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Although I do not want to dwell on this, in other cases we agreed with the Government’s desire to cut out some of the rather exotic tax avoidance schemes. But we know that one area, which has been mentioned already, is growing in terms of loss of revenue—the MTIC, or missing trader intra-Community, fraud. We know from the evidence that we took that it is a very serious matter and one that is growing rather than declining. It is growing because criminals are using this sophisticated fraud to take more and more money out of Revenue and Customs. The ONS is also having to change its statistics because it recognises that, if it does not do so, it will show billions of pounds in the statistics which are simply being duplicated through frauds.
Unfortunately, much as we supported it, I fear that the Government’s new legislation is not getting anywhere near meeting that problem. I know that the Chancellor—indeed, any Chancellor in any Government—would not want to see the European Union become involved in our tax laws, but it seems to me that in this instance that is the only way that we are going to get across the problem. It applies not only to the UK; it is an intra-Community fraud which applies right across the Community. I believe that the only way to deal with it will not be in the kind of legislation, or even more sophisticated legislation, in our Finance Bills, but on an intra-Community basis. We should be pressing the 25 member states. It is never easy to get agreement, but on this I would have thought there was a better chance because they are also suffering. I hope that the Government and the Opposition will support changes that will allow us to have serious discussions to stop this very serious fraud before it gets even worse, as it seems to be doing.
I turn briefly to the economy. Of course, there are problems—it would be incredible if there were none—because of what is happening in the global economy and events elsewhere, including what we have just been discussing in your Lordships' House, the problems in the Middle East and the effect that is likely to have on the global economy and on our own economy—events over which any Chancellor of the Exchequer would have no control. I can safely leave it to the Minister to tell us all about the wonderful things that the Government are doing and I can safely leave it to the noble Baroness, Lady Noakes, to tell us how terrible the Government are. To talk about the economy as a failing economy, even for her, is a bit much. After nearly 10 years of an economy growing—
Baroness Noakes: My Lords, I did not say it was a failing economy. I made it plain that I did not say that.
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Lord Barnett: My Lords, I was surprised and delighted with how brief the noble Baroness was in her opening remarks. She obviously could not find enough to criticise the Government for. I shall leave that aside. Normally I can rely on her being very critical of everything to do with Finance Bills and the economy. I look forward to hearing some constructive proposals about how she would amend the Bill.
I recognise that everything is not always brilliant in our economy, but at the moment it is difficult not to accept that in the past nearly 10 years we have had economic growth, which is unusual. I do not want to quote the Minister but he will tell us how great it all is. I have a problem with inflation. We know that the Opposition initially opposed the setting up of the Monetary Policy Committee of the Bank of England. I am sure that noble Lord, Lord Forsyth, did not do so because he is too intelligent to oppose such a sensible proposition. I am sorry he was not in his place a few moments ago because I referred to something he said. We have a very low rate of inflation—around 2 per cent—and the Governor of the Bank of England has forecast, as has the Monetary Policy Committee, that it will stay broadly at that level for the next two years.
Despite that, the Governor is constantly speaking around the country about the serious dangers of inflation. Frankly, if he has to increase interest rates by a couple of quarter per cents over the next few years to keep inflation at the figure that he has forecast of around 2 per cent, would that be disastrous? I am beginning to worry that the Governor of the Bank of England does not have enough to do. If he is going around the country spreading gloom about the rate of inflation when it is only around 2 per cent, and he forecasts that it will stay there for two years, I wonder what on earth he is talking about. I could have understood it coming from the noble Baroness, but not from the Governor of the Bank of England. Perhaps I could suggest to the noble Lord, Lord Wakeham, that the Economic Affairs Select Committee could call the Governor before it to ask a simple question: what on earth is he on about?
I am obliged to my noble friend for pointing out that I have spoken for too long, but I shall take another minute or two.
The golden rule has been raised again. The Economic Affairs Select Committee, under the chairmanship of the predecessor of the noble Lord, Lord Wakeham, said that it was a better system than any other that has been devised in the European Union. For my part, if it is slightly overreached, it would not be a terrible disaster. Other than that, I leave the defence of the Finance Bill and the economy to my noble friend who I know will manage very well.
