Examination of Witnesses (Questions 167-179)
Mr John Cridland, Mr Mervyn Woods and Mr Richard
Baron
7 MAY 2008
Q167 Chairman: Welcome back and welcome
to our witnesses from the CBI and the IOD. Thank you very much
indeed for giving up your time to be here today and thank you
for your very useful written evidence. Is there anything you would
like to say by way of introduction or shall we go straight into
questions?
Mr Cridland: Nothing from me.
Mr Baron: No, nothing.
Q168 Chairman: I know you are fairly
short of time and we have not too much time so we will try to
be fairly concise at our end and perhaps I could encourage you
to be the same at your end. If I can kick off with capital gains
tax and entrepreneurial relief. The October 2007 PBR said, "The
Government is committed to ensuring that the UK has an internationally
competitive capital gains tax system that promotes flexibility
and competition, and responds to the changing needs of investors
... [The reform] will put the CGT regime on a more sustainable
footing and help investors plan for the long term." How successful
was it in achieving those aims? Insofar as it was not, where did
it fall down? A specific question for the IOD, if I may, in your
evidence we were not quite sure whether you were intending to
imply that the original proposals were "a daft idea"
or not, and do you not welcome the simplifying element of that?
You also imply that changes might be made on a revenue neutral
basis, but would not a consideration of this nature tie the hands
of the Government unreasonably, in that the only time they could
make a change would be when it was revenue neutral, so why should
it not be open to the Government to simplify with a single rate
but choose that rate so that overall revenue is increased?
Mr Baron: Perhaps I could take your questions
in reverse order, if I may. Of course it is open to the Government
to propose changes which are not revenue neutral, we merely suggested
that if they had done it would have taken a lot of the sting out
of that debate because they could have said, yes, there are winners
and losers but at least the winners are as big in cash terms as
the losers. So it is a consideration. Should you make changes
on a revenue neutral basis or a revenue increasing basis? In this
case they chose a revenue increasing one which I think is probably
the meaning of the word "sustainable" in the quote you
gave. The Government meant: we want something sustainable, ie
we want something which will fit in with our other proposals and
give the right balance to the Budget. You asked about competitiveness;
your first point. Yes, it does make the regime reasonably competitive
internationally, the problem is we are starting from where we
were. The 18% rate may look reasonable if you just compare it
with rates in other countries but it was for business owners a
worse deal than they had under the old regime. I think it sent
very much the wrong message to say, "You were going to have
10%, the current Government a couple of elections back introduced
that, now we are going to take that away from you", so it
is really about the messages being sent within this country. I
am sorry you had another point?
Q169 Chairman: I had one about your
"daft idea".
Mr Baron: Yes. What I meant in that part of
the written evidence was that there are some ideas which come
out of Government which are daft ideas—we all have daft
ideas—and it is helpful to put them forward in an open-minded
way and say, "We do not know if this is a daft idea, please
give us your opinion." I did not mean to imply in that paragraph
in my written evidence that this particular idea was necessarily
daft, I think these things are too complex to make a single sweeping
judgment about a whole policy package.
Q170 Chairman: The CBI's point of
view? Is this an internationally competitive regime?
Mr Cridland: I feel it failed the Government's
own test. It has materially and inimically altered the reasonable
expectation of many thousands of entrepreneurs, and I think the
most insidious aspects are that we no longer treat business assets
held for a reasonably long period more favourably than we treat
speculative investments. I think that is a retrograde step. I
think it is also unreasonable, leaving aside the headline rate,
to remove the reasonable expectations long-term entrepreneurs
heading towards retirement had for indexation relief. So the lack
of a taper and special status for business assets and the removal
of indexation are both significantly inimical. The relief that
the Government provided in the concessions it put forward after
the concerns expressed by the business community help a particular
sort of entrepreneur, they help the corner shop entrepreneur,
and that is a valuable thing to do but they do not help the entrepreneurs
in CBI membership who invest consistently—sell one business
and reinvest in another business to grow significant growth small
business with high employment opportunities—because for
them the £1 million lifetime limit is barely significant.
Q171 Lord Wakeham: I will continue
in the same tone and ask some questions which arise directly out
of your evidence. One of the things I ask you is, should the principle
of taxing a gain be determined by the law in force at the date
of disposal and not preserved within these changes? The IOD sees
these changes as retrospective. That is the first question. Does
the removal of indexation to April 1998 (frozen indexation) seem
justified in the context of the overall package? Would the IOD
enlarge on their suggestion that deemed disposal at 5 April 2008
be allowed? And one question which really arose from the answer
the CBI gave us a minute ago, there is an argument for the point
you put but there is another argument that it would have eliminated
very largely the simplification proposals which were part of what
the Government said, and I just wonder where you see the balance
of that?
