| Previous Section | Back to Table of Contents | Lords Hansard Home Page |
There is far too much tax legislation. Here we go again with another Finance Bill in two volumes, adding to our tax code which under the Prime Minister, as Chancellor, has doubled in size. We now have the distinction of having the longest tax code in the world, longer even than India's. This will put us at the top of the international league table for tax complexity, something which will not in any way help with our competitiveness, which the Minister assured us the Bill was concerned with.
I shall not bore the House by giving all the examples of the tinkering by this Chancellor and his predecessor, now the Prime Minister—although I suspect that the Chancellor has a backseat driver in No. 11 in the form of the former Chancellor. I just point out that under Mr Gordon Brown, we had the abolition of retirement relief and the introduction of taper relief; now we have the introduction of entrepreneurs’ relief. Under Mr Brown as Chancellor we had the introduction of the 10p band, then its abolition, then a hiatus, and now we have the raising of the threshold to compensate for the effects of that change. We had the introduction of the zero band of corporation tax for small businesses, then its abolition, and now we have another change.
This has been a period of great instability in the tax system. The one thing that businesses hate more than their costs going up and higher taxes is uncertainty, but this Government have produced it in spades.
I was very struck by the Minister's comments on how this Finance Bill is concerned with fairness. In particular, he said that as a result of the raising of the threshold, people on low incomes will be better off than they were at the time of the Government's initial proposals. I accept that, but what he leaves out is that they are not paying tax at 20p; their effective marginal rate of tax is very much higher, thanks to the incidence of the tax credit system and the benefits system. Single parents moving from part-time to full-time work can pay an effective marginal rate of tax and withdrawal rate of 90 per cent. Those changes have been brought about by this Government; they are the result of initiatives of this Government. We have 5 million people who are economically inactive sitting on benefits. For many of them, going into work would mean paying very high marginal rates of tax.
At the same time, this Government introduced the 10 per cent taper relief, which meant that people in private equity earning tens of millions of pounds were paying tax at 10 per cent. The Bill provides for a sudden change in the capital gains tax regime to raise it to 18 per cent in response to the problem created by the initiative of the Prime Minister, then the Chancellor. It is extraordinary. The effect of the changes to capital gains in the Bill is that tax on hard-working entrepreneurs who create jobs and wealth through their businesses has gone up by 80 per cent and the tax on speculators who are short selling, buying and selling property, or whatever has gone down by 55 per cent. What kind of message does that send out? The abolition of taper relief has created a situation where there is no distinction between short-term and long-term gains and therefore no incentive for people to make investments for the
18 July 2008 : Column 1457
I read the Select Committee’s report early this morning and it is an absolute indictment of the performance of the Treasury and of the Government in the way in which they go about the administration of our tax affairs. It is bad enough to get the policy so badly wrong, but they have been unable to implement it effectively. The report is a tale of incompetence. Reading the evidence, one is almost moved to tears of sympathy for those who are on the receiving end of this stuff. It is a tale of chopping and changing, of information not being provided, of one arm of government not knowing what the other is doing. I commend it to every Member of the House. I hope that the Government take it much more seriously than the Minister appeared to do.
The Minister dealt with none of the fundamental points in the report. He passed very briefly over consultation, but the conclusion that there was a dysfunction between tax policy and its administration struck me as quite extraordinary. This arose when HMRC was created. Guess who took charge of tax policy? It was the Treasury, under the Prime Minister—the previous Chancellor, Mr Gordon Brown. The result, which is clearly set out in the evidence—the committee points to it—is that HMRC, which is responsible for implementing tax policy, has sometimes appeared not to know what the policy was, and vice versa. There is a good example of that in the report. The entrepreneurs’ relief, which the Minister presented as some great idea to help entrepreneurs, was in fact a last-minute panic. When the Government discovered that their capital gains tax proposals were not going to work properly and there was huge outrage among small businesses, they introduced the relief as a measure.
There is evidence in the report that HMRC did not know about the change in policy. Business representatives of accountants and other organisations with important professional responsibilities discussed it with HMRC, which said that it knew nothing about it, even though all the newspapers had been briefed by the Treasury, as they have this morning. That is completely unacceptable. It is very dangerous to have policy and the administration of policy out of kilter. It is a sad tale, and the committee is to be congratulated on the thoroughness with which it has highlighted the need to improve consultation and the proper administration of our tax policy.
