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I hope that that was a colouring-in exercise about what the functions and roles will be. I found it extremely useful to understand noble Lords’ concerns. I do not see the need for the amendments that have been tabled. I hope that noble Lords will accept that the Government’s clear intention is to keep the House, and particularly the Select Committees, up to speed with what is happening. I hope that on that basis the noble Lord will feel able to withdraw his amendment.

Lord Pearson of Rannoch: I hope I have not missed the noble Baroness’s reply in her answer, but I think she dismissed the idea of United Kingdom troops being committed to the EU army and for that we are, of course, grateful. I think she said that there is no basis in European law for the European flag or anthem. I am not sure that I heard her this time dismiss the rumour that borderless healthcare is on the way.

Baroness Ashton of Upholland: There is a proposal for a directive on healthcare, but it is nothing to do with the Lisbon treaty. If the noble Lord will forgive me, I shall write to him in more detail about it, but it is nothing to do with the treaty. It is a separate proposal that is running its way through Brussels in the usual way.

Lord Pearson of Rannoch: There is also the question of whether the treaty could lead to the harmonisation of direct taxes. Finally, I think the noble Baroness said she would write to me about those areas of our national law upon which Brussels—the European Union—cannot act.

Baroness Ashton of Upholland: That is an almost philosophical debate, which is why I was going to save it for the next big debate we have, in which the noble

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Lord will play a leading light. I am sure he will because he has played a leading light in every debate we have had so far. There is an interesting discussion to be had about when the European Union, member states, the Commission and so on put forward proposals for areas to be discussed and deliberated. We have just had a brief discussion about healthcare, and noble Lords will know that there were proposals at the European Council that my right honourable friend the Prime Minister went to last time that we feel particularly concerned about; for example, proposals to do with climate change and international issues. Ten years ago, those issues might well not have been on the agenda at a European Council, but I would argue—and I suspect the noble Lord might agree with me—that they are issues that need to be tackled internationally, not by an individual state. They demonstrate that agendas in Europe change depending upon the issues coming forward, many of which increasingly require international, certainly Europe-wide, responses. It is therefore not a simple question of saying that these are the areas that would never be discussed. Another example is that issues to do with banks and financial institutions have become more prominent of late, but would not necessarily have been on the agenda some years ago.

Lord Pearson of Rannoch: The noble Baroness would not put direct tax into that category, would she? Can she assure us that there is nothing in the intention of the European project to extend its influence over direct tax and tax harmonisation?

Baroness Ashton of Upholland: I am always hesitant to say anything to the noble Lord when I do not quite know his source. Often in these discussions, a particular issue is bubbling away. Healthcare was a good example. If I had simply stood up and said, “No, we are not doing anything on healthcare”, that would have been factually incorrect. It is nothing to do with the treaty, but there is a proposal on healthcare. I know of nothing to do with taxation, but I want to check—which I will in the break—before I say categorically, “Never, no, never”, on anything to do with tax; not direct tax, of course, although the noble Lord may be quoting from a source that I have not yet seen.

Lord Howell of Guildford: I think that it is high time that we gave the noble Baroness a break. The sheer length of her exposition is demonstration of the enormous complexities of what we are dealing with and the vast range of unfinished business that is implied—which, contrary to the assertions of the Prime Minister, will lead to more institutional change, more constitutional change and more treaties, probably in the next few years, certainly within the next five-year period.

I admit that the amendment is extremely limited in scope; and intentionally so. It was simply aimed at opening the door to a variety of issues, which has been opened wider, quite rightly, by some of your Lordships in very interesting comments. I hope that it is not facetious to say that it is possibly better to open doors before you try to go through them. That is what

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I was seeking to do by moving my amendment. When we open the door, we immediately find a sort of goulash or pot pourri of issues, difficulties and matters to be negotiated here, there and everywhere about where power is going, who is going to hold it over us and how it is to be administered and called to account. All those things are left rather in the air.