6.05 pm
Lord
Marlesford: My Lords, I cannot resist making a
comment on the maiden speech of the noble Lord, Lord Burnett. I shall
do so in the context of suggestions about certain people paying to come
here. Having heard the speech, in my opinion the House of
17 July 2006 : Column 1058
First, I want to make some remarks about the Chancellor's Budget and the finance Bill, and then I shall discuss Britain's economic situation in the context of the EU and world outlook, as reflected in the Chancellor’s speech. I believe that as a consequence of his decision three years ago to abandon his reputation for caution, Mr Brown is facing serious dangers in keeping to his cherished two golden rules. As my noble friend has said, he has changed the definition of the economic cycle so frequently it is hard to hold him to account. He now depends on nothing unexpected happening and, of course, plenty is going wrong. It will be very hard to rein back on spending. The military commitments overseas are huge and growing rapidly and the provision made is quite inadequate. Then tax revenues, at a time when the world economy slowdown is starting, are likely to be much less buoyant than expected.
More serious is the threat to the Chancellor’s sustainable investment rule, which means net debt has to be below 40 per cent of GDP. It is already some 37 per cent and is expected to exceed 38 per cent in each of the next three years. But let us look at the accuracy of the Treasury forecasts for the current year and last year. In his 2002 Budget the Chancellor predicted a net debt at £18 billion for the current year, 2006-07. He is now predicting that debt at £36 billion, double the earlier figure. In his 2001 Budget the prediction was even worse. He predicted net debt for 2005-06 at £12 billion and it has turned out to be three times larger at £37 billion. For the probable last year of this Government, 2008-09, he is predicting £25 billion of net debt, a figure which could on past form be anything between £50 billion and £75 billion—and by my reckoning he has only £25 billion to play with.
My last point on the Budget is to say how foolish it was for the Chancellor to allow the Paymaster General—the right honourable Dawn Primarolo, who has been lurking in the depths of the Treasury ever since 1997—to attempt to make those drastic changes to inheritance tax which have caused such great concern to much of middle England. The proposals were not even in the Budget speech, and I have been told that the Inland Revenue officials were kept in the dark about them until a couple of weeks before they were put in the press release. I am glad to note that the Select Committee was robust in its condemnation of,
Thank goodness most of the worst of Dawn Primarolo’s proposals have been abandoned.Changes are needed to IHT. Many of the minor rules seem quite absurd. For example, there is an annual small gift limit exemption, intended for Christmas and birthday presents, which is still only £250 per donee. That level is both unjustifiable in today's money and prosperity, and unenforceable. It should at least be quadrupled. That is a small point.
The lesson is that there
must be consultation on nearly all tax changes. I remember the very
detailed
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The Chancellor is to be congratulated on sticking, for all these years, to the 40 per cent top tax rate introduced by my noble friend Lord Lawson 18 years ago in his 1988 Budget. That was, incidentally, the only Budget speech when the House of Commons had to be suspended in disorder, with Dawn Primarolo being one of only 14 MPs who voted against the Speaker's motion on that occasion. I looked it up in Hansard.
Lord Forsyth of Drumlean: My Lords, surely my noble friend is wrong in saying that the Chancellor has stopped at a top rate of 40 per cent. By introducing the 1 per cent national insurance charge, he has effectively raised the top rate to 41 per cent.
Lord Marlesford: My Lords, some people have top rate plus 1 per cent, but many still have an ultimate top rate of 40 per cent. Let us never forget that when my noble friend Lady Thatcher was elected in 1979, the top tax rate was 98 per cent, which applied in today’s money at an income threshold of about £76,000 a year. Think of that: 98 per cent at £76,000 income.
I turn to the macroeconomic outlook. Britain’s economic growth fell to a rather poor 1.7 per cent in 2005, not that much better than the eurozone’s 1.3 per cent. This year it looks like 2.4 per cent, sadly altogether lower than the US’s 3.5 per cent. These figures are nothing compared with China and India, which are growing at 10 per cent and 9 per cent respectively—and China has no inflation at any rate. These countries are rapidly replacing the manufacturers of the western world.