I commend to the House the report published last week by my noble and learned friend Lord Howe of Aberavon, who is not in his place at the moment. It contains some very important recommendations, some of which were preceded in the Tax Reform Commission report, which I produced some two years ago. I commend to the Government the radical idea that it might be a good idea to announce by the Pre-Budget Report what the Government propose to do in precise detail and to consult on that.
I love the other place, but looking at its performance in scrutinising this Bill, no one could argue that there was no room for improvement. The proposal to have a Joint Committee of both Houses is very wise, as such a committee would draw on the expertise in this House
18 July 2008 : Column 1458
The Minister mentioned competitiveness. This is very important for competitiveness. The compliance costs of all this are enormous. I do not know whether the Treasury talked to HMRC, but even HMRC estimates that the compliance costs of our tax regime are £6 billion for business. Simplifying the tax system and having stability in it improves competitiveness and reduces the costs to business of compliance.
Let me give the Government some credit; the measures that were introduced to reduce the basic rate and to alter the capital gains tax regime were presented then—but not today, I noticed—as simplification measures. However, if you are going to simplify capital gains tax, why do you end up with a rate that is different from the basic rate which is different from the top rate? Do the Government not remember what happened in the 1970s when we had different rates of capital gains tax from the marginal rate of tax at which people paid income? Lots of clever people in the City devise schemes to turn income into capital gains, and I confidently predict that a year from now, if this Government are still in office then, we will have another Finance Bill that will say that we need to close the loopholes that have been created by the changes that we have made to the capital gains tax regime, just as the Government did when they introduced the zero rate of corporation tax for small businesses.
The Minister then argued that the non-doms’ position needed to be dealt with, and that this was an aspect of fairness—this from a Government who reviewed the taxation on non-doms from 2002 and suddenly introduced it about three weeks after the shadow Chancellor indicated that he was going to do something in this area. I make no comment about the coincidence of timing, but it is extraordinary, if you have been looking at something for nearly six years, that you should rush it through in such an ill considered manner, and that as late as the new year, after the Pre-Budget Report, people still did not know how the system was going to operate. All the damage that was done to Britain’s standing in international markets and all the uncertainty that was created could have been avoided.
In short, this is a very sad Bill, which the Government themselves are having to pull back on. They seem to have lost control of public expenditure and run out of ideas and out of road. They have tinkered with the tax system, to the dismay of business and to the damage of our competitiveness, and they have tinkered with the administration of our tax system by merging the Inland Revenue and Customs and Excise, with disastrous results. This is the price that we have paid for having a meddler in Downing Street, and the sooner he is out of there and we have a Government who are genuinely committed to fairer, lower, flatter taxes, the sooner the growth that we need in our economy will return.
18 July 2008 : Column 1459
10.47 am
Lord Vallance of Tummel: My Lords, I am pleased to introduce the report of the Economic Affairs Committee on the Finance Bill 2008, which was so colourfully previewed by the noble Lord, Lord Forsyth of Drumlean. It is the sixth annual report in a wellestablished series that confirms the role of this House in parliamentary scrutiny of Finance Bills. Within its remit, our sub-committee on the Bill offers taxpayers and advisers a forum in which to express their concerns, which our reports then convey, together with our own views and recommendations, in time to inform debate in Parliament.
I thank my fellow members of the sub-committee for the knowledge and wisdom that they brought to bear and for their hard-working and non-partisan approach. I am grateful to the witnesses, professional and official, and, for the first time this year, eminent academics from two of our universities, whose input was essential to our report. I also thank our specialist advisers, Leonard Beighton and Trevor Evans, for their invaluable contribution, as well as the Clerk and our secretary-administrator.
The committee cannot sensibly look at the whole Finance Bill. It has to focus. This year, it chose three topics: changes to capital gains tax; proposals on residence and domicile; and changes to encourage enterprise. As we heard evidence, we became increasingly aware of two issues that cut across these topics: consultation and international competitiveness. Our report considers these issues first. Many private sector witnesses thought that the consultation on both CGT and residence and domicile had been very poorly handled and fell well short of the good practice that they had seen on other topics. Witnesses from Her Majesty’s Treasury and Her Majesty's Revenue and Customs accepted that consultation was a key part of getting tax policy and delivery right, but did not agree that a clear policy statement had been lacking or that the Treasury and HMRC had not worked well together.