Mr Cridland: On that particular point, I do
not think there were many people outside of Her Majesty's Treasury
arguing for simplification of capital gains tax, it certainly
was not an objective of the CBI. Indeed, we were not aware that
the current regime was not stable or sustainable, and we are not
such avid fans of simplification that we are prepared to pay the
really very serious price of destabilising the entrepreneurial
seed bed of our economy on the altar of simplification. So I think
that was a somewhat spurious defence by the Government of its
own policy.
Mr Baron: Your questions to me relate to the
issue of retrospection. I guess to quote Cyril Joad, it all depends
on what you mean by retrospection. It is possible to see the changes
as retrospective in the sense that if someone bought an asset
20 years ago the gain accrued is partly under the pre-1998 regime,
partly under the 1998 regime, and then suddenly they find a completely
new regime which may only apply for the last few months of their
period of ownership of the asset. It is possible to see that as
retrospective, but you could equally argue a different definition
of retrospection. The suggestion that we made that they could
have allowed you to have a deemed disposal at 5 April 2008, to
cover the gain accrued up to that point, would be one way of taking
away pretty well any charge of retrospection, so the gain accrued
under the old regime, you could tax under that regime and a gain
accrued from now on under the new regime. It would have introduced
some complexity and in particular you would have had to do some
valuations, although we have had valuations built into the system
in the past, in particular valuation as at March 1982 has been
an important part of the tax system for a long time. The question
of removal of indexation is of course only going to be significant
for people who have held assets since before 1998, because indexation
stopped accruing at that point, but if somebody had held an asset
from somewhere back in the 1980s and it had not grown in value
enormously then the indexation would make a significant difference
to the effective tax rate on the gain. It was surprising, and
I suspect it was motivated simply by budgetary considerations
of how much money they wanted to give away, that they chose to
remove that indexation, which after all had already been computed,
was a known amount, so taking away the right to use it was not
really simplification. It was also a little surprising, as I touched
on in our written evidence, that they left open the door to people
who are either married or in civil partnerships to preserve indexation
simply by doing an inter-spouse transfer before 6 April 2008.
Q172 Lord Wakeham: There were a number
of well-publicised arrangements. Do you think the Government should
have taken steps to stop those?
Mr Baron: I do not think that stopping them
would have been the right thing because that actually would have
made it look even more retrospective; there would have been a
much stronger case for saying it was retrospective if you did
not have that opportunity to do that little bit of tax planning.
On the other hand what is unfortunate is that those opportunities
were limited in the case of indexation to those who were married
or in civil partnerships, and in the case of those who wanted
to create deemed disposals using trusts to those who had the right
kind of advice. If you are going to leave open that sort of opportunity
to forestall forthcoming tax change, then you should do so explicitly
and say, "Here is an option, tick this box on your tax return
to take advantage of this."
Q173 Lord Sheppard of Didgemere:
Do you think we are going back to the period of yesteryear when
there was a great deal of debate and a great deal of action between
income and capital and shifting between the two for individuals?
Do we think that is likely to reappear and go against the simplification
point if it exists?
Mr Woods: My Lord, I think it is inevitable
it will reappear. It is clearly something which HMRC does not
think is sufficiently serious to warrant specific anti-avoidance
measures. I am not privy to their thinking on this, why they came
to that conclusion, but either they think it is an imaginable
amount or they think alternative anti-avoidance measures which
have been introduced since the heyday you are referring to are
strong enough to tackle that sort of thing in another way. Time
will tell. I suspect, as always in tax, whenever there is a new
boundary created or difference in the boundary figures, then somebody
will look at that boundary and say, "Here is an opportunity."
Q174 Lord Barnett: I am interested
to hear that the CBI, as you put it, are not fans of simplification;
you like to leave everything alone, it is much easier than making
changes. Your case then is not simplification is all right but
the rate is wrong, you are against simplification full stop? You
want to keep the taper relief with all its complications?
Mr Cridland: In principle, as evidenced by our
recently published Tax Taskforce Report, we are great supporters
of simplification but I would suggest my Lord that any simplification
proposal, as with any other Government proposal, should pass a
proper cost benefit analysis. In this particular case, the disbenefits
of the measure significantly outweigh any particular benefits
of simplification. What I was suggesting was, certainly as far
as the CBI was concerned, the CBI Small Business Council and our
entrepreneurial members, there was no great appetite to see simplification
in this particular area.