Britain has a big advantage in having already moved its economy away from manufacturing. In 1979, manufacturing made up 27 per cent of UK GDP and 28 per cent of employment. In 2004, manufacturing was down to 15 per cent of output and, last year, to 12 per cent of employment. Service industries now account for some 73 per cent of the economy. We must remember that there is still scope for growth in productivity and manufacturing, especially as we focus on high value and higher technology products. In 2004, output per head grew by over 6 per cent in manufacturing, the best for 15 years. Last year, however, I am afraid that it was down to 2.5 per cent.
France and Germany, on the
other hand, have retained a considerable manufacturing base which they
seek to protect by every means possible. That is not necessarily in
their national interest. The thesis of invasion of industries by new
technologies is 40 years old, and was sponsored by the Americans at the
time of the formation of Route 128 in Massachusetts and
17 July 2006 : Column 1060
Another way forward is through the so-called platform company, which organises the production of its products throughout the world, sourcing wherever materials, components, manufacture and assembly is cheapest. A good example is the Dell computer company: flat screens are made in Taiwan; the chip and software are American but the chip is made in Taiwan; the mechanics and box are manufactured and everything assembled in China. That enables national participation where appropriate. Profits and risks are spread between countries, as are jobs. The net effect tends to be broadly contra-cyclical—another plus. We have enjoyed an element of this with British participation in the Airbus.
A word on monetary policy: I am a firm believer in its value, both to cool and to stimulate the economy. But to be able to use it in both directions means that there must be real interest rates to vary. Japan is an example of where the zero interest rate was a disaster, from which the Bank of Japan is only now freeing itself. The Fed got rates down to a dangerous 1 per cent level but, since June 2004, it has wisely raised rates to the present 5.25 per cent. Our own 4.5 per cent rate probably needs to go higher.
The European Central Bank has bravely resisted French and German government pressure for loosening to help those countries avoid the necessary structural change. Indeed, the ECB has taken a first step to tighten. There comes the question of what is the right rate of interest. Two possibilities are: either a figure which gives some return to savers—I suggest 3 per cent real is the minimum—or a real rate roughly equal to long-term growth. In the West, that should also be about 3 per cent plus.
Protectionism looms—the easy way out for politicians seeking re-election. How can Peter Mandelson agree to the ban on imports of New Zealand butter announced last week? Did he not learn a little lesson from his defeat over the bra wars with China? If this is the attitude of the EU Trade Commissioner, what hope has the Doha round got? Both Hong Kong in December and Geneva this month failed. In the absence of a Doha succession, the way forward for freer trade is almost certainly through bilateral deals.
Four other factors are important. First, there is a need to deregulate. That applies at both EU and national level. It is much easier said than done. Governments are constantly trying to do it and the EU Commission is trying to do it. Some months ago, a commissioner told one of the committees I am on that, when he was trying to deregulate, he had discovered that many in the Commission thought their main job was to keep the chauffage—their jobs—going.
Secondly,
there is a need to face up to the demographics of retirement. It is
frankly absurd and
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Thirdly, there is a need to give state aid to those who need it rather than those who do not. One example: it is indefensible that benefits such as the winter fuel payment and free travel for pensioners should be untaxed. I recognise that those are rather hot political potatoes.
Fourthly, I congratulate the Government on opening the door to nuclear power. I particularly congratulate the noble Lord, Lord Sainsbury, on his bold recognition that nuclear power is a renewable. The world urgently needs a massive nuclear power programme to combat global warming, to ensure that world supplies of hydrocarbons are kept for what only they can be used for and, not least, to reduce the cash flow and power of jihadist terrorism.
We must all recognize that world economic prospects are dominated by politics, both national and international. In 1933, President Roosevelt, at the height of the depression, when Keynesian policies were about to rescue the world economy, reassured his fellow countrymen,
If only that were true today.Lord Monson: My Lords, would the noble Lord not agree that the party to which he belongs did nothing whatever to raise the small gifts exemption, or the exemption for gifts in consideration of marriage, in line with inflation for the 18 years they were in power from 1979—or during the Heath Administration, when inflation was rampant?
