reform Bill and there was a debate about whether directors must be aged 16 or 18. Noble Lords on the opposition Front Bench argued that the age of 18 was entirely appropriate.
I was astonished at the challenge to the position of London, given that over recent years it has advanced its position as one of the two truly global financial centres. I have dealt with the issue of reclassification of the golden rule.
I do not have time to go over the position of occupational pension schemes, except to say that the withdrawal credit was part of a process started by the Conservative Government, who reduced the ACT credit. That was much to do with holidays taken on unrealistic expectations of long-term growth in the stock market, as well as changes in the understanding
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My noble friend Lord Rosser again raised issues about MTIC and whether £500 million was the appropriate provision for the impact of the changes. That was a prudent basis on which we have made provision. That revenue will be gained by fraud reduction, but clearly we need to ensure that we keep abreast of future changes. Would other goods be substituted? It is possible that they will. It remains to be seen whether there are sufficient goods of high value and low volume that make those frauds particularly possible. Do we have enough staff? We increased staff and the Government are intent on keeping that under review. We should see this as serious crime. It may be seen as white-collar but it is crime.
The noble Lord, Lord Forsyth, gave us an interesting view of the tax system and of where it was heading. I was surprised at the way in which he referred to avoidance. He said, without any qualification, that it was perfectly acceptable, however artificial the scheme might be. I was surprised that he did not qualify what he said and I wonder whether that is the official position of the Conservative Party.
We have dealt with issues of economic growth.
I was asked why the Finance Bill is larger than it has been in previous years. In the four years to 1997, the average length of the Bill per year was 412 pages and 210 clauses. Since 1997, the average length has been 466 pages and 178 clauses per year. So I do not think that there is a significant difference from one year to the next.
I shall write to the noble Lord, Lord Newby, about the advance clearance of tax relief for charities and also about when a decision is due on tax deadlines for online returns. He will forgive me if I am not able to deal with that more extensively.
I hope that I have already picked up a number of the points raised by the noble Lord, Lord Howard. I touched on the figure of 6 per cent. Historically, the percentage of estates that have paid IHT has been 6 per cent of the total, and that figure has been broadly consistent over quite a long period. The Government have brought forward no plans to change the rules on potentially exempt transfers or to extend the length of time.
I must close the debate now as I have run over the time available to me. Again, I thank noble Lords for their insightful and wide-ranging contributions. The Government are focused on developing the macro-economic stability essential for our future productivity, growth and stability. The Bill will support business while ensuring fairness, and it will enable the country to sustain and build on a competitive, enterprise-based economy, allowing for security and opportunity for all to benefit from growing prosperity.
On Question, Bill read a second time; Committee negatived.
Then, Standing Order 47 having been dispensed with, Bill read a third time, and passed.
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