Q175 Lord Barnett: So you are still
not avid fans of simplification but in this area, not in other
areas?
Mr Cridland: Simplification has to pass a cost
benefit analysis, a case has to be made on its merits.
Q176 Lord Barnett: Turning then to
the entrepreneurial relief, you referred to it as "helping
the corner shop". I know you may not be very close to small
businesses but corner shops do not usually make—I know £1
million is not a lot of money to the CBI—capital gains of
£1 million, do they?
Mr Cridland: We are very close to small businesses,
small businesses which tend to associate themselves with the CBI
and sit on our Small Business Council may be very small, my Lord,
but they are growing small businesses. For a growing small business
that level of relief is not answering the challenge. I am afraid
you can see that from the Government's own estimates of how much
the concession costs the Government, £200 million, and how
much they believe they will still recoup, £500 million, which
means the real value growth of small businesses—the entrepreneurs
who sell a business for £5 million and immediately reinvest
it in another business and five years later sell that for £10
million and create jobs—are not likely to be able to take
advantage of the lifetime limit.
Q177 Lord Barnett: Perhaps somebody
with a few dozen corner shops, but let's leave that aside. When
somebody starts a small business—I declare an interest of
some 12 years ago—my experience is that you do not ask yourself
when you start, "If I make a huge success and make capital
gains when I sell, I will be very concerned about the tax relief",
the first thing you want to do is make a profit. Is that not the
concern of small businesses who are starting an enterprise?
Mr Cridland: Tax, I would willingly accept,
is one of a number of factors and I do not think the CBI has ever
said it is the overriding factor. Equally, as you will see from
the submissions we made to the Government at the time of the debate
on the Pre-Budget Report, we were not seeking to hang on to a
headline rate of tax for long-held assets of 10%. The principles,
my Lord, were more important to us. The principles that these
changes had not been consulted upon, that these changes were to
some degree retrospective, that the failure to treat serial entrepreneurs
with long-term assets differently from speculative investors was
a mistake, and that indexation removal had changed people's reasonable
expectations. The rate itself was less significant in our deliberations.
Q178 Lord Barnett: Is it not always
very difficult, the question of consultation has been raised by
Lord Wakeham, for any Government or Treasury or Revenue in advance
of a major change to discuss that kind of detail publicly?
Mr Cridland: I do not think so, my Lord. I think
we have now reached the point in the development of globalisation
where tax decisions can cause companies to uproot and move to
different domains, where the Government needs to recognise it
is just as important to consult on the tax as it is to consult
on regulation, and if Parliament is entitled to consider Green
Papers, White Papers, Draft Bills in some cases in other areas,
I see no reason why it cannot do that in relation to tax. More
importantly, I think the difficulties, sadly, which we take no
pride in, that the Government has got into with capital gains
tax and with some of the other tax measures in the Finance Bill
show it is in the interests of Government to consult. I think
the relationship with the CBI, and I suggest with the IOD, is
mature enough that if they came to us and said, "We want
a real debate with you about this tax because we do not think
it is sustainable going forward, we believe simplification is
the primary objective, you cannot say keep the status quo, CBI,
there are going to be changes, how would you achieve our Government
objectives?" that is a perfectly fair challenge to put to
us, but they did not put that challenge to us.
Q179 Lord Paul: Is the introduction
into the entrepreneurs' relief of a lifetime limit a reasonable
compromise? The IOD want the limit of £1 million kept under
review and are concerned that it may discourage investment by
serial entrepreneurs. Perhaps you would expand on this?
Mr Baron: £1 million certainly sounds like
a lot to most of us, but if you think of it in terms of, say,
a 40-year career, you would use that up at a rate of £25,000
a year, and if you were making gains of that sort of amount then
you could eventually run out of it. The successful serial entrepreneur
of course will make gains of more than £25,000 a year over
a 40-year career, perhaps not evenly, perhaps smaller to start
with and getting bigger, but one can easily see it running out,
and of course it is the successful ones we want to encourage.
We think it needs to be kept an eye on, the Government will get
information from people's tax returns on how much it is being
used, and it should be in the diary now to come back to it in,
say, five years' time and say, "How is this going? Are we
in danger of perhaps not putting off the person starting their
first business, who may well not have this in the forefront of
their mind, but putting off the person who already has some success
and sold on a couple of businesses and this is running out and
they are thinking, `Do I want to go through all that again, take
that risk, have all the hassle of starting a third business?'"
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