6.20 pm
Lord Sheldon: My Lords, in any discussion of the economic situation, an attack on the Chancellor of the Exchequer is hardly justifiable. I do not defend him on everything that he has done, but it is clear that the standing of the Chancellor of the Exchequer in his control of the economy should be increasing year by year. However, in the 10th year of success people are talking about the ending of the great advance we have had in the past. There has been no crisis, but the noble Baroness, Lady Noakes, referred to a failing economy. If it is a failing economy, I am happy to deal with it now.
Baroness Noakes: My Lords, I must have expressed myself badly because I have been misheard twice by the Benches opposite. I did not say that this is a failing economy; I was clear about that. I said that the economy is being managed sub optimally.
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Lord Sheldon: My Lords, I am sorry if I did not hear the noble Baroness correctly, but that is what I thought I heard. The important thing is that the criticism seems to be increasing as the years of success increase, which I find rather strange. Every year of success should be applauded, not condemned. But let us turn to the finance Bill.
There is some unease about the role of the House of Lords, but it does not look at rates of tax or at political issues of taxation. That is not our job. The Economic Affairs Committee looks at technical aspects of the finance Bill, as do tax experts, business companies and the press. It has a useful level of experience and expertise and has among its members two ex-Chancellors, three ex-Treasury Ministers and an ex-governor of the Bank of England, who are the core of the success of the committee. Its role is to present its views on technical aspects of the finance Bill with no party-political involvement. It has been very successful in that, and the way that we limit the kind of discussions we have and the recommendations that we make should be welcomed widely.
Despite the reduction in the rates of income tax over the years, the level of tax avoidance and evasion has not fallen as much as many had expected. There have been a number of complex and contrived schemes and, despite the close watch by Her Majesty’s Revenue and Customs, new ones have emerged to circumvent the control of the Government. The perennial problem is the need to counter tax avoidance. The Government rightly continue to stress the high priority that they put on dealing with tax avoidance, which undermines the fairness of the system and causes market distortions. They have to deal with ever more complex and contrived schemes designed to avoid income tax. People who undertake those schemes are very well paid and remunerated for the work they do. We all realise the difficulty in dealing with the highly paid innovators of such schemes that put the Government at a disadvantage, given the time required to deal with them. Quite rightly, the Government have decided to close down a number of schemes with effect from December 2004. They also have disclosure rules that deal with targeted anti-avoidance measures. I welcome those actions and support the considerable increase in staff that has been provided to deal with such problems, and I understand the difficulty of keeping up with new schemes that wealthy individuals are able to acquire. One of the major problems is that very wealthy people get information about how things are developing and deal with them in advance of any actions that the Treasury can take.
A serious
aspect of tax fraud is the missing trader intra-community fraud. There
have been few occasions in our financial past where such damage to the
Revenue has occurred. Small but expensive goods—mobile
telephones are the most prominent examples—are imported by a
trader who pays no tax when importing them. He sells the goods with the
VAT added, which is not sent to HMRC. After a number of such deals, the
trader absconds with the money. The goods are exported, the VAT is then
reclaimed, the same goods are reimported and the
17 July 2006 : Column 1063
It is the underlying problem of the VAT system. According to the Association of Chartered Certified Accountants, a solution was possible in the 1990s by initiating a single VAT system within the European Union, but there was a lack of trust between Governments about how the pot would be shared out, so no solution was implemented. Eventually a solution might come about, but an awful lot of money will be lost before it does. To get all the countries to agree will be a major undertaking. We must accept that and try to find some way of dealing with the problem in the interim.
HMRC considers that carousel imports and exports were worth more than £7 billion in the first three months of this year, which is a rise of 35 per cent in one year. Year by year, the Treasury could lose enormous amounts. Some estimates have been extraordinarily high, and they show no evidence that the amount of fraud will not rise, let alone be contained.