Two aspects came out in our debate. One was, frankly, not dealt with in the amendment. As I said, that is the wider question, which will come up again and again. We are moving to a scene in which, with the collapse of the third pillar, a vastly wider range of issues come within the purview of the rulings—apparently, I am not allowed to call them judgments—of the European Court of Justice. We will want to think about the mechanisms by which Ministers can interpret to Parliament the effect that those rulings—which may lie well outside what appears to be delineated in the treaty—will have on our laws, our behaviour, our lifestyle pattern, budget and all the rest. We will need to think very hard about that. That is coming up in later amendments and we must all think about that very carefully.

The point is that the ECJ has become what the noble Lord, Lord Wedderburn, who is not in his seat, has called a creative court. It is a court that does not merely administer or seek to make judgments on existing laws, but seeks to make new laws and to interpret existing laws in wider ways. That is now being spread right across areas of home affairs and justice and may even intrude, despite what the treaty says, into areas of common foreign and security policy. We will have to see, but it is highly likely that it will. Some of our debates will be able to demonstrate that that is a possibility—even by interpreting, or trying to interpret, what we all recognise to be the inaccessible language of the treaty.

That is the broader question that lies ahead. The narrower question, which the amendment directly addresses, is that of the role of the president. That is crucial, because here again there is the matter of where power lies, how it will be administered and with what powers the president will be endowed, as opposed to the head of state rotating president, as opposed to the President of the Commission and as opposed to the High Representative, which is the Foreign Minister with a new name, but with the same powers. All those things need to be sorted out because they affect us very directly. They are not remote issues that are considered boring and can be pushed aside, they directly affect how we live in this country and how we can decide who we hold accountable when things go wrong, or even give credit to when things go right.

The Economist article that I cited earlier states that in the treaty, all the compromises have reduced the definition of the role of the president—the full-time president—to gibberish. That is probably right. Several other commentators, including the eminent and very effective Quentin Peel, in the Financial Times, talks about “another messy compromise” in trying to decide this turf war of who does what between the President of the Commission, the rotating head of state president, and all the rest. There is a lot to be sorted out there

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and it cannot be just pushed aside by saying, “It is all right; we will sort it out by discussion in the next few months”.

I am sure that your Lordships will feel that the time is getting near when we could take a break and have some dinner, but in all this discussion, it seems to be constantly forgotten by Ministers that this is an evolving process and a self-evolving—if that is not too odd a word—Bill and treaty. It contains within itself the power to move on, to carry whole areas out of the national veto field into the qualified majority voting field—sometimes to our benefit, I must concede that; sometimes not at all. But we cannot tell. We do not know how that is going to work. We are taking a step into the dark in the way that we would have done with the previous constitutional treaty, but perhaps not so much as we would have with the Maastricht treaty and previous treaties, although obviously they were highly significant steps forward as well.

One is left feeling that there is a real danger that if we rely on the scrutiny and calling to account that we have had in the past, it will not be enough. We have set in motion a new vehicle that will move faster and will require much more agile supervision if we are to know what is to happen before it hits us and takes us by surprise. There is something deeply unsatisfactory about how our Parliament has, even in the recent past, been able to keep up with European legislative procedures, with the rulings of the court, with the decisions of Ministers in the European Council and with the instruments and regulations of the Commission. Everyone feels that we should do better in this Parliament. Just receiving information, being kept up-to-date and being told to tick the Brussels boxes is not enough. We want a European system that is more flexible, which gives a greater and more progressive role for the nation states—as I said the other day, probably the most progressive idea in the entire concept of European development.

We want to move on from the current position and not see ourselves taken down the road to more centralisation and a reinforcement of the outdated European concepts to which Ministers and the Liberal Democrats seem to cling, under which they cannot see that we are living in entirely new conditions of a networked world in which the old idea of blocs and centralisation are completely out of date. Having said that, of course we will return to these matters.