We as a committee are firmly in favour of consultation. Despite what officials said to us, we have little doubt, given the strength of feeling of our private sector witnesses, that something went very wrong in the development of these initiatives. We see no reason why there could not have been earlier, better and more open consultation. We are particularly disappointed that the progress we welcomed last year has not been maintained.
Our report recommends that the Treasury and HMRC should critically consider why the private sector was so unhappy and thought that its messages were not getting through to Ministers: they should learn the lessons. They should also look at their record as a whole, learning from well handled examples, which our witnesses acknowledged, and identifying best practice across the board. In the light of that, there should be a dialogue between officials and the private sector to develop a code of practice on consultation on tax policy changes.
The second cross-cutting issue was competitiveness. We recommend that the Government and the Treasury should work to reassure investors of the advantages of investing in the UK under the new CGT regime. Some doubt has been cast on that, at least in the minds of
18 July 2008 : Column 1460
I come now specifically to capital gains tax. Under the changes announced in the Pre-Budget Report there would have been one tax rate of 18 per cent on all gains. Indexation and taper reliefs were withdrawn. As a result, the rate of tax on business gains generally went up, while that on other gains went down. The intention was to make the system more straightforward and sustainable and to help investors plan for the long term. But noble Lords will recall that the announcement proved so contentious that in January the Chancellor of the Exchequer announced that there would be an entrepreneurs’ relief under which qualifying gains would be charged at 10 per cent up to a lifetime limit of £1 million.
In our view, given the unwelcome surprises investors received, the feeling that legitimate expectations have been denied, and that long-term gains are no longer treated more favourably than speculative gains, it will take time for certainty and confidence to be restored. So we recommend that the Government should continue their efforts to explain their case, with the aim of restoring that lost confidence. Some people were better placed than others to forestall any increased liability as a result of the changes. This was unfair and we recommend that, in future, the opportunity to forestall should be available either to everyone or to no one.
Indexation of gains made between 1982 and 1998 had previously been frozen. On balance, we thought that the abolition of the freeze was justified, despite the disquiet that was aroused. Although the changes bring about some simplification, CGT remains a complicated tax and we recommend a dialogue aimed at further simplification in future years. We were surprised at the Treasury’s confidence in the forecasts of the yield of the tax and recommend a further explanation. We also believe that breaking the link between the rate of tax on income and on gains might increase the scope for avoidance, a risk on which HMRC should keep an eye. Finally, on entrepreneurs’ relief, we recommend that there should be some means, such as indexation, to ensure that the lifetime limit keeps pace with events.
On residence and domicile, under the changes in the Finance Bill, all those who are non-domiciled and who claim the remittance basis of taxation will have personal allowances withdrawn and longer-term residents will have to pay £30,000 for each year they remain on the remittance basis. Those proposals have been a source of contention since they were announced in the Pre-Budget Report and particularly since the publication of draft legislation in January.
The evidence from our private sector witnesses was harshly critical. Words such as “a real shambles” were used. Officials denied poor handling, although they
18 July 2008 : Column 1461
Our report recommends that the Treasury and HMRC should carry out a full review of the reasons why there were so many difficulties. The Finance Bill’s clauses on this topic were not finalised when the Bill was published. That is not good practice and we recommend that if, in future, final provisions cannot be published in the Bill, the proposals should be withdrawn.
Our report surveys the likely impact of the changes at different levels of income, including high net worth individuals and middle income executives whose employers may face a compliance burden. But our main concern is about those of more modest means, such as the migrant worker from eastern Europe, who, with unremitted income of £2,000 or more, would have to decide whether to claim on the remittance basis and be denied personal allowances, or be taxed on worldwide income and subsequently grapple with double tax relief on his overseas income. All our private sector witnesses saw the £2,000 level as too low and some saw it as “ridiculous”.