A more recent development is that the goods on the roundabout are not physically moved and the fraud is conducted with paperwork. European Community involvement is needed, which is not easy to achieve with all 25 countries, many of which have trade arrangements that will be difficult to amalgamate because they have different systems. Not only may all 25 countries not agree on what needs to be done, but the VAT system might need to be amended, which involves long-term negotiation.
I shall answer the question asked by my noble friend Lord Barnett. The Treasury said that it was in discussion with the European Commission on a proposal for derogation and HMRC pointed to some successful prosecutions. I hope that when the Minister replies he will put these matters in perspective so that we can see the scale of the actions in the context of the increasing problems being faced, and that he will say how derogation will happen and how these matters will be dealt with.
6.28 pm
Lord
Northbrook: My Lords, we are once again here on a
hot July day to discuss the Finance Bill and the report on it produced
by the committee chaired by my noble friend Lord Wakeham. As usual, the
committee has done a fine job and deserves our congratulations on an
excellent and impartial document. I very much regret that the
Government
17 July 2006 : Column 1064
I declare an interest as an investment fund manager. I can support certain aspects of this Finance Bill. I welcome the broad thrust of the Government’s attempt to prevent the abuse of charitable reliefs, and their attempts in Clauses 95 to 98 to provide a legal and tax framework to accommodate the Sharia-compliant finance arrangements of wakala and diminishing musharaka. That is important, not only to make us more competitive in an increasingly global market in Islamic finance but also for tackling financial exclusion in Britain’s Muslim community.
Like other speakers, I welcome the Government’s long-awaited framework for real estate investment trusts. Reform here has long been overdue as such structures have been in place in other developed countries for many years. I feel that more could be done to encourage residential properties into REITs. Like my noble friend Lady Noakes, I ask the Minister why REITs are not allowed to be quoted on the AIM market. I cannot see the objection, as they are permitted on the main market. Without this concession, smaller companies without the benefits of REIT status could be taken over and the UK property market increasingly dominated by a relatively few large REIT companies.
Secondly, what is the progress of discussions between the Treasury and the property industry referred to in last Saturday’s Financial Times? On new real estate investment trusts not listed on the stock market, as I understand it, there is an opportunity to entice the £40 billion offshore property fund management industry back onshore, although at present it does not pay the 20 per cent tax on their income.
Like many other speakers, I welcome Clauses 19 to 21, which crack down on missing trader intra-community fraud. My noble friend Lord Wakeham’s sub-committee’s report made an excellent study of this area of the Budget in a level of detail that I do not have time to debate today. I reiterate the sub-committee’s concern set out in paragraph 100(d), on whether the safeguard to protect the innocent trader is sufficient. Also some commentators, according to the accountants Smith and Williamson, have criticised the clause for appearing to transfer the responsibility for policing or controlling fraud from the state to the taxpayer rather than dealing with the fraud itself.
My criticisms of the Budget focus on two main areas: first, the Chancellor’s habit of altering existing relief, which makes life so uncertain for companies, which are thus unable to plan with certainty; and, secondly, trusts. Since 1997, I have thought that the Government were going to have a go at trusts, as they seem automatically to consider them tax-avoidance vehicles, whereas the truth is often very different. Where some avoidance clearly has occurred, as my noble friend Lord Wakeham states in his report, this is far from the sole reason for setting them up.
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The problematic change to existing allowances this year comes in four areas: small companies corporation tax, film industry taxation, capital allowances and the home computer initiative. The Finance Bill clauses will remove a non-corporate distribution rate, a 0 per cent rate of tax on corporate profits and effectively take corporation tax for small businesses back to the situation in 2000.
The Institute of Chartered Accountants in England and Wales stated in its parliamentary briefing note on the Budget:
- “The changes in the Finance Bill
will hopefully bring to an end the long run of uncertainty and
complexity for the taxation of small business
profits”.
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 (ICAEW) 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 his 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 community initiative allowance (HCIA), 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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The Minister’s description of the trust tax changes conveniently ignores the hullabaloo that first greeted their 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 the 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.
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