Lord Wallace of Saltaire: I apologise for intervening, but we have a couple of minutes before we break. We on these Benches entirely understand that we are living in a fast-evolving world. That is precisely why we think that things cannot be put down in black and white. What is the noble Lord’s conception of politics, both at the national and European level? I think that I heard him say that he wants to see the distant shore and that, unless he does, one step is too much for him—to misquote the hymn that we both used to sing as boys.

The Conservative idea of politics is that it is a messy compromise. I assume that Edmund Burke would have said that international politics is a messier

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compromise than domestic politics. If that is not the case—if everything has to be sewn up and clarified in black and white—I do not see how we can have a Conservative foreign policy.

Lord Howell of Guildford: It is a little late in the timing, and certainly in my speech, to branch off into political philosophy. It is also possibly too late to sing the words of “Abide with me”, which I think is Hymn No. 354, but not, “one step enough for me”. I ask noble Lords to leave all that aside and merely allow me to say that the answers to our concerns, and the understanding about where Europe should be going, are shallow and unsatisfactory in the minds of ministerial and Liberal Democrat spokesmen. A new and much better Europe can be constructed, and we are quite ready to bring forward our ideas about how that should be done. We have the very large support of many wise people throughout modern Europe, which is a quite different place to the one it was 10 years ago with the return of the ex-communist countries, which I visited last week and which have a new liveliness and realism about how much centralisation they want and how much they do not want. I move, I am afraid, beyond the amendment in saying these things, and merely note that we will return to these issues and much greater ones behind them later on in our debates. For the moment, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Bach: I beg to move that the House do now resume. In moving this Motion, I suggest that the Committee does not begin again before 8.30 pm.

Moved accordingly, and, on Question, Motion agreed to.

House resumed.

Taxation: Inheritance Tax and Capital Gains Tax

7.31 pm

Lord Burnett asked Her Majesty’s Government what plans they have for the future of inheritance tax and capital gains tax.

The noble Lord said: My Lords, I am grateful to have been given this opportunity to debate these tax matters. I draw the House’s attention to my interests, which are contained in the Register of Members’ Interests. I was given a similar opportunity in February last year to discuss inheritance tax, and I spent a considerable part of my speech discussing and recommending to the Government that the nil-rate tax band between spouses and civil partners should be transferable. I gave a series of what I thought were compelling reasons why this should be done. I am delighted that, six months later, the Government decided to adopt these suggestions.

I hope that the House will forgive me if I make a few general observations on international tax avoidance and evasion, and if some of what I have to say gives rise to a measure of optimism. I have given Front-Benchers

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notice of this. When a new President, whether Republican or Democrat, is elected in America, there will be considerable international impetus to bear down ever more strongly on international avoidance and evasion. I shall advert to that later.

It is one of the key principles, if not the key principle, of taxation that it should be fair. It is imperative to have a fair tax system, but one that recognises that we live in a worldwide or global economy. Individuals and businesses have opportunities, especially given the internet and other electronic means of communication, to set up and carry on their trade or profession wherever they choose. The level of taxation is an important consideration in their deciding where to carry on their businesses.

It is interesting to note that from 1979 to 1997, mainstream corporation tax was reduced from 52 per cent to 33 per cent—a massive 19 per cent reduction. The tax take in real terms rose enormously. More businesses were created, with opportunity for everyone, and far more jobs were created. There was more money with that measure and other tax measures in those years. There was more money for hospitals, schools and pensioners, and these are lessons that we should never forget.

In the last year or so, the Government have had one or two tax problems with their proposals. I gather than the planning gain supplement is unlikely to happen and that the Government are rethinking their announced measures to tax spouses, especially those who own and control businesses and make transfers between themselves. However, the most staggering tax blunder is the Government’s decision to abandon the 10 per cent rate of tax without any compensatory measures for the 5 million of the poorest of the working population who are adversely affected. I believe that the Government will be forced to make changes to these measures.

