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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.
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, I found particularly irritating about the Government’s justification of the way in which they dealt with these provisions 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
17 July 2006 : Column 1085
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.
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