Officials did not seem overly worried by these compliance concerns. They thought that the calculations were “in reality, quite simple”. We think that HMRC is greatly underestimating the compliance difficulties for people of more modest means. In our view, the provisions as drafted are essentially unworkable and we recommend that the bulk of modest earners should be spared, possibly by raising the level of £2,000 to the level of the personal allowance, which this year is £6,035.
In the Commons Public Bill Committee, the Government promised to think about this further, but the Financial Secretary resisted any increase from the £2,000 level as unnecessary and argued that, for most on modest means, the arising basis would produce the better outcome. We believe that the Government are considerably underestimating the compliance problems and are disappointed that they have not responded to the case for increasing the level. On a more positive note, it was also put to us strongly that there should be comprehensive legislation to determine UK residence, rather than reliance on Revenue practice. We are pleased to note that the Government have accepted the case for looking at this, in consultation with the representative bodies.
Our final topic was the changes to the tax rules for encouraging enterprise, notably an increase in the qualifying limit for investments under the enterprise investment scheme. We were not persuaded that such an increase was economically justified. The committee also looked at venture capital reliefs. By no means all witnesses agreed that these reliefs should continue if the alternative could be a modest contribution towards a general reduction in rates. So we recommend a review to assess the net benefit of the reliefs as against the economic benefit of that modest reduction in tax rates across the board. Finally, we examined the study by the University of Sussex, published by HMRC, on the effectiveness of the venture capital reliefs. Some
18 July 2008 : Column 1462
The committee's overall impression is that this year the formulation of tax policy has been marked by uncertainty of direction and exacerbated by examples of poor consultation, which have led to a loss of confidence in the sustainability and predictability of the tax system. The feeling that the system is unstable and subject to unwelcome surprises cannot be good for the competitiveness of the UK economy. Of the topics considered in our report, this impression stems in large part from the handling of the initiatives on CGT and residence and domicile. There were, of course, other topics that we did not address which also contributed to the sense of instability. It is up to the Treasury and HMRC to learn the lessons so that these mistakes are not made next year.
Notwithstanding the emollient words of the Minister, we are disappointed that the Government did not feel able to take greater note of the points in our report and act accordingly, particularly given the strength of feeling that remains in the private sector. Although Ministers responded initially, the changes they tabled were largely on technical matters. We remain concerned that they may have significantly underestimated the issues of substance raised by this Bill. I commend our report to the House.
11 am
Lord Higgins: My Lords, it is a great pleasure to follow the noble Lord, Lord Vallance of Tummel, and to congratulate him on the report his committee has produced. It is extremely valuable. For a moment it is worth while to put into context the whole role of the committee because the matter arose in the course of the deliberations of the Joint Committee on Conventions when the question of financial privilege came up, in particular the role of the Economic Affairs Committee of your Lordships’ House. Doubts were expressed by the Government about whether it was appropriate for us to have such a committee and for it to produce the kind of valuable report we are discussing today, which should surely be of value to the Government. It is noted that not only did the Government object, but Mr Jack Straw, the Leader of the House of Commons at that stage, suggested that it was incompatible with the conventions as a quite deliberate claim to additional powers. I am very glad indeed to say that that committee, a broadly based Joint Committee of both Houses with many distinguished members, robustly rejected the idea that it was not appropriate for the Economic Affairs Committee to deal with these matters and felt that it did not raise issues of financial privilege.
On the other hand, one can well understand why the Government were not particularly happy about some of the comments made by the committee, such as:
“We are at a loss to explain the difference in views as to how open the consultation on capital gains tax was”,
and that the review did not work appropriately. The report goes on to say,
- “a review which starts with consultation, continues in a desultory way and appears to have petered out, only to be followed by the announcement of wide-ranging proposals which bear little relation to the matters previously under discussion, tends to devalue consultation”.
18 July 2008 : Column 1463
In opening the debate, the Minister suggested that the Government did eventually take notice of it, but this report is evidence-based. I believe it is absolutely clear that on this occasion—perhaps partly for political reasons, particularly on capital gains tax, and the Government’s impromptu responses to proposals elsewhere, as well as on the question of being domiciled—the issue was not well handled and is of grave concern. The noble Lord has spelt out those concerns, and I hope that the Government will now respond more positively than they have done so far.
| Next Section | Back to Table of Contents | Lords Hansard Home Page |