There was an outcry about the capital gains tax changes that were announced last year and which abolished taper relief. I shall refer to those later. Changes were made to soften the blow, but in addition there was considerable unease about the announcement of the taxation changes for non-domiciles. The Government had to make changes fast both to the capital gains tax and to the non-domicile proposals. It was interesting to hear a BBC programme on the non-domiciles by Rosie Millard last Saturday morning. It finished on the note that home is where the heart is, and certainly some of our non-domicile residents in this country seemed to have no great allegiance to the country other than it being a convenient and tax-efficient place to do business. There should have been a thorough and rigorous review of the tax status of non-domiciles that compared cost with benefit.

There is reason to be reasonably confident that major economies in the world are becoming more enthusiastic about dealing with international, corporate and individual tax avoidance, some of which is evasion or at least on the cusp of it. I believe in international tax competition as long as international conglomerates and individuals pay their fair proportion of tax in the countries in which they operate. In Britain, we have

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sensible attempts to tackle these problems. The genesis of these attempts was made decades ago. I remember the controlled foreign companies anti-avoidance legislation in the 1980s. However, the only way in which to tackle these matters is for the advanced economies of the world to work together, and there are encouraging signs that they are beginning to do so.

There are growing deficits in the major economies of the world, which makes it an auspicious time for us to face down and deal with international, individual and corporate tax abuse. Last year in the United States, three senators introduced the Stop Tax Haven Abuse Bill. The Bill will probably not become law. Nevertheless, one of the senators was a Republican and two were Democrats, one of whom was called Mr Barack Obama. One of the main thrusts of the Bill was to impose restrictions on foreign jurisdictions, financial institutions or international transactions that are either of primary money-laundering concern or, interestingly enough, impede US tax enforcement. There will be pressure to tighten up tax avoidance provisions in our series of double-tax treaties and, no doubt, in the OECD model.

In the Financial Times on 28 February this year, it was reported that the Indian Government were going to take steps to clamp down on international tax avoidance and evasion. Again, earlier this year, the German Chancellor, Angela Merkel, visited both Monaco and Liechtenstein and made it abundantly clear that Germany would take steps to deal with international tax evasion. The French Government have announced similar aims. There is a growing international will for co-operation in this endeavour, and a desire to crack down on international tax evasion, whether by individuals or companies. I applaud these endeavours.

In early 2005, I was a member of a committee in the other place when we debated what I believe was the first information-sharing protocol with a tax haven country. There will be, and no doubt have been, further such measures. I also remind the House of last year’s amnesty, which was not quite an amnesty, for overseas deposits and holdings. Many hundreds of millions of pounds have been collected by this move. Tax fraudsters should beware, because I believe and hope that the net is closing in on them. Those who do not pay their rightful contributions are breaking the criminal law and ensuring that the rest of us pay more.

I understand that Ministers and Members of Parliament were surprised at the outcry that greeted the announcement of the recent capital gains tax changes and the abolition of taper relief. Some changes have been made in respect of what I call business assets, including the new £1 million relief. Since its inception in 1965, capital gains tax has contained special relieving measures for bona fide businesses which have been owned for a period of years. I cite, for example, retirement relief, which was phased out by the Finance Act 1998, which introduced the new generous taper relief.

The effect of the business taper was to encourage businesses to locate in this country and to encourage indigenous businesses to grow and to prosper here.

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On 16 June 1998, when we debated the introduction of taper relief in the other place, the Minister said that these changes are intended,

Finally, she said:

That was not said by someone from the right wing of the governing party—it was Red Dawn herself. No wonder the business community was up in arms about the changes by the Government, because the Government had broken a contract they had made with it 10 years previously. I look forward to hearing from the Government exactly how they envisage capital gains tax evolving in the next few years and their philosophy on that tax.

As I said earlier, I was grateful that the Government adopted a system of transferability of nil-rate bands between spouses. There are a number of changes that could be made to inheritance tax. I outlined some of those last year when I stressed that the main complaint about inheritance tax was its unfairness in so far as the very rich can afford to avoid it by making potentially exempt transfers, whereas millions of people—so-called middle Britain—are liable to pay the tax. I made the suggestion last year that the system of potentially exempt transfers should be reconsidered with a quid pro quo of a higher nil rate and far lower rates.

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